===== PAGE 1 =====

AUSTRIAN

Spring 1978 Volume 1/Number 2

Nobel Laureate,
Sir John Hicks

The NYU Conference—Austrian
Perspectives on Contemporary
Economic Theory

by Gary G. and Eugenie D. Short

Fr.

ar’ Perhaps the most successful of the changes and adjust their behavior in a through the interest rate, can transmit
recent Austrian conferences was held manner which offsets the effect of in such circumstances.

at New York University on Jan. 7-8, 1978, these policies while the latter theory im- Professor O'Driscoll concluded by
The conference. “issues in Economic plies that economic policy does cause comparing the theoretical frameworks
Thecry: An Evaluation of Current Aus- real economic fluctuations. used by the Rationa! Expectations and
trian Perspectives.” was directed by Dr. Professor O'Driscoll argued that Political Business Cycle Theorists. He

Mario J. Rizzo and sponsored jointly by there are important insights in both pointed out that the two approaches are
the Center for Applied Economics of theories, as well as errors. Providing a similar in that both assume that indivi-
NYU and the Institute for Humane Stud- thorough examination of the rational duals will respond to policy changes in
ies. Approximately 150 economists at-- expectations. literature, he observed a ‘rational’ manner. However, the impli-
tended from various institutions through- that expectations are certainly. impor- cations derived from these two ap-
out the United States as well as from tant in influencing individual behavior proaches are quite different since '‘ra-
Great Britain and ‘Australia. Among and hence it is desirable to see - tional behavior” is interpreted in two
those attending were the editors of economists focusing onthem. However, rather distinct ways.
three leading economic journals; Eco- he criticized the existing literature for Commenting on the O'Driscoll paper
nomic Inquiry, the Journal of Economic merely replacing the traditional was Professor Richard Wagner of VPI,
Literature, and the Southern Economic assumption of perfect knowledge of who insisted that the only difficulty with
Journal. Sessions were held at the NYU outcomes with the no less restrictive the paper was that it did not go far
School of Law and consisted of six pa- assumption of perfect knowledge of enough. Drawing from his own work on
pers and comments primarily examin- subjective probability distributions. Political Business Cycle theory, Wagner
ing Austrian insights into important O'Driscoll also pointed out that the ra- argued that rather than being primarily
questions confronting the economics tional expectations approach is in- concerned with the impact of policy on
profession. capable of dealing with aspects of macro-aggregates, the intent of politi-
The conference began Saturday uncertainty such as “incomplete lista- cal action is to influence the state of
morning with a paper by Professor Ger- bility.” i.e., a state of affairs where the variables affecting particular indivi-
ald P. O'Driscoll. Jr.. {lowa State) enti- agent does not know (and does not duals with aggregate consequences
tled "Rational Expectations. Politics, presume to know) a!l of the possible emerging only as a by-product. Working
and Stagflation.” O'Driscoll drew atten- outcomes. In other words, the rational within a public choice framework, Wag-
tion 10 a relatively neglected paradox expectations approach cannot deal ner asserted that the motivating factor
between two widely discussed bodies. with Knightian uncertainty. Further, behind the monetary authorities deci-
\f contemporary thought in economics:  O'Driscoli was critical of the rational ex- sion to print money is that some groups
rational expectations and political busi- pectations thecrists for neglecting F.A. are able to profit from inflationary pol-
ness cycle theories. The implication of Hayek's insight that monetary expecta- icies and these groups provide incen-
the former is that economic policy will tions can distort the whole structure of tives for the authorities to pursue this
have no real effects on the economy relative prices because of the misinfor- course of action.
since individuals will anticipate pclicy mation that the price system, working Continued on page 3


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Austrian Economics Seminar, 3
Part I: 1975-76 | -

by Don C. Lavoie -

© When the last of Ludwig von Mises’ phere of scientific criticism. It was in
A N regular seminars in Austrian econom- the AES that the Austrian spectrum was

ics ended at NYU in 1969, it looked like revealed and the lines of disagreement
Volume |, Number 2 Spring 1978 the last dying gasp of the Austrian drawn. Rothbard and others attacked
school. Ludwig Lachmann had said he what has affectionately come to be
The Austrian Economics Newslei- expected that when Hayek died he known as ‘“Lachmannia.” an allegedly
ter is designed as a research and would be the last living expositor of this nihilistic tendency associated with
communications device for work in once widely held point of view. But the Keynes and Shackle. On the other hand,
Austrian economics. As such, it is resurgence of Austrian economics in Lachmann and others attacked what
essential that we have the active sup- the 1970's has exceeded the expecta- they perceived as latent “Ricardian-
port and cooperation of our readers. | tions of even the most optimistic ism", a mechanistic tendency allegedly
We need any information which would among us. In a series of conferences implicit in some of the Austrian titera-
be of value to other Austrians and we beginning with South Royalton a whole ture.
welcome any suggestions for improv- host of young enthusiasts of modern Indeed much of the argumentative
ing the Newsletter. The success of subjectivism were discovered. And in history of the AES can be analyzed as a
the Newsletter fundamentally de- September, 1975, only six years after gradual recognition of these two poles
pends on our ability to encourage the Mises’ seminar ended, the new Austrian of thought, and the clarification or reso-

participation and involvement of our Economics Seminar was formed, lution of points of dispute between
readers. This was the result of the efforts of them. On the one hand, if we treat ex-
Professor Walter Block who circulated pectations as entirely autonomous then
Editor: Gary Short a letter to some of the prominent expo- the future becomes unknowable and it
Managing Editor: John Kunze nents of the modern Austrian school liv- seems that economics can say nothing
Editorial Board: Walter Block ing in the New York City area {(Profes- at all. On the other hand, we cannot be
Richard M. Ebeling sors Grinder, Kirzner, Lachmann, satisfied with mechanistic economic
Richard Fink Rothbard and Spadaro} suggesting the reasoning where events are completely
Don C. Lavoie formation of a monthly seminar and out- determinate and it seems that econom-

Joe Salerno lining a possible format. The main pur- ics claims toc much. .

poses cutlined were that the Austrian The “nihilistic” extreme at times ap-. 2
The Newsletter is an independent Economics Seminar (AES) serve as an pears to discard equilibrium analysis
project sponsored by the Center for advanced seminar extending the fron- simply because we are never in equi-
Libertarian Studies and will be pub- tier of Austrian economics, and as a librium, stressing the diversity of expec-
lished three times per year. Subscrip- {| vehicle for the criticism and improve- tations and seeing the market as in-
tions are $6.00 annualty from: ment of new Austrian contributions. cluding both equilibrating and dise-
These expectations were remarkably quilibrating forces. In contrast, the
Austrian Economics Newsletter well confirmed by the ensuing operation “Ricardian” extreme seems to ignore
200 Park Avenue South of the AES. Genuine and significant disequilibrating elements, stressing the
Suite 911 contributions to economics have been market process. whereby plans are
New York, N.Y. 10003 forged by some of the papers, but it has made more convergent with each other.
been the actual two-hour discussions As in any advanced discussion much ef-
Newslelter design by Jim Garrison among the leading luminaries of Aus- fort is required just to understand what

trian economics that have proved each contributor is trying to say, and
invaluable. For the first time, two of the these “poles” of thought are frequently
most prominent American students of found to represent only matters of dif-
Mises—Murray Rothbard and Israeli = ferent emphasis.

Kirzner—engaged in controversial dis- The first meeting of the AES was held rd
cussions with such perceptive Austrian at New York University on December 17, E
economists as Ludwig Lachmann, 1975, to discuss Professor Joseph ¥
Walter Grinder and others, It proved to Salerno’s “The Modern Monetary
be a veritable feast of knowledge for Theory of the Balance of Payments: A
those whose intellectual appetites have Subjectivist Critique”. There were three
been stimulated by the various writings major foci of discussion: methodology,

of these scholars. The many points of the Evenly Rotating Economy and the
contention among the different partici- Keynesian tripartite division of the de-
pants were brought into sharper focus mand for money. The methodological
and the various strands and tendencies issue arose in response to Salerno’s
of Austrian economics were more clear- heavy emphasis on method, given an

ly identified during these animated dis- economic academia in which funda-
cussions than had heretofore been the mental methodological questions are
case. Until recently Austrian economics rarely asked. Austrians were urged: to,
had often matured independently in the take pains to show how and where our
minds of isolated readers, taking on dif- approach would yield significantly dif-
ferent shades of emphasis and interpre- ferent conclusions. We will be heeded
tation which had not had much chance as a scientific school only to the extent
for confrontation in the fruitful atmos- Continued on page 4

PAGE 2 AUSTRIAN ECONOMICS NEWSLETTER



===== PAGE 3 =====

Gerald P. O’Driscoll, Jr. ~~ The NYU Conference—
G0 0mics as a Coordination Problem: The Contributions of Austrian Perspectives on
riedrich A. Hayek. Sheed Andrews and McMesl, xxi, 240 pp. $12.00, pb $4.95 Contemporary Economic

|
Reviewed by Jeffrey Rogers Hummel Reviewed by Richard M. Ebeling Theory (Continued)

Of the writings of alt Austrian econ- ~~ When studying social phenomena, it Conference director Mario Rizzo pre-
omists, those of Friedrich Hayek are is necessary to remember that all man- sented the second paper, “Uncertainty,
undoubtedly the most difficult, com- made objects and recorded data of Subjectivity and the Economic Analysis
plex, even obscure, Any effort, there- prices and quantities are merely the his- of the Law.” Dr. Rizzo examined the now
fore, to explicate them or make them torical sediments of previous human popular contention in much of the law
more readily understandable to a wider plans. To successfully understand the and economics literature that the law of
audience provides a valuable service. . relationships between those objects, torts promotes economic efficiency. He
Gerald O'Driscoll’s first book, Econo- quantities and prices it is incumbent demonstrated that there are serious dif-
mics as a Coordination Problem, is upon the social scientist to analyze the ficulties understanding the meaning of
such an effort and, for that reason ends and means of the human actors in- this contention since “efficiency” is
alone, deserves to be applauded. Fur- volved. If we are to know what things either irrelevant to the economic agents
thermore, O'Driscoll has gone beyond a mean in the social world we must try to or it is a tautology since every situation
mere summary.of Hayek's ideas; he has understand what the purposeful acting will be seen‘to be efficient if all relevant
identified the fundamental theme that agents meant. constraints are recognized. Additional
integrates and ties together all of The task is the same—and no less ly, Rizzo .examined six major legal
Hayek's positions but that Mayek him- difficult—when it involves the analysis precedent areas which appear to con-
self never made explicit, Showing how of an-author's work. To successfully tradict the assertion that the law of
Hayek's treatment of each specific is- capture another person's perspective torts promotes efficiency. Finally, he
sue is simply another illustration of the as presented through his written words presented the position that outside of
coordination problem, which in turn is is a notable achievement. This is what general competitive equilibrium, the
the central question for the discipline of makes Dr. Gerald P. O'Driscoll’s book, minimization of objectively measurable
economics, is a flash of insight from Economics as a Coordination Problem: costs does not ensure the minimization
which many students of Austrian €CO: The Contributions of Friedrich A. Hayek, of true social opportunity costs. There-

| nomics have profited already. - such a valuable addition to the book- fore, even if it were possible to show
| Unfortunately, Economics as a Coor- shelf of Austrian literature. that tort law minimizes the former,
dination Problem is also a flawed book Dr. O'Driscoll has brought together (which he argues.it does not), it would

ill consider. First, while O'Driscoll in- oped by Friedrich A. Hayek and has latter.
cludes extensive, explicit treatment. of demonstrated the underlying theme in Professor Murray N. Rothbard of the
most of Hayek's works, especially of all of them. In the forward, Professor New York Polytechnic Institute com-
Prices and Production and Profits, Inter- Hayek admits that he “was occasion- mented on Dr. Rizzo's paper. He voiced
est and Investment, he all but ignores ally... surprised when found in profes- his wide agreement with the paper and
The Pure Theory of Capital. O'Driscoll sor O'Driscoli’s account. side by side stressed the meaninglessness of the
only mentions The Pure Theory of Capi- statements | made at the interval of concept of economic efficiency. Follow-
tal about five times in the entire book, many years on quite different problems, ing Rothbard's comments a lively dis-
and this despite the fact that one of which still implied the same general ap- cussion from the audience ensued.
those times is to refer to it as Hayek's proach.” Harold Demsetz, from UCLA, took Rizzo
magnum opus. In fact, The Pure Theory The underlying theme that O'Driscoll to task for the view that six cases were
of Capital is Hayek's most difficult has seen in Hayek's work concerns an enough to counter the vast empirical
work, the one most in need of elucida- understanding and appreciation of how, research of Posner, Landes, and others.
tion. If Hayek's other books deserve a in a world of imperfect knowledge, the which suppcerts the hypothesis that tort

) with several drawbacks, two of which | the various strands of thought devel- still not follow that it minimizes the

full treatment, then surely it does. divergent plans of a multitude of individ- law does promote efficiency. Rizzo re-

A second flaw in O'Driscoll’s book is, uals are brought into consistency inthe sponded that the cases discussed in his
in my opinion, more serious, and it market economy. : paper were important legal precedents
stems partially from the first. O'Driscoll, ~~ Existing general-eguilibrium theory which show that in significant areas the

in a series of chapters that successively guarantees the consistency of plans by law of torts clearly does hot promote ef-
build upon one another, gives Hayek's postulating a set of conditions that ficiency.

approach to issues of increasing com- makes anything less impossible. It has . Nobel Laureate Sir John. Hicks pre-
plexity until reaching the final issue: never fully explained how those condi- sented Saturday's final paper, “Is Inter-
business cycles. While discussing this tions could be expected to existin areal est the Price of a Factor of Production?”
final issue, O'Driscoll treats the title es- market or what forces could. be ex- His remarks were wide ranging and only

| say of Hayek's Profit, interest and in- pected to propel the economy towards in the second half of the paper did he
vestment as the most advanced state- the equilibrium solution. address his title question, answering it
: ment of Hayek's business cycle theory. As Dr. O'Driscoll explains, Hayek was in the affirmative: Throughcut the first

This sequence, in effect, represents interested in analyzing both the institu- half of his paper Sir John chided the
Profits, Interest and Investment as the tional arrangements under which coor- Austrians for their excessive mistrust of
culmination of Hayek's thought. dination could be brought about and the. the notion of equilibrium, accusing

This is a peculiar way to view Profits, nature of the process involved. It was them of rejecting equilibrium analysis
| — and Investment for three rea- the price system as a transmitter of in- “even as a tool of analysis.” However,
sons. To begin with, Hayek conducts formation that Hayek came to see as Hicks himself admitted to having be-

the analysis in that book within the con- the focal point of this process. come “‘quite critical of equilibrium eco-
text of four very restrictive and far- In the three central chapters of the nomics"—at least of the manner in
reaching, though usually unrealistic book, O'Driscoll provides an extremely which it is often utilized.

Continued on page 10 Continued on page 10 Continued on page 4

AUSTRIAN ECONOMICS NEWSLETTER PAGE 3


===== PAGE 4 =====

The NYU Conference— Austrian Economics Seminar,

Austrian Perspectives on Part I: 1975-76 (Continued) SE |

Contemporary Economic ww |

Theory (Continued) i
Ludwig Lachmann, visiting professor that our method can handle problems The second meeting of the AES ]

at NYU commented on Sir John’s paper. and surmount obstacles which other ap- (January 14, 1976) began with a discus- §

In his comment Lachmann stated that proaches cannot. sion of the Dailas AEA sessions on the

there is much common ground between The Misesian imaginary construction economics of F.A. Hayek. Ludwig

Hicks and the Austrians although “the of the Evenly Rotating Economy was Lachmann, one of Hayek's best stu-
sources of our disagreements run rather the second major topic of discussion. dents at the London School of Eco-
deep.” Lachmann explained that Aus- Mises had argued that the ERE was nomics led the discussion with a sum-
trians do not object to the concept of unrealizable in the real world but was mary of the proceedings. The main topic
equilibrium per se, particularly indivie only a construct intended to explain the of discussion, however, was the paper:
result of the tendency of entrepreneur- “A Theoretical and Empirical Analysis
ial action. In the real world of change of the Spatial Diffusion of Inflation” by
entrepreneurs must continually adjust Murray Sabrin. A major point of Aus-
their actions toward greater coordina- trian monetary thecry has always been
tion, though complete coordination is that inflation will cause relative prices
never achieved. On the other hand, ina tc change, with some prices moving
mental experiment where no other before others. In a modern market econ-
changes impinge, we can imagine com- omy the exact sequence of price rises
plete coordination (the equilibrium (separated out from noninflationary
state of the ERE) resulting. This issue price adjustments} is a bewilderingly
was brought up in relation to Mises’ complex matter. In the discussion of
argument that in the ERE the demand Sabrin’s paper the main question was
for money would fall to zero since the interpretation to be given to the em-
money is only useful in a world of uncer- pirical data, and whether meaningful
tainty, and thus prices would rise to in- empirical results are even possible.
finity and the market process would Since markets are integrated through
end. Some participants argued that in high speed data communications we
approaching such a world ancther com- wouid not expect inflation to smoothly .- . 3
modity, for example some readily ac- ripple through the geographic andy,
‘dual equilibrium (self-consistent ac- cessible form of credit, would become scape. Although one might observe 4
tion}, or Marshallian partial equilibrium. the most marketable commodity and prices rising earlier near the sources of
They do, however, object to the general accounting prices could still be used in new money (for example, near Federal
equilibrium models of Walras and non-money units. It was widely agreed Reserve Banks) than in the remote 3
Pareto. Lachmann further contended that the usefulness of the mental con- countryside, this need not be the case.
that there is more to economics than struct does not depend on its realiza- Most participants concurred that this
determinate models and that “human bility. empirical work would at best illustrate ¥
action, in its more interesting forms, This discussion led to a third issue, and not test Austrian inflation theory.
cannot be pressed into this mold with- the Keynesian tripartite division of the The possibility of measuring Hayekian 1
out losing most of its distinguishing demand for money into transactions, distortions in the capital structure (re-
characteristics.” speculative and precautionary demand. sulting from credit expansion) was also
Following the discussion of the Hicks’ A strong objection to these categories raised. Would one find capital goods
paper, a cocktail party and banquet was was that they overlap. Since a transac- prices in general rising in advance of :
held. After dinner Professor Israel Kirz- tions demand is for an uncertain future, consumer goods prices? That the indus- 3
ner of NYU gave a warm and inspiring it must have both precautionary and trial commodities index is not disag-
tribute to Professor Lachmann, honor- speculative motivations inextricably gregated by regions (in contrast to the §
ing him for his contributions to Austrian bound up in it. In principle the econo- CPI) makes such empirical study diffi 1
economics and to the NYU program. mist may analyze hypothetical cases cult at present. The possibility of apply- :
(Professor and Mrs. Lachmann have where a particular motivation is domi- ing Leontief's Input/Output empirical 3
since returned to South Africa after a nant. However, such an investigation studies to Hayekian cycle theory was
three year stay in the U.S.) The evening might more appropriately be classified also considered.
ended with Sir John toasting the health as market research, analogous to dis- The third meeting of the AES, held on
of the Austrian school. covering the inner motivations of a February 17, 1976, discussed Walter
Professor Harvey Leibenstein of Har- peanut consumer, rather than as eco- Grinder's “An Investigation into the Pro-
vard opened Sunday's session with his nomic theory per se. A recurring theme blem of Misinvestment and Capital Dis-
paper, "The General X-Efficiency Para- of AES discussions has been the dis- tortion Concerning Subsidization of
digm and the Role of the Entrepreneur.” pute over the scope of economic theory. Research and Development”, a prospec-
He briefly outlined his work on x-effi- The praxeological view of economics as ‘tus for an (unsubsidized) research pro-
ciency and then related it to the theory the logic of action recognizes psychol- ject. His intention was to ‘clarify
of entrepreneurship. Leibenstein argued ogy and history as separate disciplines. theoretically and to illustrate empirical- * °
that the greater the x-efficiency there is In contrast much of modern economics ly why ‘Austrians’ are certain that F
in an economy, the greater is thercle for has tended to blur psychological mat- government subsidization of public or
entrepreneurship. He also stressed that ters (e.g., estimations of aggregate con- private R and D will very likely lead to a 3
there is no role for the entrepreneur sumer demand) and historical matters misallocation of resources, a distortion
within a general equilibrium framework (e.g., econometric studies) with eco- of the structure of production, and will
Continued on page 6 nomic theory. Continued on page 6

Professor Ludwig Lachman

PAGE 4 AUSTRIAN ECONOMICS NEWSLETTER


===== PAGE 5 =====

Methodology Conference Held at University of Delaware

by John Kunze

To promote scholarly methods in the Objectivist theory of concepts. Criti- Monday's sessions concluded with
social research, the Institute for Hu- cizing the Humean view of causality, he an ambitious paper by Frederic Jen-
mane Studies recently sponsored a distinguished between two types of nings, Jr., (Economics, Stanford Univer-
Symposium on Methodology in the So- causality, the mechanistic causatity of sity). In “The Rand-Polanyt Synthesis
cial Sciences at the University of Dela. the natural world and the teleological! and its Methodological Relevance to
ware. The conference was well organ- causality of the social world. Thus he Economic Theory” he began with a criti-
ized by Leonard Liggio {Cato Institute) conctuded the methods of the two dis- cal summary of the debate on the meth-
and graciously hosted by Burton ciplines may be expected to differ. odology of Austrian economics. He then
Abrams (Economics; University of Dela- Robert Bradley, Jr., (Economics, Uni- argued that this approach would benefit
ware). About thirty-five scholars attend- versity of Houston) provided the second greatly from a reformulation based on a
ed the four day conference (November paper: “Positivism and Praxeology: An synthesis of Ayn Rand's theory of con-
19-23). Participants represented such Essay on the Philosophy of Economics.” cepts and Michael Polanyi's emphasis
disciplines as philosophy, history, law, Bradley provided a thorough survey of on the personal element in concept for-
potitical science and sociology, but two the Austrian criticism of positivism and mation. Jennings saw the approach as
thirds were economists. Likewise, half contrasted it with praxeology. He con- empirical in nature.

of the papers dealt with economics. The cluded with an examination and de- The first paper on Tuesday was Craig
papers were distributed well in advance fense of the Austrian approach. Bolton's (Economics; Denison Univer-
of the conference and this procedure Mario Rizzo's (Economics; NYU} sity) “Methodological Individualism: An

greatly facilitated discussion. Indeed “Equilibrium and Optimality: A Method- Appreciation and Clarification.” Bolton
most scholarly discussions are more ological Investigation” explored the explored the meaning and implications
successful if the participants are famil- relationship between equilibrium and of methodological individualism, a key
iar with the particular positions being optimality to determine the value of concept in Austrian economics. He
considered. each concept. He argued that any situa- sought to “indicate the proper scope
Since conferees had already read the tion could be analyzed as a relevantly and limits of methodological individual
papers, each session began with restricted equilibrium {given transac- ism, the different implications atten-
prepared comments by the senior com- tions costs, the distribution of know- dant upon Its various interpretations,
- mentators who included Professors {edge and other relevant constraints) and the ties, if any, between methodolo-
(@ Neii B. De Marchi (Economics; Duke), J. and thus as an equally restricted opti- gical individualism and public policy
Charles King (Philosophy; Pomona Col- mum. Since in this sense all situations questions.” He contrasted Mises’ Kant-
tege), Israel M. Kirzner (Economics; are optimal, Rizzo questioned the use- ian epistemology, Rothbard’s Thomist-
NYU), Ludwig M. Lachmann (Econo- fulness of optimality as a concept. He Aristotelian views and the ideas of Karl
mics; NYU}, Louis M. Spadaro (Econo- then identified situations which, though Popper.

mics; Fordham), Vincent J. Tarascio consistent with a maximization frame- Gary Short (Economics; University of
(Economics; University of North Caro- work, coutd be more fruitfully analyzed Virginia) provided a survey of the theo-
lina) and Leonard Liggio. trom other perspectives. he concluded ries and problems of the “growth of

Although the quality of the papers by noting that only the introduction of knowledge” literature as they relate to
varied, each stimulated interesting dis- value judgements would give “optimal- the social sciences, and in particular to
cussion. Indeed this was their most val- ity” content not shared by “equilibrium.” economics. The emphasis was on exam-
uable service. By dealing with contro- The first session on Monday con- ining Method and Appraisal in Econo-
versial questions, they encouraged an sidered David M. Levy's (National Plan- mics (edited by Spiro J. Latsis), a vol-
appreciation of the complexity of the ning Association) paper, “ ‘False’ Theo- ume of essays which considered the ap-
problems which must be solved. rems or ‘Mistaken’ Choices in the Study plication of Lakatos’s Methodology of

The majority of the papers consi- of Human Action.” Levy drew on the Scientific Research Programmes (MSRP)
dered either the Austrian contribution ideas of Mises, George Stigler and Gary to economics. Short concluded that the
to the methodology of economics, the Becker (“De Gustibus Non Est Dispu- growth of knowledge theories do not
debate on the growth of knowledge liter- tandum,” AER, March, 1977), John provide valid proscriptive statements
ature (Popper, Kuhn, Lakatos and Locke, and Bernard Mandeville to ex- about the social sciences since they
others) or both. Since most conferees plore the problems which “arise for a were developed from the natural sci-
were familiar with these topics, the dis- theory of choice which allows indivi- ences and are not applicable to the dif-
cussion proved to be progressive with duals to to make ‘mistakes’.” He con- ferent nature of the subject matter in
arguments expressed In one session cluded that the concept “mistake” is the social world. As descriptive theo-

3 setting the stage for higher level discus- useful only when defined ex post in a ries, however, they recognize the role of
sion in later sessions. means-end framework. An “ex ante mis- values in the evolution of science and
The first paper considered was Sam- take" would merely mean that the actor are thus important for the social

uel Bostaph’s (Economics; Western held a belief (theory) that was false. sciences.
Marytand College) “On the Origin of Randy Barnett’'s (District Attorney's “Incommensurability and Demarca-

Methodological Differences Among Office, Cook County, IL) “Toward a The- tion,” a paper by John T. Sanders (Philo-

& Economists and the Resolution of the ory of Legal Naturalism” offered a sym-  sophy; Rochester Institute of Techno-
Resulting Conflicts over Methods.” He pathetic, but critical analysis of Lon L. logy) was the subject of the fast discus-
argued that methodological disputes re- Fuller's Morality of Law, a theory of sion on Tuesday. Sanders focused on
sult from epistemological and metaphy- legal process. He urged that natural law Thomas Kuhn's thesis that scientific
sical questions and developed a method- theorists integrate the insights of the theories are incommensurable. He be-
ological position from a metaphysical Reformist Legal Realists into an organ- gan with an examination of Kuhn's
assumption of the law of causality, and ic theory of law. Continued on page 7

AUSTRIAN ECONOMICS NEWSLETTER PAGE 5



===== PAGE 6 =====

The NYU Conference— Austrian Economics Seminar,
Austrian Perspectives on Part I: 1975-76 (Continued) Co
Contemporary Economic Ww
Theory (Continued)

and offered the x-efficiency paradigm necessarily lead to economic inefficien- of substance. In Mises’ approach there
as an alternative framework where, con- cy in terms of satisfying consumer wel- is one force operating. the entrepre-
trary to the accepted approach, itis not fare.” The discussion surrounded the ‘neur's coordinating actions. which are
assumed that all behavior is maximiz- question of how analogous the subsi- described as equilibrating. Lachmann
ing behavior. dized lengthening of the structure of speaks of two forces. equilibrating and

Commenting on the Leibenstein paper. production in the “knowledge industry” disequilibrating. The allegedly “nihilis-
Professor Kirzner agreed that the entre- is to normal Hayekian cycle theory: tic” tendency seems to derive. at least
peneur does not fit within the world of would such malinvestments be unsus- in part, from this apparently unpredic-
general equilibrium since the entre- tainable. to what extent would specific table balance between equilibrating
. capital be stuck in abandoned projects. and disequilibrating forces. Only where
and more fundamentally. can we speak the former is 'stronger” do we tend
of an optimal structure in the produc- toward edguilibrium. The charge of
tion of knowledge {as Lachmann noted. mechanistic Ricardianism is leveled
“Knowledge not yet had is unknowable against the Misesian approach for only
before its time")? concentrating on one of these forces

It was argued that government sub- and leading one to suppose we must
sidy of R and D would distort the market usually be in equilibrium. But for the
signals which suggest how much to in-  Misesian, Lachmann's disequilibrating
vest in R and D and at what appropriate forces are described as movements of
level of abstraction; Coordination re- the unattainable equilibrium toward
quires that the individual entrepreneur which the equilibrating actions tend.
spot the gaps in his own knowledge and Thus each approach deals with both
select fruitful avenues for research in- kinds of forces. though in different
vestigation. Through government subsi- ways. This is not to say that there is
dy such decisions are taken out of the complete agreement underlying these

entrepreneur's hands and this is likely terminological differences or that the | 2

Professor Harold Demssiz to lead to research which is unconnect- approaches are equally fruitful in com- 3 fF

: ed to the production process. prehending the market process. * 2
preneur is driven by the desire for pure While some of the fundamental in- A difference in emphasis emerged in k 3
profits which exist only in disequili- ternal controversies inherent in the the discussion concerning the descrip-

brium. Kirzner stressed the importance various Austrian wings had come to tion of entrepreneurship. In Kirzner's
of the entrepreneur as the driving force the fore in minor skirmishes. it was with classic presentation of market process
behind the economy and noted that this the fourth session {(March’ 9th) that (Competition and Entrepreneurship) he 3
is a much stronger role than Lieben- these issues were directly addressed. concentrated on the arbitrage aspect of }F
stein assigns the entrepreneur within Lawrence White. then an undergraduate the entrepreneurial function and re-
his x-efficiency model. He was also cri- in economics at Harvard. presented a ferred to spotting gaps in the market
tical of Leibenstein’s contention that challenging paper entitled 'Entrepre- almost as if they were objectively pre-
some firm behavior does not fit the max-  neurship. Imagination. and the Ques. sent. Lachmann (and Mises) have ai-
imization hypothesis. Kirzner, citing: tion of Equilibrium.” Here the “nihilism” ways emphasized the futurity inherent
Stigler's critique of x-efficiency, argued vs. ‘Ricardianism’™ issues emerged in in all action. and it does sometimes get
that non-profit maximizing behavior is the context of an inquiry into the nature awkward. as White pointed out. to dis-
not inefficient. but merely behavior of equilibrating forces. The Misesian cuss the spotting of an opportunity that
aimed at goals other than monetary approach performs a’ ceteris paribus does not yet exist. But Kirzner agreed
profit. mental experiment to observe the entre- that he had abstracted from the prob-
Following ‘Kirzner's comments, Pro- preneur's coordinating role in pushing lems of time in that book and had in-
fessor Harold Demsetz of UCLA pre- the market toward equilibrium. Yet this tended to later extend his analysis to
sented his paper. “Ethics and Efficiency process of reaching an equilibrium, these problems {as he has.done recent-
in Property Rights Systems.” In this Lachmann argued. must itself change ly): While admitting some difficulty in
paper Demsetz argued that our notions the distribution of resources, a datum speaking of the grasping of a future pro-
of ethics and efficiency are closely supposedly frozen. It was not clear that fit opportunity. it is nonetheless useful
related. His ideas are closely allied with ~~ “other things being equal” was meant to see the arbitrage element in all entre-
the recent work on the relationship be- to exclude the very consequences of the  preneurship, just as it is useful to point
tween economics and biology which at- entrepreneur's actions. But. it was out that all real world action is forward-
tempts to relate the survival properties argued, the changes emanating from looking into an uncertain future.
of efficient behavior to ethical views. the actions of entrepreneurs move the On April 8, 1976. the fifth session of
Demsetz also took some libertarians to equilibrium point towards which the the AES was honored to have Dr. Robert :
task for their insistence on treating pro- coordination is headed. This coordina.  Nozick of Harvard present his extensive §
perty rights as sacrosanct rather than tion activity never comes to rest in the paper “On Austrian Methodology. This 3 i
relative to efficiency criteria. In the real world: however. White was asking paper proved to be a rather ampitiou dy
course of his discussion. Demsetz de- whether it would come te rest even if task for a two hour discussion that

monstrated that Walter Block's criti- there were no other changes. ranged from methodological individual-
cisms of his work with Ronald Coase on ‘As with many issues. apparent dis- ism to Darwinian evolution to time pre-
private property rights depended on the agreement proved on further discussion ference. Particularly interesting was
Continued on page 8 : to be more matters of terminology than Continued on page 8 ,

PAGE 6 AUSTRIAN ECONOMICS NEWSLETTER


===== PAGE 7 =====

The Monetary Approach to the Balance of Methodology Conference Held
SgyPayments: New and Old at University of Delaware

by Joseph Saiernc

In the early 1970's, there emerged a stock adjustment process implies that treatment of W.V.O. Quine’s doctrine
formidable challenger to the reigning the effect upon the domestic money concerning the indeterminacy of radical
post-Keynesian orthodoxy in the realm supply of net inflows or outflows of in- translation. Quine argued that we can
of balance-of-payments theory. “The ternational reserves cannot be steril- find no single translation of one lan-
Monetary Approach to the Balance of ized by the monetary authority in the guage into another to be the most cor-
Payments,” as it was dubbed, counted long run. Any attempt to do so will rect and that, in fact, no fully correct
among its most eminent and vocal pro- cause the flows to persist until the at- translation is possible. Sanders then at:
ponents Robert Mundell and the late tempt is abandoned and cash balances tempted to show that Popper and Kuhn
Harry Johnsen. And if today the four are permitted to adjust to desired levels. can be reconciled to some degree by ad-
post-Keynesian approaches to the bal- for example, the undertaking of domes- mitting that Kuhn is right that scientific
ance of payments (the elasticities, Key- tic credit expansion to prevent the con- theories are indeterminate, but that
nesian multiplier, absorption, and tractionary effect on the money supply Popper correctly notes that there is a
Meade-Tinbergen policy approaches} of a balance-of-payments deficit will on- mechanism which provides for a con-
have not been abandoned, the partisans ly serve to transform the deficit from a sensus in science. Sanders argued that
of the monetary approach have at least transient to a chronic phenomenon. The that mechanism provides a foundation
forced the consideration of an alterna- deficit will continue until either the off- for Kuhn's “normal science.”

tive theory. setting credit expansion is terminated The conference concluded Wednes-

Briefly, the monetary approach is or the stock of international reserves is day morning with David Osterfeld’s
based on a simple, though fundamental, exhausted. (Politicat Science; University of Cincin-
insight: the balance of payments is, in The monetary approach, therefore, nati) “Group Theory and the Economic

its essence, a monetary phenomenon. has definite implications for govern- Approach to Politics: A Methodological
Thus, the monetary approach empha- ment monetary and balance-of-pay- Critique.” Osterfeld examined the politi-
sizes the supply of and demand for ments policies. In the first place, under cal philosophy of pluralism which
money or, in Misesian terms, the “mon- a system of fixed exchange rates, a na- “depicts a self-regulating order which
ey relation” as the central theoretical tion's monetary supply is “endogen- automaticaily harmonizes political utili-
relationship in the explanation of bat- ous.” That is, monetary policy is incap- ties.” He found this theory deficient in
ance-of-payments phenomena. For the able of exercising more than a tempor- that it rests on a false analogy with the

\ monetary approach, then, net outflows ary influence upon the domestic money voluntary exchange model of classical
or inflows of international reserves supply. The supply of money in the economics. He argued, first, that
under a regime of fixed exchange rates economy will tend towards that level pluralism is based on the methodolo-
(e.g., the classical gold standard) are which, given the world price level, is gically holistic group theory of politics,
symptomatic of monetary disequilib- consistent with stock equilibrium in the whereas the economic concepts of plu-
rium domestically or abroad. For in- money market, i.e., an adjustment of the ralism are methodologically individual:
stance, an excess domestic supply of actual to the desired level of cash bal- istic and thus do not fit a holistic frame-
money is cleared” through internation. ances. Any action of the monetary au- work. Secondly, since economic analy-
at purchases of goods, services, securi- thority which causes the supply of sis assumes voluntarism, or the right to
ties, etc., creating a net deficit in the na- money to diverge from this level will ac- property, and government entails the
tion's balance of payments. This deficit tivate a stock adjustment process. This violation of property rights, politics is
is financed by an outflow of interna: process will restore the original level of ipso facto coercive.

tional reserves which effects a contrac money balances through balance-of- While conference attendees express-
tion of the domestic money supply to its payments disequilibria and the atten- ed dissatisfaction with the incomplete
equilibrium levet. dant flow of international reserves. It is and unrefined nature of many of the

Thus, the central implication of the thus impossible for the monetary au- papers, most participants entered into
monetary approach is that balance-of- thority to pursue an “independent” the spirit of critical evaluation of argu-
payments disequilibria constitute a monetary policy. ments which is necessary for progress.
phase in a stock adjustment process Secondly, if the monetary approach As a result the conference must be

which operates automatically to equate implies that monetary policy cannot deemed successful in provoking valu-
the levels of actual and desired cash have a long run impact on real econom- able discussion.
balances. This central implication car- ic variables, it also implies that balance-
ries in its wake two subsidiary implica- of-payments deficits and surpluses
tions. First, surpluses and deficits are are part and parcel of the monetary
not to be regarded, as they are in the stock adjustment process, their disap-
various post-Keynesian approaches, pearance inevitably attends the
as intractable “flow equilibria” which termination of the adjustment process
will persist until remedied by deliberate and the corresponding achievement of
poticy measures. Rather, they are a stock equilibrium in the money market.
manifestation of and a response to Thus, the tools fashioned to alleviate
stock disequilibrium in the “money mar- payments disequilibria, e.g., export sub-
ket” which wilt disappear when the dis- sidies, import restrictions, exchange
equilibrium has been adjusted. In other controls, devaluation, etc., can be dis-
words, deficits and surpluses are mere- pensed with. The more radically consis-
ly transitory concomitants of a stock tent exponents of the monetary ap-
adjustment process. proach have also found Milton Fried-
Secondly, the automatic nature of the Continued on page 9

AUSTRIAN ECONOMICS NEWSLETTER PAGE 7


===== PAGE 8 =====

The NYU Conference— Austrian Economics Seminar,
Austrian Perspectives on Part I: 1975-76 (Continued)
Contemporary Economic wis

Theory (Continued)

existence of income effects which Nozick's critique of methodological indi- ture of our methods, an indispensable
Coase and Demsetz had explicitly as- vidualism; if Austrians object to macro- organ for the development and refine-
sumed away. economic aggregation because it has ment of economic theory. Austrian
In his comment, Professor John Eg- failed to reduce variables to their con- economists employ a deductive method
ger of Goucher College raised an objec-  stituent parts in human action, then which spins out the meaning of eco-
tion to the belief that the ascertainment why stop there? Why not reduce human nomic concepts by the formation of
of costs and the allocation of property choices to the cell interactions that ex- mental experiments. The assumptions
rights are independent of each other. plain them, and the cells to the mol- of such experiments are often either im-
Egger argued that since costs (like pref- ecules? In other words, how do we op- plicit or not yet clear and must be
pose the arguments for reductionism? brought out by critical discussion, by
The answer, given with characteristic specifying alternative assumptions and
eloguence by Professor Lachmann, deducing their various implications.
referred to the importance of meaning in Austrians reject methods whereby theo-
the understanding of human action. We ries are tested with the “facts” and
are methodological individualists argue that the very interpretation of
because it is only at the leve! of the indi- facts presumes an underiying theory ac-
vidual that we can attach meaning to cording to which the data are classified.
human actions. Wider groupings such It is the province of the social historian
as institutions are meaningful only as to coordinate the various classificatory
they are guideposts in individual plans. knowledge supplied by political sci-
More narrow analysis could at best only ence, economic theory, sociology. an-
explain how a mind comes to form its thropology, psychology, ethics, etc. to
purposes (neurology has a long way to interpret the actual concrete events of a
go before it can even begin this ana- particular pericd of the past. Social
lysis) and the /ogic of the interaction of theorists, or as Hayek would put it,
purposeful beings would be no less theorists of complex phenomena, are
valid and useful if these purposes could denied the simple physical experiment
be explained by cell interaction. for the isolation of causal forces. Econ-
erences) can only be revealed in action. In a year's discussion which so often  omists must rely on discursive reason:
the particular property rights assign- dealt with the “nihilistic” vs. “Ricard- ing to break down the multiplicity of
ment which affects behavior also influ- ian” issues it was only fitting to end causes that occur in market phenome-
ences costs. Hence costs cannot be with a discussion of the controversial na. Since this makes our theories im-
analyzed as if they are independent of Lachmannian, G.L.S. Shackle. Cn May mune from experimental falsification it
the existing property rights allocation. 11th the AES discussed Don Lavoie’s is all that much more necessary that our
Professor Yeager of the University of paper, “Shackle: A Critical Sampling”. speculations be subjected to intense
Virginia ended the conference with his The discussion began with a point by logical criticism, that our implicit as-
paper, "Capital Paradoxes and the Con- point review of written criticisms sub- sumptions be challenged into the open,
cept of Waiting.” The paper is an out- mitted by Gerald O'Driscoll. Discussion that the full implications of our con-
growth of his September. 1976 article in soon gravitated toward a key “nihilist” cepts be relentlessly pursued.
Economic Inquiry which won the award vs, "Ricardian issue, the “unknowabil- Such has been the product of the
for the best article of the year in that ity” of the future. Lachmann and Austrian Economics Seminar. No per-
journal. Professor Yeager demonstrated Shackle insist that “the future is un- son could attend one of these heated
that the Cambridge capital paradoxes knowable, but not unimaginable”. Some sessions without realizing that modern
dissolve when waiting is viewed as a found this statement a bit strong since  subjectivism is infused with a rich varie-
factor of production. He aiso demon- it seems to imply that our knowledge is ty of approaches, is enlivened by con-
strated the usefulness of this view when onfy historical, that we have no general troversies and is an open field of
examining several different analyticai knowledge that applies to the future, for research where much work has yet to be
problems. but cautioned against believ- example laws in the naturat sciences or done. It is the demanding work of cre-
ing that this is the onfy valid way of ap- general economic laws. Yet Shackle ative imagination, scrupulous logical
proaching all questions concerning agrees that we can “eliminate the im- analysis and rigorous cataloging of the
capital and interest. possible” and rank our anticipations of many diverse possibilities of human ac-
Roger Garrison. also of the University possible events according to how sur- tion which the first year of the Austrian
of Virginia, commented on Yeager's prised we would be if they were to oc- Economics Seminar has begun. The
paper. In general agreement with cur. Some participants were inclined to seeds have been planted for the flower-
Yeager's analysis, he emphasized the go further and assert that it isn’t entir- ing of a new approach to economics in
meaninglessness of the Cambridge ely subjective whether we would be our time.
paradoxes pointing to the fact that they more surprised by one event or another,

Professor Leland Yeager

are derived by using comparative static but that there is an element of skill in- The first year of the AES benefitted
rather than dynamic analysis. Garrison volved in the entrepreneur's ability to immeasurably from the presence and
argued that the Cambridge theorists understand his fellow's purposes. efforts of its first secretary, Roy A.
have not demonstrated that reswitching From the foregoing it can be seen Childs, Jr., from whose notes this arti-

can take place in a given economy over that the AES has been not merely a cle was in great measure written. Parti-
time. To do so they cannot assume. as stimulating atmosphere for fellow Aus- cipatien in the AES is by invitation and
Continued on back page trian theorists, but also, given the na- Continued on back page

PAGE 8 AUSTRIAN ECONOMICS NEWSLETTER


===== PAGE 9 =====

The Monetary Approach to the
Balance of Payments: New

and Old Continued)
man’s scheme of freely floating ex- win, 1973). ploys as explanatory variables macro
change rates among national fiat cur- Jude Wanniski, “The Mundell-Laffer aggregates and averages such as na-
rencies to be superfluous. Hypothesis—A New View of the World tlonal money supplies, national de-
Finally, according to the monetary Economy,” Public Interest (Spring, 1975). mands for real balances, national in-
approach, payments disequilibrla are Harry Johnson has illuminated the comes and expenditures, the world

transformed from short-lived to chronic differences between the monetary ap- price level, etc. Austrians have often ex-
phenomena only by the continuous re- proach and the orthodox post-Keynes- pressed their dissatisfaction with “ex:
creation of stock disequilibrium in the ian approaches in: pianations” in terms of macro aggre-
money market via government monetary “Money and the Balance of Payments,” gates. Since market phenomena are the
policy. In this case, balance-of-pay- Banco Nazionale Del Lavoro Quarterly outcome of individual plans, a complete
ments policy can do no more than tem- Review (March, 1976), pp. 3-18. explanation must be in terms of these
porarily alleviate one of the symptoms “Elasticity, Absorption, Keynesian plans. Furthermore, the proponents of
of the monetary disequilibrium. Thus, Multiplier, Keynesian Policy and Monetary the monetary approach admit to con-
all government need do is abstain from Approaches to Devaluation Theory: A Sim- centrating upon the “long run behavior
disequilibrating monetary policy and ple Geometric Exposition,” American of the balance of payments” while
the balance of payments will take care Economic Review (June, 1976), pp. 488-52, downplaying the “short run process of

of itself. Harry Johnson has aptly char- A comprehensive overview and mildly adjustment” in thelr analysis. In other
acterized the monetary approach as favorable critique of the literature on words, the monetary approach puts in
""Mumean in spirit.” the monetary approach with critical the place of an analysis of market pro-

The. essentials of the monetary ap- commentaries by a number of orthodox cesses, a comparative static analysis of
proach are set forth in the following ar- balance-of-payments theorists is pro- the adjustment of macro variables.
ticles: vided by: As its adherents have begun to real-

Michael Mussa, “A Monetary Approach Marina V.N. Whitman, “Global Mone- ize, the monetary approach has had a
to Balance-of-Payments Analysis” Journal tarism and the Monetary Approach to the long and respectable history which
of Money, Credit and Banking (August, Balance of Payments,” in Arthur M. Okun reaches back to the early 18th century:
1974), pp. 331-51. and George L. Perry, eds., Brookings Jacob A. Frenkel and Harry G. Johnson,

Donald S. Kemp, “A Monetary View of Papers on Economic Activity 3 “The Monetary Approach to the Balance of

grthe Baiance of Payments,” Federal Reserve (Washington, D.C.: Brookings Institution, Payments: Essential Concepts and
Bank of St. Louis Review (April, 1975), pp. 1976), pp 491-555, Historical Origins,” in idem, The Monetary
14-23. An unfavorable view of the monetary Approach to the Balance of Payments, pp.

Harry G. Johnson, “The Monetary Ap- approach is taken by Gottfried Haberler, 21-45.
proach to Balance of Payments Theory,” in a strong proponent of the elasticities Jacob A. Frenkel, “Adjustment Mech-
idem, Further Essays in Monetary approach, in his review of Frenkel and anism and the Monetary Approach to the
Economics Cambridge, Mass: Harvard Johnson's The Monetary Approach to the Balance of Payments: A Doctrinal Perspec-

University Press, 1973), pp. 229-49. Balance of Payments in the Journal of tive,” in EM, Claassen and Pascal Salin,
— “The Monetary Approach to Economic Literature (December, 1976), pp. eds. Recent Issues in International
Balance-of-Payments Theory: A Dia- 1324-28, Monetary Economics (Amsterdam: North
grammatic Analysis,” The Manchester It was only a matter of time before the Holland, 1976).
School (September, 1975), pp. 220-74. monetary approach made its debut In What has thus far not been realized
P.D. Jonson and H.I. Kierkowski, “The textbooks on international trade and by its modern supporters is that the
Balance of Payments: An Analytic Exer- balance-of-payments theory: monetary approach has been formu-
cise,” The Manchester School (June, 1975), Charles P. Kindleberger, international lated within a “micro” framework pri-
pp. 105-33. Economics, 5th ed, (Homewood, Ill: marily by economists of the Austrian
The Mussa and Kemp articles are es- Richard D. Irwin, Inc., 1973), pp 338-86. School. Ludwlg von Mises gave the
pecially recommended for their clarity. Leland B. Yeager, International Mone- monetary approach a firm basis in the

The following book is a collection of tary Relations: Theory, History and Policy, marginal utility theory of money in his
seminal articles on theory and policy 2nd ed. (New York: Harper & Row classic work, Theorie des Geldes und
and empirical studies penned by writers Publishers, 1976), pp. 182-200. der Umiaufsmitel, published in 1912,
laboring within the framework of the Herbert C. Grubel, International Eco- Mises also unveiled his purchasing
monetary approach including Johnson nomics (Homewood, Ill: Richard D. Irwin, power parity theory of exchange rates in
and Mundell: Inc, 1977), pp. 391-409. this work. It should be noted that the

Jacob A. Frenkel and Harry G. Johnson, It is only natural that Austrians Misesian version of the theory bears lit-
eds., The Monetary Approach fo the should welcome with some enthusiasm tle resemblance to the better known
Balance of Payments (Toronto and Buffalo: an approach which not only recognizes though flawed version formulated later
University of Toronto Press, 1976). the existence of a mechanism operating by Gustav Cassel. Mises’ contribution

For a defense of fixed exchange rates smoothly and automatically equilibrat- to balance-of-payments theory can be
by the radical wing of the monetary ap- ing the balance of payments but also found in the English translation of his
proach or the “global monetarists,” see: percelves the essentially monetary na- work, which first appeared in 1934.

\ Arthur B. Laffer, “Two Arguments for ture of the latter. Nevertheless, in wel- The Theory of Money and Credit, new ed.
Fixed Rates,” and Robert A. Mundell, “Un- coming the monetary approach, Aus- (Irvington-on-Hudson, N.Y.: The Founda-
common Arguments for Common Cur- trians must not permit thelr enthusiasm tion for Economic Education, Ine. 1971),
rencies,” in Harry G. Johnson and Alex- to overwhelm their critical judgement. pp. 170-86.
ander K. Swoboda, eds., The Fconomics of For the monetary approach, following The fullest expositions of the market
Common Currencies (Oxford: Allen and Un- the methods of “macro-formalism”, em- Continued on page 11

AUSTRIAN ECONOMICS NEWSLETTER PAGE 9


===== PAGE 10 =====

Comment on Shackle’s Notion Gerald P. O'Driscoll, Jr.

of Opportunity Costs Economics as a Coordination Problem: The Contributions of
Friedrich A. Hayek.
J. Hummel review (Continued) R. Ebeling review (Continued)

Richard Ebeling's piece, “On the The- assumptions, making his conclusions lucid and long overdue restatement of
ory of Costs,” (AEN vol 1, no 1) is a terri- at best tangental to business cycles as Professor Hayek's monetary and trade
fic idea executed very well. As a student they occur in the real world. In addition, cycle theories. The peculiarity of a
of Shackle’s works, however, | feel it my Hayek changed the terms of the argu- monetary economy consists in the fact
duty to point out that Shackle does not ment by introducing, for the firsttime in that what would be one transaction
endorse the concept of opportunity Profits, Interest and Investment, the under barter becomes two transactions
costs. His theory of decision differen- Ricardo effect. In doing so, he managed when a medium of exchange is used.
tiates between gains and losses, which to confuse many of his critics, particu- This “loose-joint” in the exchange pro-
is contrary to the doctrine of defining larly Kaldor, and convince them that he cess opens the possibility that an in-
cost on an opportunity basis only. (Ar- had inverted his entire theory. Hayek crease (decrease) in monetary expendi-
row pointed this out in “Alternative Ap- bears much of the responsibility for this ture at one point may not be matched by
proaches to the Theory of Choice in misunderstanding because his text was an equivalent decrease {increase) scme-
Risk-Taking Situations,” Econometrica, often unclear and invited confusion. where else.
vol. 19, no. 4 (Oct. 1951), p. 432.) The Third and most important, Profits, in- Since all price signals in a market
decision-maker in Shackle's system terest and Investment contained an er- economy are, in fact, money price sig-
does not choose a course of action be- ror that not only opened Hayek up to nals, a possible source of discoordina-
cause he believes that when its outcome devastating criticism but also ran coun- tion exists within the very institutional
is reaped his benefits will outweigh his ter to the basic thrust of the Austrian mechanism by which the vast number of
opportunity costs. He does not have a analysis of business cycles. Hayek individual human plans are brought into
positive belief in any of the imagined wanted to show that the monetary dis. atignment with one another. Hayek tried
outcomes of any action, chosen or fore- turbances which caused the business to explain this discoordinative element
gone. Rather he chooses that course of cycle were self-reversing even if the rate by analyzing the results that follow from
action which enabtes him most to enjoy, of interest did not rise. Thus, his fourth a credit expansion that lowers the
at the moment of decision, the prospect assumption was to fix the rate of inter- money rate of interest. By distorting the
of future gain tempered by the prospect est. But when Hayek made his assump- relative price relationships that govern
of loss. It is this distressing prospect of tion, he forgot to specify what was hap. the production of consumer and invest-
loss which Shackle identifies as the pening to the supply of credit. Is the ment goods, monetary disturbances
cost accompanying choice. In Time and supply of credit infinitely elastic, or could resuit in malinvestment and mal-
Choice, the 1976 Keynes lectures in does something other than arise in the distribution of labor between sectors of
Economics of the British Academy, rate of interest cut it oft? Kaldor and the economy.

Shacktie writes: “What the choosing of others found it very easy to demonstrate But as O'Driscoll correctly points out,
an action-scheme can do, is to make that if the supply of credit was infinitely Hayek’s “theory is in the Cantillon tra-
some desired imagined paths of history elastic, the Ricardo effect would not. dition, which broadly speaking, empha-
possible, in my subjective sense, at the operate because new credit would equal- sizes distribution effects. Hayek's hypo-
cost of making some counter-desired ize the rates of return throughout the thesis concerns where and how the
imagined path also possible.” (p. 13; my economy. This should not surprise any injections of money and credit enter the
emphasis). student of Austrian economics; it is just economy.” And, he further notes, “it

In sum, Shackle rejects the notion of another way of stating that there is some would not be surprising if since 1931
opportunity cost because he denies the rate of credit expansion which will keep there had been important changes in
existence of well-defined opportunities the boom fueled and prevent readjust- the paths taken in the inflation process.”
in the decision-maker's imagination. A ment, a proposition which Hayek himself It is less important to the economist
close reading of pp. 132-33 of Epis- readily admitted. Unfortunately, Hayek whether Hayek's particular exposition
temics and Economics will show that abstracted the entire argument in Pro- of a trade cycle is the one most com-
Shackle is restating the doctrine of op- fits, Interest and Investment from what monly found in history (that is a matter
portunity cost in order to discuss its in- was happening to the supply of credit, sc that must be left to the historian). What
consistency with the deterministic over- that his readers were forced to conjec- js important is the theoretical under-
tones of standard microeconomic the- ture about what he thought the supply of standing of the possible consequences
ory. While the subjectivist interpreta- credit was doing. By implying that the of monetary expansions or contractions
tion of opportunity costs set forth by depression will occur even with an infi- which disturb the relative price struc-
Ebeling is entirely reasonable, it cannot nitely elastic supply of credit and no ture and prevent. market price signals
be found in Epistemics and Economics change in the rate of interest, Hayek from serving their coordinating role in a
and should not be ascribed to Shackle. treaded dangerously close torenouncing complex economy.

the basic Austrian tenet that credit ex- Dr. O'Driscoll has done more than
Lawrence H. White pansion is crucially important in genera- just reawaken interest in the valuable
ting the cycle in the first place. contributions of Friedrich A. Hayek. He

That Hayek himself became uneasy has also helped reopen an important
about this very point is evident from the chapter in monetary theory, a chapter
fact that he returned to discuss it in two long ignored by the economics profes-
subsequent journal articles, "The Ricar- sion, but one that offers a key to analyz-
do Effect” and "Three Elucidations of ing monetary dynamics.
the Ricardo Effect.” However, the major :
contribution of these articles to this par-
ticular issue was merely the argument
Continued on back page

PAGE 10 AUSTRIAN ECONOMICS NEWSLETTER


===== PAGE 11 =====

Fa In the last News/etter a new book of
Mises essays was announced, Money,
intlation and the Trade Cycle. The bock
is now available from Free Market
Books, P.O. Box 298, Dobbs Ferry, NY
10522, but the correct title is On the
Manipulation of Money and Credit. It is
edited by Percy Greaves and contains
translations by Bettina Bien Greaves of
three excellent Mises articles. Mrs.
Greaves has also been involved in sev-
eral other projects. She has written a
he BA “. highty critical review of The Economics

s m— Co of Ludwig von Mises, edited by Lau-

UCLA Study Group Left to right: Tom Hazlett. John Lott, Bob Topel. Larry White. rence Moss. Entitled “Mises Misunder-
stood,” the critique appears in The Oc-

The Austrian Economics Study Group ies of talks given last year at the Univer- casional Review, Summer 1977. She has
at UCLA is well underway. They have sity of Chicago (also sponsored by the also recently published a fascinating in-
completed- discussion of The Positive William |. Koch Foundation). Additional terview with Henry Hazlitt in the Novem-
Theory of Capital by Bohm-Bawerk, and information is available from Professor ber, 1877 World Research Ink. Finally, in
have now begun a study of Hayek's Pure Fred Glahe, Department of Economics, an ambitious and long-term project,
Theory of Capital. Group members in- University of Colorado, Boulder, CO Mrs. Greaves is compiling and editing

clude Tom Hazlett, Jack High, Joe Kalt, 80302. nearly twenty years of lecture notes
John Sell, Harry Watson, and Larry taken during the Mises Summer at NYU.
White, all graduate students in the eco- Summer Fellow Program

nomics department at UCLA. John Lott, The Monetary Approach Continued

a promising UCLA undergraduate, also The Center for Libertarian Studies,

4 attends regularly, and Ted Earle, an eco- with financial support from the Schultz process by which the balance of pay-
nomic consultant from San Luis Foundation, has recently established a ments is adjusted to a change in the
Obispo, attends whenever his schedule Summer Fellows Program in Free Mar- money relation was provided by F.A.
permits. This quarter the group will ket Economics. The program will be Hayek and F.W. Paish later in the
meet Monday afternoon at UCLA. For heid in New York City from June 5 1930's:

more information, contact Larry White through August 26, 1978. Six graduate F.W. Paish, “Banking Policy and the
(213) 478-3808, or Jack High (213) students and/or young professors in Balance of [International Payments,”
479-7082. economics will be selected as Fellows, FEeonomica (November, 1936), pp. 104-22;

and applications are being accepted rep. in Howard 8. Ellis and Lloyd A.
Lecture Series at University of Colorado through April 1. Fellows wili be provided Metzler, eds. Readings in the Theory of In-

with housing, work space, and a travet ternational Trade (lomewood, 111: Richard
“The Austrian School of Economics: An allowance. In addition each Fellow will DD. Irwin, [nc., 1966), pp. 33-35.
Alternative to the Neoclassical and receive a weekly stipend of $200. Inquir- IF.A. Dayck, Monetary Nationalism and
Marxist Paradigms” is a lecture pro- ies should be addressed to Dr. Mario International Stability (1937; rep. ed. New
gram currently being sponsored by the Rizzo, Program Director, Center for Lib- York: Augustus M. Kelley Publishers,
Department of Economics at the Univer-  ertarian Studies, 200 Park Avenue 1971), pp. 17-35.

sity of Colorado in cooperation with the South, Suite 911, New York, NY 10003. In his work, Hayek also provides a
William |. Koch Foundation and the Eco- masterful gemonstration of the flaws of
nomic Institute for Research and Edu- Hayek Works Available the fractional or “classical” gold stan-
cation. The first lecture was detivered in dard and of its necessary inferiority to
October by Professor Ludwig Lach- Among its many endeavors to encour- the 100% or pure gold standard. Unfor-

mann, “History of Austrian Economic age scholarly treatment of Austrian eco- tunately, in the same work, Hayek rates
Thought.” Other lectures in the series nomics, the Cato institute has recently as theoretically superior to both types
include: March 6, Israel Kirzner on made available several of the works of of gold standard, a pure fiat money con-
“Austrian Approach to Competition and Friedrich Hayek. The books (all trolled and manipulated by a suprana-
Market Process;” March 10, Steven Augustus M. Kelly hardcover editions) tional Central Bank. However, in his
Swiff of Metropolitan State College on are being sold at significant discounts most recent work in monetary theory,
“Austrian Economics and the Rule of from the Cato Institute, P.O. Box 2256, Hayek proposes a controversial free
Law,” March 17, Richard Wagner from Wichita, KS, 67201. Available are: Co/- market banking system with competing
Virginia Polytechnical Institute on fectivist Economic Planning, $6.00; currencies and argues it provides a
“Austrian Economics and the Theory of Monetary Nationalism and international stable monetary framework:

We Public Sector.” The final lecture in Stability, $4.00; Monetary Theory and F.A. layek, Denativnatisation of Money
the series will be presented by Gerald the Trade Cycle, $5.50; Prices and Pro- (London: Institute for Economic Affairs,
O'Driscoll of lowa State University on duction, $5.00; and Profit, interest and 1976).

March 24, “Austrian Theory of the Busi- Investment, $6.00.
ness Cycle.” The program is patterned
after a similar and very successful ser-

AUSTRIAN ECONCMICS NEWSLETTER PAGE 11


===== PAGE 12 =====

IHS Sponsorship of Austrian Economics

by Richard M. Ebeling ¢

Over the past four years, the revival of The interest generated by these suc- The Austrian resurgence has in many
the Austrian school has been assisted cessful conferences led to a series of ways been a spontaneous reaction to
by programs sponsored by the Institute regional gatherings. Attempting to ac- the unsatisfactory state of orthodox
for Humane Studies of Menlo Park, Cal- quaint students and professors with economics. Nevertheless that revival
ifornia. The Institute was founded in Austrian insights, the weil attended has benefited greatly from the support
1961 by F.A. Harper as an independent conferences presented the Austrian of the tnstitute for Humane Studies.
center to encourage basic research and positions and contrasted them with
advanced study in the humane sciences. other points of view. They were spon- The NYU Conference Continued

The Institute held three major con- sored by the Charles Koch Foundation.
ferences on Austrian economics since and were held in the fall of 1975 at they have done. that interest rate
1974, the first two in the United States Hasbrook Heights (New Jersey), Char- changes are exogenous. Garrison con-
and the third in England. In June, 1974, lottesville, Milwaukee, and London. Lec- cluded his taik by recommending that
South Royalton, Vermont served as the tures were presented by Kirzner, Lach- both Austrians and Cambridge re-
rustic location for the first of these con- mann, Rothbard, Armentano, O'Driscoll, switchers could benefit from studying
ferences. Fifty students and professors Garrison, Rizzo, Grinder, Walter Block. Professor Yeager's view of the concept
were invited to attend and participate in James Buchanan, Salerno, and (in Lon- of waiting as a factor of production and

a series of lectures delivered by Pro- don) Hayek and Lord Robbins. pointed out that this view complements
fessors Israel M. Kirznesr, Ludwig M. The Institute also holds a series of rather than challenges Bohm-Bawerk's
Lachmann, and Murray N. Rothbard ex- two-week instructional seminars which treatment of capita! and intesest.

ptoring the foundations of Austrian are intended to provide intensive and The conference must be deemed a

theory. Held for six days, the con- extensive introduction to Austrian eco- great success in presenting ‘Austrian
ference offered the opportunity for per- nomics for graduate students and perspectives on contemporary econo-
sonal contact among economists from young professors who have had little mic issues to a large group of profes:
several countries. The proceedings formal exposure to Austrian ideas. The sional economists. It is through such
have been published as The Modern first, held at the University of Delaware opportunities that the Austrians can
Foundation of Austrian Economics, in June, 1976, included lectures by Ger- hope to influence the econemics profes:
edited by Edwin Dolan. (For an extended ald O'Driscoll and Lawrence Moss. sion. For those unable to attend the
account of the conference, see Richard Roger Garrison and John Egger served conference. arrangements are presently g
‘M. Ebeling, ‘Austrian Economics onthe as seminar assistants. Guest lectures being made to have the proceedings
Rise," Libertarian Forum, Qct., 1974) were given by Kirzner, Rothbard, published as a book, edited by Dr. Rizzo.

The South Royalton success stimu- Spadaro and Yeager. The second in-
lated another conference in June, 1975, structional seminar was held at Mills Austrian Economics Seminar Continued
which was held at the University of Hart- College in Oakland, California, with lec-
ford. Papers were delivered by both pro- tures by Kirzner, O’Driscoli, Egger and limited to scholars and students with a
fessors and graduate students includ. Garrison (see an extended account by research interest in Austrian econo-
ing Gerald P. O’'Driscoil, D.T. Armetano, Richard Fink, “Conference Generates mics. All members receive copies of the
John B. Egger, Roger W. Garrison, Interest in Austrian Economics,” AEN, papers, and those living in the New York
Joseph Salerno, John Hagel HI, Walter Autumn, 1977}. A third seminar, under area may attend the monthly meetings
E. Grinder, Mario Rizzo, Sudha Shenoy, the direction of Professor Fred Glahe, is at New York University. For further infor-
William Campbell, John Blundell, J. planned for June-July, 1978, in Boulder, mation contact John Kunze (62 Pierre-
Huston McCuiloch, Edwin Dolan, Gary. Colorado, with lectures by Garrison, pont #1-D, Brooklyn, NY 11201).

North and Art Carol. A set of informal O'Driscoll and Egger. —
lectures were given in the evenings by: With grants from the Liberty Fund of Gerald P. O'Driscoll, Jr. Continued
Professors Kirzner, Rothbard and Le- Indianapolis, the Institute has spon-

land B. Yeager. During the week-long sored two summer fellowship programs that an infinitely eiastic supply of credit
conference, the extended and frequent at Menlo Park. From June to August, is highly unrealistic, because each parti-
comments of Friedrich A. Hayek provid- 1975, five economics students and cular firm, even at a fixed rate of interest,
ed a rich source of insights on various young professors worked on various faces credit rationing.

problems in Austrian theory. {See Ebel- topics in Austrian theory. During June In short, Profits, Interest and invest-
ing, “The Second Austrian Conference,” they benefited greatly from the pre- ment, far from being the culmination of
Libertarian Forum, July, 1979). sence of Professor Hayek who was Hayek's thought as O'Driscoll seems to

The third conference was held at available for individual and group con- believe, is probably Hayek's worst
Windsor Castle during August, 1976. suitations. In 1977 (June through Aug- book,almost an aberration from Hayek's
Since the focus was the advancement ust) the program was greatly expanded other work. Of course, one might argue
of Austrian theory at the frontiers of to accommodate twenty-five econo- that even if it is as poor as | claim,
economic science, participation was mists. As before, Professor Hayek parti- O'Driscoll’s task involves displaying
quite restricted. Papers were delivered cipated during June. Weekly sessions Hayek's mistakes along with Hayek's
by Kirzner, Lachmann, Rothbard, O’'Dris- were arranged at which the fellows pre- achievements, That is true, but nothing
coll, Rizzo, Garrison, Egger, Lawrence sented working-papers for helpful criti- required O'Driscoll to give such PrOM-y gf
Moss, and Louis Spadarc. The proceed- cism. Also, a number of guest speakers inence to Hayek's mistakes and parade
ings, edited by Dr. Spadaro, will be pub- delivered talks during the summer, in- them as if they were achievements. By
lished this year under the title, New cluding Thomas Sowell of UCLA and treating Profits, Interest and investment
Directions in Austrian Economics, in Martin Anderson of the Hoover Institute as Hayek's paramount work, O'Driscoll

“the Studies in Economic Theory series. at Stanford. greatly mars the value of his own book.

PAGE 12 AUSTRIAN ECONOMICS NEWSLETTER

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