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Wednesday, August 22, 2012

Joshua Wojnilower — Hayekian Limits of Knowledge in a Post-Keynesian World

To explain my position in a bit more detail, I agree that government deficits can help sustain growth and employment while the private sector attempts to increase its savings. This view, however, does not imply that government spending should increase or that it will be productive. Aside from the difficulty of knowing what to produce, government spending and deficits are often prone to corporate favoritism that serves to enlarge the income inequality gap. From my perspective, these concerns too often go unaddressed in proposals for larger deficits and increased public spending. The Post-Keynesians may hold the upper hand regarding causal relationships among macroeconomic factors but they could learn a thing or two about the limits of knowledge.
Bubbles and Busts
Hayekian Limits of Knowledge in a Post-Keynesian World
Joshua Wojnilower

binve adds his very good thoughts in a link in the comments there. This is a section in Why Deficit Spending and Creative Destruction are not Mutually Exclusive Positions, which is well worth the read, including discussion in the comments.

While I like Hayek and agree in general with "The Uses of Knowledge in Society," the argument is often overextended. The inability to know everything does not imply the inability to know anything, and therefore that policymakers should do nothing.

Secondly, the argument that because decision-making in representative democracies is political, it is driven by self-interest and possibly corruption and capture is not as overwhelming an objection as it claims to be because representatives are periodically accountable to the people and can be removed if they do not produce results or are corrupt, unlike in command system that are based on politically independent control. The idea that governments should just butt out because of imperfect knowledge and the possibility of interest and influence is absurd.

Moreover, the Classical assumption of an invisible hand is based on 18th c. Deism and Newtonian laws of motion, and Neoclassicism is simply the attempt to formalize this assumption along the lines of 19th c. physics. It's just nonsense, as Marx, Schumpeter, Keynes, Kalecki and the Post Keynesians have shown.

So Hayek needs to be taken with a grain of salt here. He was greatly influenced by the Soviet experiment with command economies and he rightly showed the weaknesses of that approach. But his work cannot be (over)extended to mixed economies, and Hayek was not completely opposed to government interventions either, as some suppose. The question is where to draw the boundary without crossing the line into gross inefficiency and cheating.

And, yes, economists and policymakers need to be humble about what they can know and accomplish. But the idea that humanity should just return to letting Nature rule is silly, and this is what "the invisible hand" of the market is made out to be on the natural order argument. In addition, the natural order argument is premised on the assumption that the subject matter of economics is like the subject matter of the natural sciences, when it is not.

What many economists seem to forget is that policy is not merely economic. It is inherently political and leaving things to the "invisible hands" is also a political decision in which there are winners and losers, and just as in corruption and capture, the winners are generally the top of the town and the losers "the little people." 

At the same time, politicians always have either eyes on the next election, and they know they cannot stray to far from the wishes of the people. They know that voters will not sit idly by if they do nothing. So doing nothing is not an option for them if they want to retain their position.

The problem is therefore a political problem rather than chiefly an economic one. The problem is one of selecting representatives that are people of integrity rather than "interested men" in Tom Paine's sense, as well as people who are honest and sincere instead of nest feathers and supporters of the interests of their own group.

And economists should focus on supplying policymakers with the best possible policy recommendations they can devise, based on a clear and well-substantiated rationale, instead of involving themselves in the political process.

15 comments:

  1. Tom,
    As you accurately acknowledge, Hayek was not opposed to all govt interventions and to be clear, neither am I. It may simply be a factor of who I'm reading, but I often feel that the view policy makers should/can do something gets overextended. IMO, the goal is to ensure there is a healthy debate including the merits from both sides of the knowledge continuum.

    One other point I would note, is that the difficulty in selecting representatives, while a political issue, has also been addressed by public choice economics. In this regard, I probably hold a more skeptical view about the ability of a society to select the "good" representatives.

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  2. In this regard, I probably hold a more skeptical view about the ability of a society to select the "good" representatives.

    It may be difficult but it it not impossible and needs a lot more attention

    My view that the leaders reflect the collective consciousness of the society, and the issue is therefore raising the level of collective consciousness.

    This happen naturally through historical progression, history having a liberal bias. But what can be done consciously and intentionally to increase the adaptability rate is the question. Humans are no longer completely subject to the process of natural evolution and have it in their power to take greater control of their destiny on an ever broader and deeper scale.

    Presently, human knowledge vastly exceeds our ability to use it and scale it up, except where it is profitable to capital. That is a limitation to be transcended, and that will mean taking a step beyond "capitalism" as presently configured.

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  3. Excellent post and discussion! Thanks

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  4. "The inability know everything does not imply that inability know anything"

    I think that should be "the inability to know everything does not imply the inability to know anything"

    A few more typos in there too (Mark or Marx?)

    You should clean it up because its a great little piece.

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  5. Thanx, y. I think I've squashed all the bugs now.

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  6. > My view that the leaders reflect the collective consciousness of the society, and the issue is therefore raising the level of collective consciousness.

    I don't think this is true at all. But I also think there's no such thing as a collective consciousness.

    Why is there nothing here about tragedy of the commons? It is *the* key problem with all collective systems, including democratic ones.

    > Presently, human knowledge vastly exceeds our ability to use it and scale it up, except where it is profitable to capital.

    Can you provide the best example you have of such "unused knowledge"? I'm skeptical that there is much low hanging fruit like this.

    After all, rich people generally have more resources to spend on pursuing new experiences, even if it just means they do it in their free time.

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  7. marris, the term "collective" sets you off. It is a commonly used work in sociology, just as "aggregate" is in economics. It means the cultural and institutional relationships of a group that distinguish one group from another. If you don't think that social groups are based on cultural and institutional relationships, you'll have to explain why, since sociology is based on this, just as macro is based on aggregate data.

    A good example of unused knowledge is all the scientific knowledge available in the life and social sciences that a country like the US is not using to full advantage due to cultural and institutional drag. Fundamentalists of all religious around the world are an obstacle to the use of contemporary knowledge, for example, and advocate living in the past as a matter of tradition. There is a vivid demonstration of this near where I live, in the there are two quite large groups, Amish and Mennonite, the most of conservative of whom live in the 18th or 19th c., eschewing all modern technology.

    The collective level of conscious was well demonstrated by a friend of mine that ran for president a few years ago. Warten can probably tell a similar story. My frield is a theoretical physicist who saw that most of the pressing problems of the US and world can be solved based on existing scientific knowledge that has already been scaled in a minor way in different situations. He ran not thinking he had a chance of winning but to get his message out. This opened the door to him to talk to many people of influence and he reported that most agreed with him and added that it is not practical politically, i.e., voters are not ready for that kind of change. We see the same problem with acceptance of MMMT, as Warren has reported.

    Level of consciousness is a big deal, and just because Marx introduced it into the study of economics is no reason to dismiss it. He was also a founder of sociology, and sociologists have adopted most of his sociological contributions like the importance of the level of consciousness as exhibited by culture and institutions and the role of social status in societies that results in class differences and therefore sub-groups within a larger groups, with all the social, political and economic ramifications that this may involve.

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  8. marris Why is there nothing here about tragedy of the commons? It is *the* key problem with all collective systems, including democratic ones.

    We just don't use terms like "tragedy of the commons" and "enclosure." Not because they are not important concepts but the pressing problems now are termed differently, such as "negative externality," "resource depletion," and "resource degradation," which are developed aspects of the tragedy of the commons.

    The world is fast becoming urbanized as agriculture is industrialized, and most people living in cities are living in unhealthy air, drinking substandard water, and dealing with the toll that urban stress takes on life. These are important socially, politically, and economically, and it seems to me that these are rising trends that are often mentioned as negative cultural and institutional factors needing to be addressed.

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  9. One other point I would note, is that the difficulty in selecting representatives, while a political issue, has also been addressed by public choice economics. In this regard, I probably hold a more skeptical view about the ability of a society to select the "good" representatives.

    Is there any other choice than public choice?

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  10. marris - good points and thanks for backing up my claim.

    Tom - I wouldn't be so quick to write off the tragedy of the commons concern. There is legitimate reason to think that money influences politics, which suggests the collective consciousness is not well represented.

    Oliver - Public Choice theory is a distinct branch of economics that includes Nobel laureates such as Buchanan, Smith and Ostrom (You can look it up on Wikipedia). So yes, there are many others choices.

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  11. I wouldn't be so quick to write off the tragedy of the commons concern. There is legitimate reason to think that money influences politics, which suggests the collective consciousness is not well represented.

    I am writing on the tragedy of the commons much of the time. I am just not using that terminology, as I said in my reply to marris.

    I often post on exploiting enclosure, although I don't use that term. I call it "privatization," which is what enclosure is. Extraction of economic rent through enclosure, negative externality, resource exploitation, and creation of artificial scarcity to induce monopoly pricing are also frequently mentioned, and political corruption is an ongoing theme here.

    The tragedy of the commons is an inevitable outcome of economic theory based on on unbridled self-interest and the denial of public goods. This is a growing trend in the US, and both parties carter to wealthy donors that depend on govt favors, which I call corruption.

    Moreover, one our political parties has as its ideological basis the unbridled pursuit of self-interest, including using political influence. Citizens United, for instance, is an excellent of example of judicial capture, which if you read Karl Rove's biography was the means by which he sought to get the funds from wealthy donors to create a permanent one-party majority based on corruption.

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  12. Wow!

    I'll bear that in mind next time I'm watching Hannity.

    "We call him the Architect"

    (Sean Hannity introducing Karl Rove on Fox "news").

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  13. The trouble with the "tragedy of the commons" argument and its close cousins the Malthusian population arguments, is not that they are not taken into account but that they tend to be over-emphasized. They depend on a sort of biological determinism that discounts human intelligence and culture. Historically, commons have always been managed. There were generally social and material penalties for individuals who abused them. Of course examples can be found where "the tragedy of the commons" resulted in a common resource being depleted. Those then tend to be used as an argument against public ownership of resources.

    Similarly, "over-population" is often a sort of catch all excuse for failing to use human resources appropriately. As Henry George said, "every mouth to feed comes with two hands to work." In England, before the Tudors dispossessed the Catholic Church, there was quite an extensive "commons." Poor people, if they had nowhere else to go , could always work on church land in exchange for food. After these "commons" were privatized the cities and countryside became filled with beggars and petty thieves. "Overpopulation" had become a problem. This was the situation the Rev. Malthus wrote about. If one is not looking at it in the one-sided, biological-deterministic way that Malthus did, one could well conclude that it was a "tragedy of no commons" more than it was one of over-population.This remains an unresolved problem of Anglo-America capitalism. Usually, blaming the victims is how we justify this systemic failure. When we want a quasi-scientific excuse, then we blame biology.

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  14. What I find particularly interesting about Hardin's "The Tragedy of the Commons" is that he brings in morality.

    Aside from its subject matter (resource use), the essay is notable (at least in modern scientific circles) for explicitly dealing with issues of morality, and doing so in one of the scientific community's premier journals,Science.
    Wikipedia, Tragedy of the Commons

    This relates to the level of collective conscious that I often mention. The lower of the level of collective consciousness, the higher the level of egocentricity and inability to function holistically. The result is that the commons (shared property) gets abused and private property rights also are abused through exploitation, negative externality, etc.

    The issue can only be addressed through a process of consciousness raising. This is already happening due to global warming. I live in a predominantly agricultural area and people are realizing that not only are their lives and occupations being adversely affected, but there may not be enough food.

    When this realization becomes wider, there is going to be a sea change in the way people see the world. Some will see the need for greater coordination and adaptation, others will take an "it's everyone for themselves" stance, and the coordination they will recommend is use of US military power to secure borders and obtain scarce resources abroad as needed.

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  15. Can you provide the best example you have of such "unused knowledge"? I'm skeptical that there is much low hanging fruit like this. Well, Wray says that there are low hanging fruit everywhere.

    The biggest example of unused knowledge is in economics. In the 70s, full employment was abandoned worldwide, after the tremendously successful postwar era. This had enormous negative effects on basically any measure but the relative wealth of the wealthy, roughly in proportion to how much the goal of full employment was abandoned.

    The applied social technology of economics has declined enormously since then. This has pretty much countered improvements in material technology, so that the bottom half, say, quite arguably lives worse now than it did 40 years ago.

    Basically, there is not all that much that MMT suggests to drastically improve on from the system the USA had in 1942 say. Pretty much every political change in the structure of the US economy since then has been deleterious; slow at first, going into high gear during the 70s.

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