I refer to yesterday’s event, held at Mercatus.
1. Google has made me stupid. I know where Mercatus is, but the address on the invitation was different, and I went with the address, and with Google Maps, and got off at the wrong subway stop (along with at least two other would-be attendees).
2. Everyone who was everyone was there.
3. The main speaker was Israel Kirzner. He spoke really well. I took his main point to be that the causality ran fromm Hayek’s 1974 Nobel Prize to the interest in his insights rather than the other way around. Those insights include the knowledge problem, the implications of subjectivism, and the importance of the open-ended world in which we live, as opposed to the closed world of general equilibrium theory. Instead, the Nobel folks focused on Hayek’s macro work. Hayek’s speech at the Nobel might be considered an attempt to shift the focus to his other insights. Whether it was that speech (which Pete Boettke later pointed out was not accepted for publication by Economica and thus was not published until almost two decades later) or something else, a rebirth of interest in Austrian economics can be traced to that period.
4. Among the all-stars in the audience asking questions was Russ Roberts, who admitted that although he had moved far in the Austrian direction he still liked old-fashioned supply-and-demand. Kirzner was sympathetic, saying that it is much easier to teach new students supply-and-demand than to teach the insights of Hayek. (Note that Russ has made a remarkably good attempt to teach Hayek in his didactic novel, The Price of Everything.)
5. The afternoon was to feature three Nobel Laureates, but one of them, Edmund Phelps, was sick, and so Boettke read Phelps’ remarks. The other Nobelists were Vernon Smith and Eric Maskin, and I disagreed with both of them.
6. Smith said that the financial crisis was caused by principal-agent problems in mortgage securitization. He suggested that loan originators should not be paid up front, but they should instead be paid over time, as the mortgage is paid off. That is an approach for reducing principal-agent problems, but in my view there are better approaches–the stream of payments over time is a complex financial asset that few originators would be equipped to manage.
One alternative, of course, is to go back to the old originate-to-hold model, in which the loan originator is an employee of the bank, and the bank is in a position to reward or punish originators based on how well they adhere to standards. But more important, I do not believe that principal-agent problems were at the heart of the crisis. Originators were contractually obligated to deliver loans that met the guidelines of investors. Loans that did not meet those guidelines can be considered fraud, and there was plenty of that going on. But the real problem is that investors were, for the most part, getting the loans that they were asking for. The geniuses on Wall Street, and at Freddie and Fannie, believed that they could make money on loans with no down payment, shaky credit history, and so on, because–so the thinking went–if they bought enough of them, the risk would be diversified, particularly since everyone knew that house prices only go down in some places, never in lots of places at once.
Anyway, I’ve made the point about cognitive failure, as opposed to moral failure, at length.
7. Maskin said that mathematical proofs in mechanism design demonstrated formally Hayek’s point that markets make efficient use of information. During the Q&A, I asked if it was possible to reconcile the methodology of those proofs, which involve closed-end models, with the larger point stressed by Kirzner that the world is open-ended, including new technology that has not yet been discovered. Maskin answered, in effect, that all you have to do is extend the Arrow-Debreu state-space to include all possible technological discoveries, and the proofs carry over. I was not satisfied with that answer. Some possibilities:
a) He is correct, and I am too prejudiced against formal modeling.
b) I asked the question poorly, and had I been more articulate he would have given a different answer.
c) He just does not “get” the point about open-ended economics and that it eludes formal treatment.
Among those I spoke with afterward–and obviously there would be selection bias at work–the unanimous opinion was (c). This raises the intriguing possibility that mainstream economics and Austrian thinking are still a long way from reconciliation. In effect, Maskin is no further along the road to understanding Hayek than is a freshman to whom Kirzner would only teach supply-and-demand.
Perhaps Hayekian economics is a bundle of insights that are deceptively simple. Some people think that they get them, but, like Maskin, they are still stuck in the mainstream paradigm.
Russ and I are examples of mainstream economists who drifted toward a Hayekian view. I cannot think of economists who have drifted in the other direction. To me, this suggests that there is something difficult to grasp about Hayekian economics, or the Austrian viewpoint more generally, and that training in mainstream economics does not necessarily ease that difficulty.
That is my main take-away from the event.