Thursday, October 21, 2010

Austrian Economics Forum Fall 2010 #4

This past Friday, the Austrian Economics Forum met for the fourth time this semester at North Carolina State University.  This week we covered the 7th chapter in Hayek's book, Individualism and Economic Order.  This chapter is actually the introductory chapter of Hayek's edited collection Collectivist Economic Planning.  It is called "Socialist Calculation I: The Nature and History of the Problem."  The other reading was written by our own Dr. Roy Cordato called, "Knowledge Problems and the Problem of Social Cost."  It was published in the Journal of the History of Economic Thought, Fall 1992.

Since Roy was with us that afternoon, we began with his article.  It is a critique of Ronald Coase's famous 1960 article, "The Problem of Social Cost."  The Coase article is important because it has given rise to the Chicago (University) Law and Economics program.

Essentially what Coase's article says is that the right to property is an important institutional factor in the efficiency of the market.  Coase argues that we should first set property rights and see if it creates an efficient solution.  If it does not yield an efficient outcome and when there are no transaction costs, then through trading by affected parties, the system will naturally move to an efficient system.  However if there are positive transaction costs that prevent these negotiations from taking place, then what is now called "the Coasian Judge" will step in and redistribute the property rights so that the highest valued use of the resources is obtained.  For Coase's system, property rights are a variable to be manipulated.  Manipulated how?  Well, the judge will simply look at the various prices and make an economic calculation and reassign the rights.

Cordato objects to this entire process.  He uses Hayek's arguments on knowledge to say that there is a fundamental flaw in this logic.  The flaw is this: The judge assumes that the prices that he is using are equilibrium prices.  Only equilibrium prices contain the correct information about the relative scarcity of goods and services.  Disequilibrium prices do not contain such information.  We can take the argument a step farther and say that if the economy is in general equilibrium and prices are truly equilibrium prices, then why is there a dispute in the first place?

It has been 18 years since this article appeared.  I asked Cordato whether he has seen much literature that condemns the Coasian approach from the Austrian point of view.  He said other than some work by Walter Block, he has seen very little.  So, what does Coase have to say about these criticisms?  Well, nothing.  To our knowledge, he remains silent on these issues.

A great paper topic was generated by this discussion: the application of Public Choice theory to judges.  In North Carolina, we elect judges, why should we not apply standard Public Choice theory to the so-called Coasian judge?

During the discussion I brought up a point to clarify what we mean by "prices contain information."  I posited that there is a parcel of land that is currently owned by the state.  Scenario A is that we suppose that it is given to one person.  Scenario B supposes that the plot of land is divided into 100 units and given to 100 individuals.  Wouldn't it be better to follow scenario B because it contains the "information" of 100 individuals instead of just one person?  Wouldn't Hayek like the second scenario based on his information and knowledge arguments?

The answers to these are "No."  Karen Palasek rightly pointed out that Hayek does not mean quantity of information, that more people's subjective preferences are better.  Hayek's focus is on the coordination of information.  Hayek is focusing on how well and how quickly the subjective information is incorporated.  The subjective preferences themselves and who is participating is a not the focus of the problem.

Unfortunately, Hayek did not have a fully articulated ethical system on which to rest the rights to property.  Unlike Rothbard or Rand who had articulated ethical systems, Hayek cannot make the same sorts of policy recommendations.  All that he can ground his arguments on are the efficiency of coordination.

The second article discussed was Hayek's introduction to the Socialist Calculation Debate to the English speaking world.  Hayek's retelling of the intellectual drift from laissez-faire to Marx is excellent.  The laissez-faire economists of the 19th century had a fundamental flaw, the labor theory of value.  The logical extension of the labor theory of value leads straight to Marx.  So, the economists of the Marginalist Revolution and immediately thereafter, put aside the popularization of economic's insights on competition and wealth generation, and instead concentrated on reworking the foundation of economics.  This foundational work, while absolutely necessary, was technical work which excluded the average reader.  As a result, the popular field was left wide open to the Marxists, the German Historical School, etc.

According to Marxist thought communism is inevitable.  It would come about by the "material productive" forces of history.  As a result, there was little questioning of how a communistic society would operate.  In fact, as Hayek points out, to raise such a question was to question "scientific socialism" and called for stigmatization of the questioner.  Hayek further argues that there is no predestination in the evolution of institutions and that institutions can certainly regress.

The article then sets up the collection for which it was originally written.  We had little discussion on the later sections of the article, and decided that we would get to the center of the arguments next time.

For the next meeting, we are to cover chapters 8 & 9 in the book.  They are "The State of the Debate (1935)" and "The Competitive 'Solution'" (1940).


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