Wednesday, August 22, 2012

Hayekian Limits of Knowledge in a Post-Keynesian World

Steve Horwitz explains how The work of Friedrich Hayek shows why EU governments cannot spend their way out of the Eurozone crisis:
Politicians and bureaucrats lack the knowledge to know which pieces fit with which pieces as they cannot know the nature of the idled resources and what consumers want. They are unable to know what is needed to create a sustainable recovery. One of the most fundamental insights of Hayek and the Austrians was that prices, profits, and losses serve as knowledge surrogates to coordinate the decentralised decisions of producers and consumers, themselves often based on knowledge that they could not communicate any other way.
Politicians who are structurally unable to know how best to allocate stimulus resources will inevitably distribute them to those persons and groups who will give them the most electoral support. The Austrian caution about the limits of politicians’ knowledge suggests that no matter what is drawn up on the blackboard, the politicisation of stimulus spending is not an accident and cannot be avoided. Stimulus spending that goes to groups that will provide the most votes will ensure that the right combinations of capital and labour will not be formed.
On this blog I often outline my views of the macro-economy based on the Post-Keynesian tradition (including MMT, MR, circuitists, horizontalists, etc) because I believe they offer the most accurate version of monetary operations and a stock-flow consistent approach. Where I generally depart from these economic sects relates to their specific policy prescriptions. On these matters, I more frequently side with Austrians for the reasons highlighted by Horwitz above.

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.   

9 comments:

  1. Woj,

    Good post. I very much agree that while government deficit spending must remain at elevated levels in the current environment to simultaneously allow the private domestic sector to continue to deleverage as well as to put a floor under the demand in the economy to prevent a recession/depression, the risk is that the deficits will not be used productively and will foster corporate cronyism. So I thought about this problem as an opportunity to help solve the problems that have plagued us the last several decades (which will increase productivity) as well as cutting off the biggest benefiters of corporate cronyism. See this whole post, but most especially Section 6 which directly addresses the thoughts you pose here: http://marketthoughtsandanalysis.blogspot.com/2011/08/why-deficit-spending-and-creative.html#Section6

    ReplyDelete
    Replies
    1. Sorry for taking a couple days to respond. You offer some really good thoughts in the post linked below and I suggest others interested in this debate click through.

      There are two areas where I would say our views diverge:
      1) You say "there is no danger of running a budget deficit." This is true regarding solvency, but not politically. If a budget deficit is used to promote greater inequality through non-productive means, than there is certainly a cost to society.

      2) The plans you lay out for correcting the current policy errors are generally positive and would represent a stark improvement. he trouble is that political incentives don't provide a clear manner by which to get from the current policies to desired ones. This is the basis of public choice theory, which recognizes the theoretical advantages of "good" government but based on incentives finds that outcome to be unrealistic.

      IMO, these issues are at the heart of the debate I was trying to outline above and my own personal struggle for understanding. The Post-K, MMT, etc. is certainly a better representation of cause and effect within a modern money regime, but it has not answered the Austrian/Public Choice critique of how one achieves a benevolent government.

      Delete
  2. The point though is that most of the deficit spending will come through automatic stabilizers. Less tax receipts, larger transfers to state and local governments (who face real budget constraints and lower tax receipts while maintaining a large part of the social infrastructure like education) and unemployment benefits and other social protection.

    Even when specific stimulus packages are passed, they mostly include measures such as temporary tax cuts, than specific spending decisions. At least MMT proposes to minimize this 'decision making' by introducing the Job Guarantee.

    ReplyDelete
    Replies
    1. I'm not opposed to the Job Guarantee, per se, as outlined by Minsky and Mosler. In fact, I would argue that both brilliantly outline a manner by which a much smaller government could effectively act in a counter-cyclical manner.

      The trouble with instituting a JG is that it would likely be on top of current programs, such as unemployment benefits. This would significantly alter the desired outcome from those described by its proponents. Separately, in Minsky's view, the program would be successful if wages remained low enough so that people were still encouraged to accept most private employment when available. I have a hard time believing that politicians would not continually raise the wage, ultimately competing with the private sector for employees.

      Delete
  3. I'll just give this post a big "Me too". I've read lots on aggregates from PKs but a lot less on structure.


    ReplyDelete
    Replies
    1. Thanks Dave. Nice to know I'm not alone here.

      Delete
  4. Not to be too dismissive, but I find arguments like Horwitz' rather tinned and unsubstantive, as well as Hayek's essay on knowledge itself.

    He speaks of consumers 'knowing better' how to allocate resources than 'the government' which is presumably some sort of monolithic entity that itself has a homogenous body of knowledge. Daniel Kuehn has touched on this a few times - where is the discussion of the division of labour within government, of the disparate goals and localised knowledge in different branches? There is not some lump called 'government,' and the choice is either that it makes decisions for private individuals, or they do it themselves - there are webs of knowledge both inside and outside government, and ordinary people do not necessarily make the distinction as often as economists.

    Another, more commonly made point is that the government may be 'stimulating' things that the private sector will underprovide for various reasons, and so it's not a question of the private sector being 'better' or 'worse;' just 'different.'

    ReplyDelete
    Replies
    1. Fair points. As I noted above and many have pointed out about Hayek, my opposition to govt action does not extend to all actions. There are certainly situations in which govt may be better suited to allocate or provide resources than the market.

      As to Hayek's essay, I find the convincing argument to be different from the one you mentioned, as discussed by Daniel. From my perspective, it's not about "knowing better" but rather that prices force private market participants to adjust in a manner wholly different from govt. Especially if we accept that govts can't go bankrupt, then the incentive to be economically efficient won't exist to the same degree. The problems of coordination in a market society are therefore better addressed by private markets over time.

      (Note: This does not imply markets will result in less inequality. The specific allocation of resources we desire is a normative question I don't think economics can answer.)

      Delete