Hayek Was a Neoclassical – Yes, NEOCLASSICAL! — Economist

In a long and productive scholarly career, F. A. Hayek worked for the most part in relative obscurity. That obscurity was interrupted by three, maybe four, short periods when his fame extended beyond his fellow economists to a wider public. The first was in the early 1930s when, arriving in London in the depths of the Great Depression, he became, while still a young man, the second most famous economist — surpassed only by Keynes himself — in Britain. Next, at the end of World War II, in middle age, he achieved international celebrity when his book The Road to Serfdom became a surprise best-seller. Then, in his old age, to the surprise of almost everyone, Hayek was awarded the 1974 Nobel Prize in economics. Finally, when he was almost 90, Hayek enjoyed a final moment of glory after the Soviet empire imploded in the late 1980s, providing ultimate vindication for his argument, advanced almost six decades earlier, but widely dismissed and mocked by many economists who should have known better, that comprehensive central planning was ultimately an unworkable system for running a modern economy. Now, once again, some 20 years after his death, Hayek seems to be enjoying another of his periodic bursts of fame — this time because the presumptive Republican nominee for Vice-President of the United States, Paul Ryan, likes to cite Hayek as one of his intellectual inspirations, offering Hayek as an alternative source for his ideological position to Ayn Rand, whom Ryan had to throw overboard because of her militant atheism, Hayek’s discreet agnosticism apparently not (yet?) making him untouchable.

Hayek’s renewed celebrity earned him the dubious honor of being written about in the New York Times Magazine by Adam Davidson, a financial journalist for Planet Money, and a columnist for the New York Times Magazine. Davidson does not get off to a good start, calling Hayek “an awkwardly shy (and largely ignored) economist and philosopher who died in 1992.” Hayek did die in 1992, and he was an economist and a philosopher, but to say that Hayek was “largely ignored” is a curious way to describe a Nobel Prize winner, even if one makes due allowance for the surprise with which the award of the Nobel Prize to Hayek was met. That was bad enough, but to call Hayek “awkwardly shy” is sheer fiction, and not just fiction, but an absurd fiction. I have never seen Hayek described by anyone as shy. And in my intermittent acquaintance with Hayek, over almost 20 years from the time I met and took classes from Hayek as an undergraduate student when he visited UCLA in the 1968-69 academic year, I never observed an awkward moment. Hayek to be sure evidenced a certain reserve, but it was the courtly, aristocratic reserve of the Viennese haute bourgeoisie, the “von,” which Hayek dropped from his surname upon becoming a British subject in the 1930s, marking the elitist background from which Hayek sprang. Among his family connections were his cousins Ludwig Wittgenstein, the philosopher and Paul Wittgenstein, the concert pianist, who, after losing his right arm in World War I, commissioned Maurice Ravel to compose his Concerto for the Left Hand.  The Wittgensteins’ father, Karl, was perhaps the wealthiest industrialist in Austria.  After a preposterous start like that, nothing that Davidson says about Hayek can carry any credibility.

But in his third paragraph, Davidson goes completely off the rails:

For the past century, nearly every economic theory in the world has emerged from a broad tradition known as neoclassical economics. (Even communism can be seen as a neoclassical critique.) Neoclassicists can be left-wing or right-wing, but they share a set of crucial core beliefs, namely that it is useful to look for government policies that can improve the economy. Hayek and the rest of his ilk — known as the Austrian School — reject this. To an Austrian, the economy is incomprehensibly complex and constantly changing; and technocrats and politicians who claim to have figured out how to use government are deluded or self-interested or worse. According to Hayek, government intervention in the free market, like targeted tax cuts, can only make things worse.

Here Davidson doesn’t just get Hayek wrong, he gets everything wrong. Where to start? “For the past century, nearly every economic theory in the world has emerged from a broad tradition known as neoclassical economics.” Fair enough, though the dominance of neoclassical economics probably goes back to at least 1880, and certainly no later than the publication of Alfred Marshall’s Principles of Economics in 1890, 120 years ago. But what can Davidson possibly mean by the bizarre parenthetical side comment “even communism can be seen as a neoclassical critique?” Does he mean that communism is a version of neoclassical economics? Or perhaps he means that Communism is a critique of neoclassical economics.  Either alternative would be truly amazing if, by Communism, he means the economic doctrines of Karl Marx, doctrines Marx had developed well before the principal founders of neoclassical economics, William Stanley Jevons, Carl Menger and Leon Walras, published their versions of the marginal utility theory of value in the early 1870s. Perhaps Davidson means something else by Communism, but for the life of me, I can’t imagine what it might be.  Then, paying no attention to the theoretical content of neoclassical theory, Davidson identifies the set of crucial core beliefs of neoclassical economics as follows: “it is useful to look for government policies that can improve the economy.” The mind boggles. This is not just cluelessness; it’s cluelessness masquerading as profundity.

Then we are told that Hayek and his fellow “Austrians” reject the notion that it is useful to look for government policies that can improve the economy. But this has nothing to do with neoclassical economics. Davidson seems to have relied on George Mason University economist, Peter Boettke, for some of his ideas, but I find it hard to imagine that Davidson is quoting Boettke accurately when he writes:

In actuality, Ryan is like a lot of politicians who merely cherry-pick Hayek to promote neoclassical policies, says Peter Boettke, an economist at George Mason University and editor of The Review of Austrian Economics.

Does Davidson know what a neoclassical policy is? Does Boettke? Does anyone? I don’t think so, because neoclassical economics, as such, has no policy agenda. But whatever a neoclassical policy might be, Davidson assures us that Hayek is totally against it.

Now, although the term “neoclassical policy” is a pure nonsense term, I can guess how Davidson, after talking to a bunch of Austrians — I hope not Boetkke or Bruce Caldwell, who is also quoted in Davidson’s piece — picked up on the propensity of modern self-styled Austrians — generally followers of the fanatical Murray Rothbard, as distinguished from the authentic Austrians of Hayek’s generation — to deploy “neoclassical” as a term of abuse, providing sufficient justification for these modern Austrians to dismiss any economic doctrine or policy they don’t like by strategically applying the epithet “neoclassical” to it.

So let me assert flatly that F. A. Hayek was a neoclassical economist through and through. He was also an authentic Austrian economist, schooled in both branches of Austrian theory by way of his association with his primary teacher at the University of Vienna, Friedrich von Weiser Wieser, one of the two principal successors of Carl Menger, the founder of the Austrian School, and through his subsequent collaboration with Ludwig von Mises, a leading student of Eugen von Bohm-Bawerk, the other principal successor of Menger.

In an introductory essay (“The Place of Menger’s Grundsatze in the History of Economic Thought”) to a volume, Carl Menger and the Austrian Theory of Value, edited by J. R. Hicks, commemorating the centenary of Menger’s classic work Grundsatze der Volkwirtschaftslehre (Principles of Economics) propounding the marginal-utility theory of value, Hayek explained that Menger’s theory had been incorporated into the larger body of economic theory that grew from the foundational contributions of Jevons, Menger, and Walras. While Menger’s work had become less influential in the second half century following publication of Menger’s Grundsatze than it had been in the first half-century after its publication, Hayek attributed that fact to a shift, under the influence of Keynes, in the interests of economists from micro- to macro-economics. Keynes’s work was not neoclassical economics, and it has been an ongoing project ever since Keynes published the General Theory to determine whether, and to what extent, Keynes’s theory could be reconciled with neoclassical economic theory. Here is how Hayek summed up his essay.

It seems to me that signs can already be discerned of a revival of interest in the kind of theory that reached its first high point a generation ago – at the end of the period during which Menger’s influence had mainly been felt. His ideas had by then, of course, ceased to be the property of a distinct Austrian School but had become merged in a common body of theory which was taught in most parts of the world. But though there is no longer a distinct Austrian School, I believe there is still a distinct Austrian tradition form which we may hope for many further contributions to the future development of economic theory. The fertility of its approach is by no means exhausted and there are still a number of tasks to which it can profitably be applied.

So we are all (or almost all) neoclassical economists, and none more so than Hayek, who was steeped in the neoclassical tradition. But no tradition is static. When a tradition stops changing, when it stops evolving, it becomes a relic, not a tradition. And with change come differences of opinion and disagreements, even bitter disagreements, between practitioners operating within a single broad tradition. Many Austrians now view themselves as completely distinct and separate from the broader neoclassical tradition from which their own doctrines evolved, but that was never Hayek’s view. And for all the severe criticisms and complaints he voiced about the direction of economics since the 1930s, he never viewed himself as being cut off, or alienated, from the mainstream of neoclassical economic theory. That Hayek could be both a critic and a practitioner of neoclassical economics is obviously too complicated a proposition for Mr. Davidson, and many others for that matter, to comprehend, but to Hayek it seemed entirely natural and unremarkable.

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38 Responses to “Hayek Was a Neoclassical – Yes, NEOCLASSICAL! — Economist”


  1. 1 andrew lainton August 27, 2012 at 7:59 pm

    Would have been more accurate to state he was non walrasian – the current that has come to dominate neoclassical thinking. Certainly also neoclassical thinking has not adopted austrian capital or business cycle theory.
    For me the break came with Kaldors comparative static critique of ‘concertina theory’. With Hayek not accepting comparative statics he cut himself off, whilst the ‘neoclassical mainstream’ simply ignored capital theory and disequilibrium. This is the big issue that this diversion over terminology obscures, why Hayek became semi-detached and whether the issues that caused this have ever been truly settled?
    By the way use of modern stock-flow consistent techniques can comprehensively show that Hayeks theory of ‘forced savings’ – which underpins his entire structure- being intrinsically inflationary is false – see my blog.

  2. 2 Fernando Arteaga August 27, 2012 at 8:17 pm

    Great piece. “Neoclassic economics” as a concept has been abused both by the fanatic austrians you recall, but also by some of the other “heterodox” schools (postkeynesians and marxians).

    I recently assisted the Mises Institute seminar and was very disappointed by this fact. I am an undergrad econ student in a very leftie heterodox school in Mexico, so i was looking for new fresh perspectives in the Mises Seminar. Unfortunately I felt I was dealing with the same kind of fanaticism that I face on a daily basis with the marxians at my faculty…

  3. 3 Greg Ransom August 27, 2012 at 11:12 pm

    Yes, of course.

    But let’s not forget that words are used to do all sorts of work.

    One job “neoclassical” is used to do is to identify the attempt to blend marginalism with Ricardo’s three categories of land, labor and capital — i.e. with the attempt to close the door on extending marginalism to multiple and heterogeneous production processes taking more or less time and producing more of less goods. Harrod/Solow one-good capital theory is a paradigm case of “neoclassical” capital theory — inspired directly by Hayek’s work (see Hicks) but effectively not just an alternative to it, but a one way mirror blocking perception of Hayek’s rival picture.

    Similarly, the word was used by Samuelson to name his ertzatz blend of indifference curve / “consumer behavior” marginalism with vulgar Keynesian macro, eg “the neoclassical synthesis”.

    And Marshall’s method — as Hayek and Lachmann and Vaugh and many others point out — finds a ground for objective and static “givens” in the scissors of supply and demand (eg objective costs) in a partial equilibrium explanatory frame which inspires an inability for many to see the dynamic, subjective costs, general equalibrating market process perspective assumed by Hayek and others in Hayek’s tradition. Hayek explicitly discusses the significance of this difference in perspectives in his The Fatal Conceit. For many economists the Marshallian price theory method is “neoclassical economics”.

    Also, “neoclassical” economics is used the Arrow/Hahn picture of using the GE construction as some sort of “invisible hand” explanation — an explanatory strategy completely rejected by Hayek in his most famous papers.

    So, two things are important.

    1) Words can be used for many different jobs.

    2) In fact Hayek’s most basic explanatory strategy is VERY different from the most basic explanatory strategy of Arrow, Samuleson & Marshall.

    Used to identify their common work using some form of marginalism, Arrow, Samuelson, Hayek, Solow, and Marshall are all “neoclassical”.

    Used to identify various attempts to find a scientist or mathematical or “gicen data” ground for created “economic science”, Hayek is very much not a “neoclassical”. Or used to identify attempts to integrate Ricardian class concepts into economics, esp in the form of an aggregate stuff “capital” or to use such a category in the construction of “macroeconomic” models Hayek is very much not a “neoclassical”.

  4. 4 W. Peden August 28, 2012 at 3:29 am

    Re: Rothbardians and the term “neoclassical”, to be fair to Adam Davidson (whom I assume is trying to follow their usage of the term) the Rothbardians don’t know what they mean by this term either. Robert Murphy, perhaps the smartest of the purer Rothbardians, managed to go through a near-hour long lecture on the difference between Austrians and “neoclassicals” (in the abusive sense) and never got any further than “I know it when I see it”. Goodness knows how the rest of us are supposed to work out what the Rothbardians mean.

    The price of relying on people who use intellectual terms in an abusive and obscure way (like the use by many of the term ‘neoliberal’ or much of the use of ‘socialist’) is that you can end up writing utter tripe.

    Greg Ransom,

    I think that using ‘neoclassical’ to mean ‘Marshallian’ is terribly sloppy; sadly, as you say, it’s commonly done even by people who like to be described as historians and philosophers of economics. It’s on a par with using ‘Classical’ to mean ‘Marxist’. We don’t need two words for ‘Marshallian’.

  5. 5 John August 28, 2012 at 4:55 am

    all of the above is an exercise in writing utter tripe.

    Hayek was a pathetically useless economist. All of his B.S. was disproved by the actions of the Fed following Lehman brothers which showed that the Gov’t does have the ability to prevent total financial Armageddon.

    And, it was Hayek’s “free market” ideas that lead to the crisis, the huge run up in private debt was the result of free market action. No one made AIG buy a single synthetic

  6. 6 Bill Woolsey August 28, 2012 at 5:49 am

    Think of the “neo-classical” view of government intervention. (Not the neo-classical view of price.)

    Identify market failure and then design a government policy to fix it.

    Perhaps Pigou would be the name best associated with that approach.

    This usage of “neo-classical” is sometimes heard in “Virginia School” circles. The “Virginia school” critique of the approach is that government isn’t a benevolent despot that fixes market failures. It operates with its own logic–ameliorating market failures is a possible positive side effect, but if
    rent-seeking creates or worsens market failures, then that is what we should expect to happen.

    However, some Austrians (say Boettke,) would add that the government doesn’t really have the information needed to correct the market failures. In our models, we can exactly identify the failure and fine tune an intervention to fix it, but no one really has the information assumed in the model.

    The economics mainstream remains infected by this approach. Even communism can be understood on this basis. There is a massive market failure, and the government allocates resources as shown appropriate by economists’ models. In other words, think about communism in the sense of the economists who were claiming that the Mises/Hayek calculation critique could be “solved.” (Not a Marxist understanding of price in a capitalist system.)

    And, of course, it was in debating those neo-classical economists who argued that “socialism” was possible, that Hayek articulated his understanding of the market process. And it does deeply undermine the “neo-classical” approach to intervention described above. Of course, Hayek found substantial government intervention acceptable.

    Do the conservative politicians who claim that Hayek (of the Road to Serfdom) inspired them understand any of this? Probably not.

    However, I don’t think that the Hayek of the Constitution of Liberty and the Friedman of Capitalism and Freedom are that much different as lodestones for actual politicians. The big government Republicans and their small government Republican opponents are not primarily divided by more or less Pigouvian optimism. And I do think that mentions of Hayek are a marker of being a “small government” conservative, and I believe they are skeptical of pro-business spending and regulation.

  7. 7 Matías Vernengo August 28, 2012 at 7:24 am

    Your take on hayek is correct, he was a marginalist. But it is important to distinguish the neoclassical/marginalist and the old classical authors, that had no notion of factors of production, and of optimal utilization of those factors. Krugman gives a particularly distorting view of the meaning of neoclassical economics in his link to your post. For a reply see here http://nakedkeynesianism.blogspot.com/2012/08/krugman-on-meaning-of-neoclassical.html

  8. 8 Greg Ransom August 28, 2012 at 10:21 am

    Paul Ryan likely does understand all this — Ryan studied with a Hayek friendly economist at Miami U and had extensive discussions about Hayek with him — Ryan has also explicated Hayek’s knowledge problem is speeches.

    Bill writes,

    “Do the conservative politicians who claim that Hayek (of the Road to Serfdom) inspired them understand any of this? Probably not.”

    The rest of what Bill writes is very helpful.

  9. 9 amv August 28, 2012 at 11:38 am

    Excellent post!

  10. 10 Mario Rizzo August 28, 2012 at 2:46 pm

    The world is different today from when Hayek wrote. Hayek’s economics, as it was and as it has evolved, is very different from today’s neoclassical economics. Isn’t this obvious? So what are we talking about?

  11. 11 Peter Boettke August 29, 2012 at 7:27 am

    Let me put some needed context. When Davidson is talking about “neoclassical policies”, he is talking about the neoclassical synthesis of the Keynesian hegemony (read Samuelson 1950-1980 economics). He technically is misquoting me, because what I said was that politicians of all stripes act as Keynesian economists — we just wafle between conservative Keynesians and liberal Keynesians. m

    But Davidson was interested as well as the debate with Keynes with the debate with market socialism, and I imagine in that context he started to blur words. To him, if you read closely, Keynes is the quintessential neoclassical economist. That is far different than most of us would say.

    Hayek is a “neoclassical economist” in the sense that he is economic analysis focuses on relative price adjustments; and he is a subjectivist, and he is a marginal utility theorist.

    But his core understanding of the economic process differs radically from how neoclassical economics evolved within the general competitive equilibrium framework. Hayek is quite explicit about this — starting with his 1937 paper on knowledge.

    In my latest book, Living Economics, I draw the distinction not between neoclassical and non-neoclassical theories, but between mainline and mainstream theories. Hayek was a mainline economist in the tradition of the Scottish Enlightenment, the French Liberals, the British Utilitarians, and the Austrian marginalists.

    Pete

  12. 12 Philo August 29, 2012 at 1:53 pm

    That’s Friedrich von Wieser (not Weiser).

  13. 13 Ritwik August 30, 2012 at 5:27 am

    I think Bill’s comment is spot on. The fountainhead of the neoclassical analysis of government intervention is Pigou. Witness Mankiw and Pigovian taxes, for example. Non-neoclassical analysis in this sense is best exemplified by the Virginia school of political economy.

  14. 15 David Glasner August 30, 2012 at 9:56 am

    Andrew, I am not sure that I agree that Hayek was a non-Walrasian. Hayek’s theory of intertemporal equilibrium was deeply influenced by the Walrasian/Paretian systems of general equilibrium. Walrasian general equilibrium was the starting point for business-cycle analysis. He tried to move beyond it and saw its limitations, but he did not reject it. Thanks for reference to your discussion of stock-flow issues. Looks interesting. I will try to read and digest it.

    Fernando, I know what you mean.

    Greg, Neoclassical economics is a big tent. Lots of stuff going on underneath that tent, and it’s easy to find stuff that may offend your sensibilities and sometimes even mine. That doesn’t justify turning neoclassical into a term of abuse and suggesting that Hayek did not identify himself with the broad stream of theory that emerged from the work of Jevons, Menger and Walras. By the way to the extent that Marshall excessively emphasized “objective and static givens” in his analysis he was clinging to classical notions and was thus being less than fully neoclassical. So it is strange to bring up Marshall as a reason why Hayek should not be considered neoclassical. I have not the foggiest notion of what you mean by Samuelson’s “ertzatz [sic] blend of indifference curve / “consumer behavior” marginalism.” I saw Hayek with my own eyes draw and use indifference curves and he had not the slightest qualm about their use. It makes no sense at all to try to discredit neoclassical theory simply because Samuelson tried to restate the Keynesian model in a way that was consistent with neoclassical theory.

    W. Peden, Thanks. Right on target.

    John, I have been critical of Hayek’s policy positions during the Great Depression which he himself later recanted. He undoubtedly committed other mistakes as well. That doesn’t take away from his stature as an economist or philosopher in my estimation.

    Bill, Thanks for your very clear and cogent explanation of the background for how neoclassical is being used. Pigou was a great neoclassical economist, to be sure. But his views on government intervention were criticized famously two other economists of some reputation: Frank Knight and Ronald Coase. What are they? Chopped liver? In addition, Hayek had no problem in principle with the imposition of Pigouvian taxes. I am sure that if we check his policy writings in books like The Road to Serfdom, The Constitution of Liberty, and Law Legislation and Liberty, we will find ample evidence that he was more than willing to entertain the possibility of using taxes as a way of improving the operation of the price system to more fully reflect social costs. I understand that it is possible to take a position like Bottke’s about the futility of trying to correct operation of the price system by imposing taxes on externalities. That’s a legitimate position to take, but it wasn’t Hayek’s. And there are surely very orthodox neoclassical economists who would agree with Bottke’s position. That said, I think I agree more or less with the gist of your final paragraph.

    Matias, I don’t think that Krugman seriously distorted the neoclassical position. I will have to look at your blog and perhaps give you a further reply.

    amv, Thanks.

    Mario, Yes, the world is different. But the passage written by Hayek that I quoted was published in 1970. I don’t think that what some Austrians find so offensive about neoclassical economics were all published after 1970, certainly the examples cited by Bill Wolsey and Greg Ransom all predate 1970 by a considerable amount. What I am talking about is how Hayek viewed himself.

    Peter, If Davidson defines neoclassical economics as the neoclassical synthesis, he is committing a travesty. To consider Keynes the quintessential neoclassical economist is just ignorant, something akin to Keynes’s making Pigou his strawman for what Keynes called “the classical economists.” I am glad to see confirmation that you were indeed misquoted by Davidson, as I suspected.

    I read Hayek’s 1937 paper as a clarification of the equilibrium concept underlying the Walrasian equilibrium concept. The subtlety of the paper is perhaps the reason that it has not had a more profound effect, as it should have had, on the development of economic theory. But that doesn’t mean that he wasn’t a fully neoclassical economist.

    Philo, Thanks.

    Ritwik, I agree with much, but not all, of what Bill says. See above

    JP, Thanks. I saw it, but haven’t yet read it. Hope to read and respond sometime soon.

  15. 16 Greg Ransom August 30, 2012 at 3:14 pm

    Samuelson’s ertzatz blend was the blend of his scientistic version of consumer behavior with vulgar Keynesian macro. (See Stanley Wong on Samuelson’s massive FAIL when it comes to Samuelson’s scientistic dreams for consumer behavior theory.)

    Hayek was the guy who suggested to Hicks that he adapt Pareto’s production indifference curves to provide a mathematical mapping of marginal ‘choice’. See the 1978 UCLA interviews.

    Hayek is on record as both endorsing indifference curves as a formal stand in representation — and he’s also on record attacking those who don’t understand that it is a fake construction, and who are mislead to read stuff into their math which doesn’t reflect the real world.

    There is no contradiction here — but there is pathology among those like Samuelson & MANY math economist who think there is more in those math constructs than in fact is their — ie its extremely common to find economist making the assumption that these bits of math limn real stuff in actual heads — note, eg how Scott Sumner talks as if people to attempt to maximize the number of “utilities” consumed. Again, read Stanley Wong on the scientistic fail of Samuelson to get a fuller understanding of one very influential set of deep pathologies.

    “I have not the foggiest notion of what you mean by Samuelson’s “ertzatz [sic] blend of indifference curve / “consumer behavior” marginalism.” I saw Hayek with my own eyes draw and use indifference curves and he had not the slightest qualm about their use.”

  16. 17 Greg Ransom August 30, 2012 at 3:19 pm

    David, you go well beyond my words.

    I didn’t use “neoclassical” as a term of abuse.

    I’m simply doing “ordinary language philosophy”, pointing out how real economists have repeatedly used the word “neoclassic” to identify specific things, things which are in contrast to Hayek’s explanatory strategy & are contrary to Hayek use of the logic of marginal valuation.

    E.g., Samuelson coined the expression “neoclassical synthesis” and more than anyone Samuelson spread the use of this word “neoclassic” IN JUST THIS CONTEXT.

    It’s just a historical fact about the word and its use.

    The term itself essentiall doesn’t get used at all until after an article published in 1946.

    Do a Google NGRAM search for some sense of the spread of the word. You can also search the word at the Ron Utz site, so see its particular use in the general language.

  17. 18 Greg Ransom August 30, 2012 at 3:28 pm

    Actually, Hayek had did have a problem IN PRINCIPLE problems with Pigouvian welfare economics — and Hayek quoted Pigou directly pointing out those knowledge problem in principle problems, see where I’ve quoted Hayek’s quote of Pigou on the Wikipedia entry for “Pigouvian Tax” on the topic of the knowledge problem and the Pigou tax “solution” to market failure problems.

    This doesn’t mean that Hayek opposed government efforts to correct market failure problems, but is does mean that Hayek RED FLAGGED the chronic failure of math economists to see the in principle limitations of their models and assumptions, and their chronic misuse of their math constructs because of this failure.

    Hayek wrote repeatedly on this topic.

    David writes,

    “Hayek had no problem in principle with the imposition of Pigouvian taxes.”

  18. 19 Greg Ransom August 30, 2012 at 3:29 pm

    Wikipedia:

    “Most of the criticism of the Pigouvian tax relate to the determination of the tax and the implementation. Pigou and Friedrich Hayek point out that the assumption that the government can determine the marginal social cost of a negative externality and convert that amount into a monetary value is a weakness of the Pigouvian tax. William Baumol suggests that the measurement of social cost is almost impossible. Ronald Coase argues that all social costs are reciprocal in nature, so, once the tax is set, it must not be changed. Others assert that political factors can complicate the implementation of a Pigouvian tax.
    Measurement problem

    Arthur Pigou said in “It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of [the gaps between private and public costs] could interfere with individual choice.”[12] In other words, the economist’s blackboard “model” assumes knowledge we don’t possess — it’s a model with assumed “givens” which are in fact not given to anyone. Friedrich Hayek would argue that this is knowledge which could not be provided as a “given” by any “method” yet discovered, due to insuperable cognitive limits.

    William Baumol argues that it is extraordinary difficult to measure the social costs of any externality, especially because many costs are psychological and individual[13]. Even if a measurement of the psychological effect of some externality did exist, it would be impossible to collect that data for all individuals affected and then find the optimum output level. If experts could find the optimum output level, it would be easier to find the optimum Pigouvian tax level to achieve that optimum. In the end, Baumol argues that the best solution is to set a minimum standard of acceptability for negative externalities, and create tax systems to achieve those minimum standards. Baumol points out that government committees have a tradition of agreeing on minimum standards, so the practicality of this solution is reasonable.”

  19. 20 Will August 30, 2012 at 5:17 pm

    “By the way to the extent that Marshall excessively emphasized ‘objective and static givens’ in his analysis he was clinging to classical notions and was thus being less than fully neoclassical.”

    This is ironic, given that the term “neoclassical” was coined expressly to denote Marshall’s blending of marginalism with the older Ricardianism: http://www.jstor.org/stable/1883770

    http://en.wikipedia.org/wiki/Neoclassical_economics

    I think the term is ambiguous and loaded, and that a more precise word should be used in its stead. “Classical” is similarly slippery, having morphed several times and often served a polemical purpose. Not that I can fault you for wanting to irritate internet Hayekians…

  20. 21 andrew lainton August 30, 2012 at 8:44 pm

    David by non walrasian I meant that the starting point being disequilibrium and permanent disequilibrium rather than equilibrium and general equilibrium. of course Austrians aversion to mathematical modelling took them away from the neoclassical ‘mainstream’.

  21. 22 David Glasner August 31, 2012 at 9:23 am

    Greg, Samuelson was an incredibly great economic theoretician, but he was not an equally good philosopher. So what? His contributions to economic theory stand or fall on their own, and we pay no attention to his philosophy.

    Your point that Hayek was willing to use indifference curves as an analytical tool without delving too deeply into its metaphysical underpinnings is a good example of Hayek’s Popperian approach to problem solving. To me that seems an eminently neoclassical approach to take.

    Just because Samuelson and other economists misunderstood the tools they were very good at manipulating doesn’t obligate us to reject the use of the tool they taught us how to use.

    I am no longer the Popperian I once thought I was, but I am still enough of a Popperian to be getting weary of trying to define what “neoclassical” really means. In any event, I think that it is a travesty to use Samuelson’s reference to a neoclassical synthesis as the epitome of the neoclassical paradigm. So at this point, I have no clue about what you think you are referring to when you use the term “neoclassical.”

    Your discussion of Pigou demonstrates that economists with impeccable neoclassical credentials are quite well aware of the difficulty of measuring social costs and benefits accurately enough to be confident that they could set Pigouvian taxes at the optimal rates. It is proper to be aware of the limitations on our knowledge and the possibility that we may be mistaken in our estimates of social costs and benefits, but we should also be aware of the danger of allowing the best to become the enemy of the good.

    Will, Thanks for pointing this out. Now that you mention them, the Marshallian overtones of neoclassical do sound somewhat familiar to me. In that case, I would have to acknowledge that there is a basis for being wary of the term neoclassical, though it seems to me to be very different from the issues that turn off Austrians to anything that smacks of the neoclassical.

    Andrew, I am still going to take issue with you. I think that Hayek started from equilibrium and tried to use equilibrium as a benchmark from which to deduce reasons that could explain the disequilibrium characteristics of business cycles. Hayek was limited in his mathematical modeling capabilities, so he had to resort, for the most part, to non-mathematical reasoning to carry out his analysis. But he wasn’t against mathematical modeling in principle, as was Mises for example.

  22. 23 Greg Ransom September 2, 2012 at 1:03 pm

    This only begs the question, David, and plays word games with me.

    David writes,

    “Greg, Samuelson was an incredibly great economic theoretician, but he was not an equally good philosopher. So what? His contributions to economic theory stand or fall on their own, and we pay no attention to his philosophy.”

    Let’s talk about this without using the word “philosophy” — which have multiple uses and is used as a dodge from addressing the questions at hand.

    WHO TO DO SCIENCE in the domain of economic science is the question.

    In the first instance this is very core of science — getting the explanatory strategy right.

    Calling this “philosophy” is NOT helpful.

    Samuelson in the first instance proposed a way to provide explanations — that strategy was a complete botch, a mess, an unsound failure.

    His SCIENCE was a failure, for all of his contributions of particular math formalism.

    I claim that Hayek provides a successful contingent causal explanatory strategy for economics — good, powerful, and sound causal explanations using a sound explanatory strategy and sound causal mechanism. I.e. exactly the sort of contribution provided by Charles Darwin in biology.

    Note well: I have not rejected any “tools”, I have pointed to alternative ways of providing explanations, alternative ways of using the “tools” (although I HATE this Samuelsonian/instrumentalist word for formal math & logical constructs.)

    Finally, Hayek is not a Popperian when it comes to science — Hayek sees Popper as showing better than anyone many of the conceptual failures of the Positivis/Carnapian program, and he sees many useful insights into science. Hayek also liked the work of Polanyi and even recommended Kuhn to Popper. Hayek was not a philosopher of physics, and his contributions to the philosophy of science and explanation provided a refutation of Popper’s picture of science.

  23. 24 Greg Ransom September 2, 2012 at 1:07 pm

    Note, David, that in my very first comment I AGREED WITH YOU.

    I agree that we can use the word “neoclassical” in a way which included Hayek.

    The word is also used to identify stuff to which Hayek provides an alternative, a rival.

    And the actual, factual, history of the use of the term often comes to identify exactly these things that are rivals to what Hayek offers.

    That’s just a fact.

  24. 25 Greg Ransom September 2, 2012 at 1:38 pm

    There is a factual history to the use of words.

    Your argument is with the facts.

    Bill & I have given a brief listing of some of those facts.

    The facts don’t change because you want to use words differently than others.

  25. 26 Greg Ransom September 2, 2012 at 1:45 pm

    Coase & Hayek & many others have used the word “neoclassical” to identify economics & economists who reify the “given data” in formal “black board” economics, and who fail to see the role of rivalrous, unique and changing individual judgments, embedded institutional norms, real world imperfect prices, etc., etc., theme in Hayek which go back to the 1920s.

    A classic exemplar of this “neoclassic” economics can be found in the work of Abba Lerner.

    That’s simply how Hayek in fact has used the word “neoclassic”, for example when Hayek specifically says that neoclassical economics never really comprehended the guide function of changing relative prices.

    Hayek says that, that’s how he uses the word.

    That’s the fact of word use that is on the table.

    The facts don’t change because we want to use words in our own way.

  26. 27 David Glasner September 3, 2012 at 1:12 pm

    Greg, You wrote:

    “This only begs the question, David, and plays word games with me.”
    What exactly is the question that you feel is being begged?
    “Samuelson in the first instance proposed a way to provide explanations — that strategy was a complete botch, a mess, an unsound failure.”

    At this point, I don’t know what you are referring to. Are you talking about his theory of revealed preference, his explanation of how comparative statics propositions can be derived from optimization solutions, or any of a dozen other big ideas that he introduced into economics?

    “His SCIENCE was a failure, for all of his contributions of particular math formalism.”

    Again, I don’t know what you are referring to. His collected papers fill five thick volumes. How many of his papers have you read? Do you really think that you are qualified to pass judgment on his scientific career. Armen Alchian considered Samuelson to be the finest economic theorist of his time. I take the judgment of Alchian, who did read Samuelson’s papers, about Samuelson over yours without hesitation.

    “Note well: I have not rejected any “tools”, I have pointed to alternative ways of providing explanations, alternative ways of using the “tools” (although I HATE this Samuelsonian/instrumentalist word for formal math & logical constructs.)

    You may have pointed to “alternative ways of providing explanations” and “alternative ways of using ‘tools,’” and you constantly talk about an “explanatory strategy” but I still don’t know what, as a practical matter, constitutes the explanatory strategy. Let me also just mention, since you brought it up, that I hate it when you SHOUT.

  27. 28 Greg Ransom September 4, 2012 at 12:27 pm

    Yes, a good example of Samuelson’s scientific botch is his “heory of revealed preference”.

    Samuelson himself says that his explicitly explained operationalist/Machian strategy for doing “science” in economics was completely failed to pan out as he had imagined it would, and that the role he expected econometrics to play in the attempt at “science” was a complete failure on the terms he demanded of it.

    Those are Samuelson’s own judgments. When people like Stanley Wong have taken a closer look at such things as Samuelson’s “reveal preference” attempt at science, things look ever worse, horribly worse.

    David, do you fail to acknowledge the difference between an achievement in pure mathematics/logic like the GE proofs of Arrow and Debreu, and the causal explanation of problem raising patterns in our experience, e.g. Hayek’s learning & rival judgment correction in the context of individual local knowledge and changing & imperfectly judged relative price signals?

    The first is a formal achievement. A purely mathematical “tool” — a tool which very often fails to perform any coherent task because the attempt is made to make it do things it is conceptual impossible for it to do.

    Samuelson was brilliant as constructing purely formal tools — he was also brilliant at bluffing people into believing he was using them non-pathologically when very often Samuelson was attempt is make to make it do things it is conceptual & empirically impossible for it to do.

    See Stanley Wong on Samuelson’s revealed preference work, as an example.

    I use capital letter EMPHASIS because there is no coding for everyday emphasis in this software.

    It’s not shouting, it’s emphasis. It’s emphasis used make sure points that have been missed are not missed again, to get the conversation back on track and to keep it from going on detours, detours which avoid or muddle the questions at hand.

    Hayek’s fundamental theme stretching from the 1920s to the 1980s is that formal constructs build out of “given data” given to those passing back and forth math constructs does NOT capture 1) the real world role of price signals; 2) the principle CAUSAL element in economic science, the learner with unique individual judgments of the significance of local conditions and changing relative prices; 3) the real structure of semi-coordinated individual plans in the market, and structural discoordinations in that structure of the sort empirically observed during business cycles.

    Hayek suggests that pure math constructs can give us some rough insight into those structures — but more often than not economists actual misperceive the real world due to math constructs because they perceive the math model to be the world, when it is not the world. Anyone paying attention can find economists doing this ALL OF THE TIME.

    Well, enough for now.

  28. 29 David Glasner September 4, 2012 at 6:38 pm

    Greg, I have only a very cursory recollection of Samuelson’s revealed preference theory. As I recall he was able to derive many if not all the standard propositions of demand theory, and was able to avoid the messy possibility of a Giffen good, starting from his axiom of revealed preference. I was never a particular fan of that theory, and I don’t remember that it ever became a mainstream part of standard neoclassical treatments of demand theory. The simplistic operationalism that motivated the theory was certainly not a point in its favor as I was concerned, but there was nothing offensive about it as a theoretical exercise. I personally would not waste my time reading a whole book about the subject. To imagine that Samuelson’s scientific reputation depends on the validity of revealed preference theory is simply laughable.

    Most of Samuelson’s contributions have deep insight into the structure of economic theory and a deep foundational understanding of how economic theory works. If he didn’t understand the theory at a very profound level he would not have been able to prove all the mathematical theorems that he did. They are a far cry from the Arrow-Debreu proofs for the existence of GE. Most of Samuelson’s theorems, which are informed by a wonderful understanding of what economic reasoning is about, had much more economic content than simple existence proofs. That doesn’t mean that everything he did, especially in macro, was valid, but his understanding of economics was just phenomenal.

    Greg, you may capitalize words because you want to provide emphasis, but that doesn’t mean that others don’t perceive it as shouting. By the way, overuse of italics, though not shouting, can also be pretty annoying.

    I agree 100% that Hayek taught us to be more careful about the implicit informational assumptions underlying formal models. There is a lot of work, hard work, to be done in teasing out the implications of those informational assumptions, and it is important to do that hard work rather than just assume that the assumptions don’t matter. That’s part of the ongoing work of economic theory. And I agree that too much economic theorizing ignores those questions. That critique doesn’t invalidate what Samuelson did. It just says there is a lot more work to be done.

  29. 30 Taz von Gleichen October 7, 2012 at 10:43 am

    Hayek is one of my all time favorite economist. I love to see articles about him. Just like for Mises, and others on here.


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  2. 2 Neo Fights (Slightly Wonkish and Vague) - NYTimes.com Trackback on August 28, 2012 at 6:23 am
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  5. 5 Economists This Week: What is neoclassical economics? Glasner, Krugman, Vernengo, Knibbe and Pilkington « Real-World Economics Review Blog Trackback on August 30, 2012 at 4:59 am
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  8. 8 Links for 08-28-2012 | FavStocks Trackback on September 1, 2012 at 1:20 am

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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