The Answer Is Transaction Costs

The Socialist Generation Debate: Boettke

• Michael Munger

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 Join economist Peter Boettke as he discusses how transaction costs impact market efficiency and our everyday decisions. We delve deep into historical examples, particularly the Soviet Union, to highlight the consequences of centralized planning versus individual market actions.

Through engaging anecdotes and rigorous analysis, Boettke reveals why understanding transaction costs is essential for navigating the complexities of modern economies. We also explore the evolving discourse surrounding socialism, questioning whether new technologies, such as AI, could revolutionize planning efforts. This episode is not just for economists; it's a critical discussion for anyone seeking to understand the interplay between institutions, information, and human behavior in shaping societal outcomes.

Our conversation unravels the myths surrounding economic models and their real-world applications, encouraging listeners to think critically about the institutions that govern our economy. Don’t miss out on this thought-provoking discussion that could reshape your perception of economics.

Peter Boettke:  

Munger papers on “Status Quo” and James Buchanan:   

Munger on information and "generation": The "Socialist Generation Debate," at AIER

Mainline Economics Resources:

 Book'o'da'month:  

Bill Mauldin, BRASS RING: A SORT OF MEMOIR. 1973, WW Norton.  



If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


Speaker 1:

This is Mike Munger, the knower of important things from Duke University. Today's guest is Peter Bettke, distinguished University Professor of Economics at George Mason University with an appointment in philosophy. We'll be talking about information and organizing the productive resources of society. A new twedge this month's letter plus book it a month and more, straight out of Creedmoor. This is Tidy C.

Speaker 2:

I thought they'd talk about a system where there were no transaction costs, but it's an imaginary system. There always are transaction costs. When it is costly to transact, institutions matter and it is costly to transact.

Speaker 1:

My guest this month on. The Answer is Transactions Cost is someone I've known and admired for a long time, peter Bettke from the George Mason University. Pete, I have a custom that I ask my guests to introduce themselves. I do have to interject, though, in this case, about how both our careers are just a litany of failures. I never got a job in an economics department. I tried for years to get it including the George Mason economics department, I should say and never got a job in an economics department. You, though, decided not just to study a country, but an economic system that disappeared, and that's actually a pretty difficult task to set oneself and to recover from, although you have recovered nicely. So how did you become interested in economics, the problems of information, and then how did you become interested in the Soviet Union, which is much harder than just getting data from a book?

Speaker 2:

Yeah, thank you, mike, and thanks for the opportunity to talk with you. I'll just tell you a story very quickly about the timing. Professionally, I lost a job coming out of graduate school in 1988 to a very formidable opponent that was from Cornell but she was a specialist on Comic-Con, which was the trade arrangements that were done with the in between all the communist countries. And the people that were friendly with me at this job told me the reason was is because she was more relevant for today, because I was writing about economic history. And then, you know, of course, everything fell apart very shortly after that.

Speaker 2:

So my human capital what year was that? What year was that? So my human capital what year was that? What year was that? 1988. And of course, 89, and then 92,. It all comes about. But my interest in the Soviet Union came about before my interest in economics, and that is because in 1972, I was, like a lot of 12-year-olds at that time, obsessed with baseball. But in the Olympics the United States was ripped off in the Olympic gold medal game by the Soviet Union and I viewed this as this great sports injustice.

Speaker 1:

We should say people don't remember. That game had like three or four endings. Yes, they kept replaying it until the Soviet Union won.

Speaker 2:

Yes, until the Soviet Union won, and so I viewed it. I sort of grew to despise the Soviet Union right then and there. And then I go to college and for a variety of reasons I have this economics professor.

Speaker 1:

And where did you go to college? That's an important part of your story.

Speaker 2:

I went to Grove City College and I had an economics professor named Hans Senholtz and he, in the very first day of the class, described why the gas shortages were taking place in the United States at the time, and I had just had a job in the summer. That was a very unpleasant job that had to deal with the gas shortages, and so I was like, oh, this is real, I need to learn this. And then, in the process of learning economics, first I learned about price controls and then I learned about the welfare state and issues like that, but then eventually I learned about the problems of central planning and I was like I knew I hated those Soviets for a reason, and so then that's where it all came from, that passion to try to understand how this system operated and why it was so unjust.

Speaker 1:

But you could have gotten that from the study of mainstream economics. You actually took an institutional approach, which maybe is characteristic of Austrian economics in some ways, but you were actually interested in the way that property rights and transactions were handled in the Soviet Union, and that's not something economists usually study, yeah, so when I was a undergraduate at Grove City we learned all of the kind of great classical economics from Adam Smith to John Stuart Mill.

Speaker 2:

We actually had to read those books. So I read JB Say's Treatise of Economics as an undergraduate because we had to doa year-long history of economic thought and then the way we were taught economics itself was very property rights oriented, and all of that. So when my choices for graduate school came along, I became obsessed with this stuff. So I had to go and study it further. And so when my choices of graduate school came along, it was either to go to NYU or you'll laugh at this. One of my professors was so out of date that he told me that I should go to UVA because that would be a great place to study with Jim Buchanan, and at the time that might have been the first time I ever heard Buchanan's name. He was half right.

Speaker 1:

Yeah, studying with Buchanan was not a bad idea. That was several schools ago.

Speaker 2:

Yeah, it was several schools ago, and so VPI was one of them. And then, like I said, nyu, auburn, or if I just wanted to stay home in New Jersey, rutgers, but Rutgers didn't have anything that I was interested in studying. And then I found out through the Institute for Humane Studies that the people from VPI were moving to George Mason and a group of younger economists that were at Rutgers, newark, were moving to George Mason University and they were creating a relatively new PhD program. And I didn't understand. I don't come from academic stock so I didn't understand any of the issues having to do with degrees or anything like that. I just wanted to go learn and these were the people that I wanted to study with and I had the really good fortune to study with them.

Speaker 2:

To your broader question, I had the good fortune of having a professor there that was a specialist in the problems of socialism, don Lavoie, and then another assistant professor who actually came from Duke and worked with Tremel at Duke, michael Alexiev. He teaches at Indiana University, and so he taught about the Soviet underground economy. And so the question was how do I fit this stuff I'm learning about property rights and political processes and this stuff I'm learning about the economic problems of socialism and the reality of the Soviet underground economy and how can I fit them all together? And so that led to this other issue about studying property rights, transaction costs and all these other things. One last thing I know I'm talking too long, but one last thing that relates to your point and this is important, I think, and you'll jump on this right away which is Jim Buchanan. I had Buchanan before he won the Nobel Prize, so I was very fortunate between 84 and 86, he was around. After 86, he was traveling because of the Nobel Prize.

Speaker 2:

But one of the things that he stressed all the time to us especially those of us he thought as too romantic libertarians was you have to begin in the here and now. You have to begin. And so if you're going to try to do a reform process where you start, matters for how it is that where you're going to go, and unless you start with that real existing and it's not that the status quo has any moral weight, it just is what it is and it's where you must negotiate off of. And once you recognize that, and now you take the black market or underground economy stuff, and now you take the black market or underground economy stuff. You realize that there are property rights that are involved. They're just not. You know there's control rights but not necessarily cash flow rights. You know, and all these other reasons for way, the system was dysfunctional but nevertheless could stay together, and so that's what you needed to start from to do the reform.

Speaker 1:

So that's why all those issues matter. We should do another whole episode about that if you have time sometime, because that was sort of a starting point for Douglas North. Also, the problem that you have contracting around the existing set of powers George Vanberg and I and then Jeffrey Brennan and I have papers about Buchanan's view of the status quo. I think that's something that people don't understand enough about. If you're going to talk about contracts, you actually need to think in terms of the existing status quo, distribution of rights and it can be the de facto as well as the de jure distribution of rights, and that's 100% yeah.

Speaker 1:

Well, if you're studying developing economies, that a big mistake is not to do that, but let's bracket that and do that again, yeah, in the future. I did want to know, because I really do want to know about your story. Do you speak Russian? Did you live in Russia?

Speaker 2:

I was a fellow at the Academy of Sciences in Moscow once, and then I did most of my international visits in Prague for a variety of reasons. I studied Russian language for about eight years, but I could never master it. I'm not very good with languages.

Speaker 1:

But you could read it, so I could, I could.

Speaker 2:

I'll give you a. I had a cultural when I was at the Academy of Sciences. I had a scientific guide and a cultural guide and I was so proud because I got tickets to go to the Bolshoi Theater and I tried to explain to my cultural guide that I negotiated with the guy on the street and did this. And of course she's looking at me like you're crazy and because she says how much did you pay? And I paid about the equivalent of 50 bucks a ticket where they were going for COPEX.

Speaker 2:

But I compared it to going to the ballet in New York City. So I was like, yeah, and she said, and I said, well, I thought I was passing as Russian. She just chuckled at me and she said no. And then she said first off, you know, basically, not only can't you talk, very, well but second of all, she pointed to my, you know, like duck boots that I had on and she says no Russian wears those. So you were taken, but still, nevertheless, I got to go to the Bolshoi for 50 bucks.

Speaker 1:

Yeah, that's really well and for a price that would have been reasonable if it had been in New York. So you should be able to Exactly. Yeah Well, so we had talked a little bit in advance about how to approach this problem. You have written a lot over the years, but recently you have a book, the Socialist Calculation Debate, which is a Cambridge Elements book, and you wrote it with Rosalino Candela and Tegan Truitt. You also just did a podcast with one of my favorite people, russ Roberts, and as often happens with Russ, it was kind of all over the place and that's great. You know, it was a lot of background.

Speaker 1:

I wanted to take a particular entering wedge here Someone. I think that many people don't read when they study this question. Now they don't read carefully enough and I was in listening to your talking with Russ. I had the feeling, you know, pete is saying stuff that's true. People that are hearing this that haven't studied it think that can't be right. He's exaggerating. But you literally were representing this correctly. But the reason I wanted to talk about Bergson is that it gives us sort of personalizes, the approach that people in the 30s, 40s, 50s were taking to the Soviet Union. So there was an article in the Harvard Crimson in 1960. That quotes Bergson and forgive me, I'm going to read a couple of paragraphs from it. From it this is quoting this is paraphrasing or talking about Bergson In October 17, 1960, 1960, if the American economy continues to grow at the present rate of about three and a half percent a year, the Soviets will catch up to the United States in the 1980s.

Speaker 1:

So he expressed an opinion in the New York Times. But then he wrote up a more academic paper criticized the optimism of the 1960 political campaigners so that's Kennedy and Nixon. He believes it's based on a misunderstanding of the facts. There are some things that are retarding and accelerating growth factors in the Russian economy. Those are going to cancel each other out in the future. He predicted that the Soviet Union will continue to grow at a present rate of about 7% a year. So that's real growth rate of 7% per year. Now there are some forces that are holding it back. They had some bad agricultural years. Their economy depended on some things going right. It wasn't fully industrialized. But since they're growing at 7%, they'll soon catch up. So offsetting these negative factors is the Soviet ability to control the rate of investment Bergson indicated that the Russians will be able to raise investment rates while satisfying the growing demand for consumption in the Soviet Union. So their advantage is that they could control the investment, whereas in this chaotic West we're investing in all sorts of things, higgledy-piggledy that can't possibly work out. So the reason that Bergson.

Speaker 1:

Now, going back to the 1930s and let me say one thing about Bergson that I think is interesting Bergson, his last name, was Burke B-U-R-K. He changed his name to Bergson in the 1930s when he was at graduate school at Harvard, in order to emphasize the fact that he was Jewish. He thought that Burke was like he was just trying to pass. That's pretty brave, given the quota system, the anti-Semitism in the Ivy League. He changed his name to Bergson in order to embrace his Jewish identity. So his story for why he wanted to study economics was, in the mixed-up world of the time, how socialist planning functioned in one country, in the one country where it was being applied on any scale, seemed a rather momentous matter, which actually sounds, maybe surprisingly similar to the reason that you were interested in it. There's this one country they're actually doing this thing that sort of hypothetically we say we're interested in as an alternative. So he decided he would study that, which is some of the things that you did.

Speaker 1:

There's a paper in 1938 that I think should be required reading for every student that studies sort of a second or third course in microeconomics, and I wanted to read two paragraphs from it. So the paper was in the Quarterly Journal of Economics in 1938. Quarterly Journal of Economics is the Harvard House Journal. It must be nice to have a top three house journal where you can publish stuff by just walking it down the hall. So the first paragraph from that 1938 paper was.

Speaker 1:

The object of the present paper is to state in a precise form the value judgments required for the derivation of the conditions of maximum economic welfare which have been advanced in the studies of the Cambridge economists Pareto, barone and Mr Lerner. I don't know why he singles out Mr Lerner, but meaning Abba Lerner, and so people have speculated about this. I'm going to show that they are right. And then at the end and this is the thing that I think is striking if the production functions and individual indifference functions are known, they provide sufficient information concerning the and now in caps economic welfare function for the determination of the maximum position, if it exists. So there's a question about whether equilibrium exists. But if and then we're going to work on that. That's a future research program.

Speaker 1:

Of course, in the forties and fifties the Lionel McKenzie because I'm going to say him first because he was from Duke, but the Arrow Hahn, debrew worked out that question about the existence of equilibrium. So if that's true, all we need is production function, individual indifference functions that provide sufficient information concerning the in caps, economic welfare function for the determination of the maximum position. So that was the research program that was spelled out. So when someone says social welfare function, they often call it the Bergson Samuelson social welfare function. So I realize that's a long introduction, but I wanted to sort of give more credibility to your apparently fanciful claims about this is how people were thinking. How was it that that position was not only advanced but was universally accorded victory? They won. That was clearly the way to think about this for really for quite a long time. So what is it about information and the way that the socialist system can and I'm using quotes now calculate the parameters that classical economists, neoclassical economists, are going to say have to be generated by the price system?

Speaker 2:

Yeah. So the first thing I think, mike, is to realize that the classical economists, from Smith onwards, were worried about bargaining behavior and the higgling and bargaining of the market, which is not a world of perfection but a world of always becoming. It's an evolution towards a solution. It's not the solution point and the desire to become more and more deterministic, which makes sense, because a lot of these debates were just recycling over and over again among economists. And so if the greatest ambiguity is because we use the same words to mean different things or different words to mean the same thing, let's try to find a universal way to say things, and that's mathematics. The relationship between averages and marginals is the same whether or not you're in China or whether or not you're in Chicago. It doesn't matter the institutional historical moment, what matters is the mathematics. And they thought they could derive the kind of governing dynamics of the economy in this pristine sense. And in a lot of ways you and I we're neoclassical economists and we kind of believe that as well. So the way Frank Knight would describe this was you have a skeleton, skeleton and the skeleton is like the optimality conditions. But in order for the skeleton to operate you need to have muscles and ligaments and other things like that, and those are the institutions and the, the social and political, legal and social institutions. And the question is, which is the foreground and which is in the background? And so what happened in the 1930s, I, I think, was that all that stuff, that was the muscles and ligaments, got put way into the background and all the other stuff came out in the foreground, whereas in the earlier time, let's say, risk, uncertainty and profit by night, or you know Henry Simon's work, you know, or whatever, or you know you would flip it this way, it'd be the other way. And so what happened? To a large extent this is for a different topic, but the kind of title of your, of your podcast here is all of that stuff Coase and Alchin and all of them. They were efforts to kind of reorient that back again. And so you know, reorient that back again, and so you know, understanding why that became.

Speaker 2:

The other thing is is a meta argument, I think, which is what purpose economics is to serve. So if economics is a science of social understanding, which is how Adam Smith thought of it, right, adam Smith's science progresses from, you know, wonder to surprise, to appreciation, and he studies, an already existing phenomenon. The dinner is already on our table. The question is how the hell did it get there? So I'm trying to provide social understanding of that, and so the surprise is that I find out that it's from marshalling the self-interest of these various people in the division of labor. And then I come to appreciate what are the preconditions that allow for the advancement of specialization and social cooperation through exchange.

Speaker 2:

But that doesn't give us exact points of prediction and control. And so if economics becomes a science of social control which you and I know is what say, for example, vincent Ostrom really put his finger on that was going on, the transformation of what happened Well then you get exactly that the science must match the task. So the science must match the task, and that's why you get what Bergson's telling you. In order to do what he thinks economics should do, you have to have that perspective. If you just came along and said, oh, there's going to be dynamic entrepreneurship and innovation and other kinds of things that are going to drive growth and development, you can't control that. By definition you can't control, but what you can do is control the level of investment okay, but let's go back to the beginning and see where the split happened.

Speaker 1:

In a way, what we have is the soviet union. Russia has a revolution, yeah, and there there's a lot of theorizing about what might need to be done in order to have a centrally planned economy. So Enrico Barone tried to write up the, because Valra had spelled out a possible solution. It seemed like you might be able to solve it, and the goal then was your description about economics being a descriptive. Science works up to the point where it becomes engineering, and somewhere around 1919, people thought this is an engineering problem. We actually don't need all of this stuff that until now we have used to generate this solution.

Speaker 1:

So Otto Neurath, enrico Barone, they were interested in the problem. Two things, I guess. One is the centrally planned economy that the Soviet Union had. It was a very exciting, interesting new problem. Is there a different way to do this? But they also saw it through the lens of what they called the war economy, because even the capitalist countries were using central planning to great effect in World War I. Why can't we apply that same reasoning to the economy then? And so that's the context that gives us a complete reversal. Later, hayek, with their claims about what has come to be translated the socialist calculation debate and, as you know, I have some thoughts about that. Just about semantics.

Speaker 2:

So I think one of the things that's most fascinating to think about in this is that the original effort to describe the optimality conditions was an effort to scientifically celebrate the invisible hand, right, and so the idea was is that? Hey, listen, if you just let the market operate, it's going to produce this idea. This is Pareto's optimality conditions, okay, and then you have so that's what? 1890 or so, right, where they're starting to do this. Paul Ross is doing this, and then you get the World War One. You know, planning for rational production in a war.

Speaker 1:

Well, and economies of scale because of the the finishing of the Industrial Revolution, so enormous economies of scale.

Speaker 2:

Yeah, yeah. And also the social ills that are still evident from that, which are on the minds of people. So the invisible hand is operating, it's delivering an amazing increase in income, but at the same time there's still social ills. You know, there's problems associated with squalor and ignorance and poverty and idleness and all these other things. And we believe somehow Pagu actually in an essay in 1910, actually argues that if he looked for inspiration he wouldn't look to the market, he would look to martyrs and things like that. But he said the only reason why economics is valuable is because it can bear fruit. And what's the fruit? It can make the world better. That's your transformation. There's a problem. These are tools that help us make it better.

Speaker 2:

And then in World War I you saw that you were able to plan, and so they said oh, why can't we do that in peacetime? And then, right on the heels of that comes the Great Depression, and then people's faith in the invisible hand just disappears, and so we have to turn it over to the planners to try to save us. And the Soviet Union appears, at least to the outside world, as if it doesn't suffer from a Great Depression. It goes from a peasant economy to an industrialized economy within a generation. And then the story becomes even more important because it's like they helped defeat Hitler. So how can you say that they're doing a bad job? When Hayek, you know, published the Road to Serfdom there's a review of it in the AER. This is critical and the AER criticizing him for criticizing the Soviets, our allies in the fight against Hitler. And how can he, how dare he, you know, take that on? And I think it's really interesting to get that mindset about what's going on.

Speaker 1:

I have a copy. It's a reprint of a 1937 book called the Planned Society and there's a bunch of papers in it and two of the papers. There's one section for actual current statesmen and there's a paper by Benito Mussolini, the political and social doctrine of. With retrospect, to see that the extent to which the is it different from the problem that a market system, or how is it the same as what a market system solves?

Speaker 2:

Yeah. So just to put one last point to your issue on the Times, rexford Tugwell, who was one of Roosevelt's close advisors in the AER, actually argues. He says the following thing the jig is up. This is actually a quote from the AER. They spoke a little differently back in that day. He goes the jig is up. There is no invisible hand and there never was an invisible hand. That was the sort of thinking at the time, the sort of progressive intellectuals. This is where they're coming from.

Speaker 1:

It was science, it was science.

Speaker 2:

It was science, yeah, and so you know the issue about rationalization. So so many of the terms that have come down are a consequence of the context of the debate.

Speaker 1:

Right, so I wanted to get into the semantics, right, yeah.

Speaker 2:

So, if you go back to what you were quoting, Bergson is doing the basic idea. There's a bunch of stuff to unpack in that, but the basic idea is to rationalize production. That's what he means by investment control. Right, they can rationalize, whereas we rely on the whims. Remember the Keynesian argument? Right, it's due to the swings of optimism and pessimism that we have levels of investment. They can control investment, which means they can take all those processes that we call the invisible hand behind the backs and instead put it in front and control it and do it scientifically. And we now have the tools to do it, both in terms of our theoretical structure but, more importantly, as the time evolves, the statistical analysis. So, the Coles Commission and all the people that were involved in that which Lange was part of that and that Coles Commission, which, of course, is what Arrow is part of later on, all of those kinds of ideas, their idea was to provide an economics of control that was scientific and that they could bring all the things that produce.

Speaker 2:

So the question is, how do I then understand the haggling and bargaining of the market? How do I understand the innovative machinery that generated the Industrial Revolution, how the tinkerers turn scientific knowledge into commercially useful knowledge, kind of things, and all that stuff was put aside because you can't really fit that into the model of social control. And instead and it's also haphazard Think about debates that we might have about science. So you love baseball? I love baseball. A really really good baseball player right, Offensive baseball player fails 70% of the time. Right If you're in the hall of fame. If your career, you fail 70% of the time. Well, now let's think about science. There's so much going on in science but a lot of it turns out to be not very useful or whatever. And that is true of businesses. 50% of businesses that open fail things like that. But what if I could get rid of all of that waste and I could rationalize it? Then I could have a burst of productivity.

Speaker 2:

And what Mises and Hayek did was they said OK, you want to rationalize production, but in order to rationalize production, you have to figure out how to get more with less, not less with more. And the only way, in their argument, the only way that that comes about is through the generative process of competitive markets, which yield to us and help us discover what are the productive avenues of specialization and what are the opportunities for mutual beneficial exchange. And it's that missing element that the socialists didn't pay attention to. It's not that they have to, as you put it. It's not that they have to calculate existing given data. Right, If they had that, you would just need a big computer, which is what Lange argued in 67. But instead, if it's a generative process, that the knowledge itself doesn't exist unless you have the process itself. Or as Buchanan referred to it later on, order is defined in the process of its emergence. It's only through this competitive exchange process that you get it. But go ahead. I'm talking too much, you go ahead.

Speaker 1:

It is not obvious that when you make that argument to someone who doesn't already believe it, that that's true. So let's go back and look a little bit at the process by which this was developed. So I often say as a shorthand that any system you have to evaluate looking at it with two eyes. Those two eyes are incentives and information. Now, as you have said a couple of times, and maybe you can talk about it a little bit, incentives were just put out of bounds as a sort of rule of debate, because incentives are we can fashion a new socialist man, that is, someone who's not going to be self-interested, who's concerned about. So if we look at John Dewey Marx, rousseau, a lot of them say we're going to fashion a new person, we're going to socialize this stuff about incentives, never mind. Which meant that if you wanted to challenge this planning revolution, you had to do it along the grounds of information, because that focus on what we need is enough information in order to do the calculation. But if I can get information about the location and amounts and quality of all of the inputs, it seems like, and I know something about the production function, which is the process by which inputs are produced into outputs and I can look at the objective needs of the population. I don't really care what people want. I can figure out what they should want, what they actually need how many shoes, what kind of clothing, how much nutrition. So we'll apply science to this question. That's obviously much better and less wasteful than just relying on this process that's full of friction and transaction costs, to be able to figure out these parameters.

Speaker 1:

And so when you look at Otto Neurath, the people in the 20s and 30s that were writing about this problem, ludwig von Mises wrote an article that in English is translated as economic calculation in the socialist commonwealth, and I think that's actually a mistake. I can't pronounce German very well, but the word that's translated as calculation is Wirtschaftsrechnung and that actually means economic arithmetic and so it could be calculus calculation. But it's more likely that what happens is that markets generate information that actually it's, not that we can find it by looking at amounts, it actually is generated at the margin about the subjective valuation that people have, and that's what is missing from socialism. But socialists said we actually don't care about that.

Speaker 1:

And famously Oscar Longa sarcastically and let me just read the quote he tried to give credit to Mises, saying. Socialists certainly have good reason to be grateful to Professor Mises, the great advocatus diabol, the devil's advocate of their cause, for it was his powerful challenge that forced the socialist to recognize the importance of an adequate system of economic accounting to guide the allocation of resources in a socialist economy accounting. A statue of Professor Mises ought to occupy an honorable place in the great hall of the Ministry of Socialization or the central planning board of the socialist state. So he's partly being sarcastic, but he's also saying yes, we do need an alternative to prices. The thing is that their way of generating measures of relative scarcity get around all of the transactions, cost and frictions of the market. Why isn't that right?

Speaker 2:

Yeah, I mean, there's so much in there you mentioned this earlier with respect to Berkson that if you're given the utility functions and the technological knowledge at a time, it's ipso facto to derive. But the question you have to ask is what are the subsidiary assumptions to be able to derive that that's in an equilibrium framework. So you mentioned before if it exists. But that question is a different one about the first and second welfare theorems as they're developed. But at this time they were assuming that if it exists is that it does exist. I'm going to work out the conditions in here and if I have this amount of knowledge here, I have this amount of knowledge here. It's just bibbling and scrimmaling to get from one to the other. And so if I can do that on paper, why can't I do it and just tell the state enterprises price equal to marginal cost, produce at that level which minimizes average costs, and we'll be fine and go from there. The issue I think is and by the way, on your point about the translations of the German, it's interesting because Hayek uses the phrase many times later on in his career of the economic calculus, and so I wonder if there's probably a good paper to talk to Bruce Caldwell about in that idea. But I've been working on this idea lately about because there's a sort of resurgence of interest in price theory and yet it's in conversation with standard Maskell, alwinson and Green kind of understanding of economics today. And one of the things I keep on thinking about is that price theory in the hands of these guys like Coase or whatever, it's what prices do, not what they represent, and in these models prices don't do anything, they just represent something, and I think that really matters about the way they understand. So when Lange, he doesn't have prices serving any function other than representing. That's why they're shadow prices, representing price-to-go marginal costs produced at the minimum point on the average cost curve, right. So to me, I think that there's a paradigmatic divorce that takes place in which economists are using the same words but they're interpreting them in radically different ways, and part of that is this issue of the aspects of discovery.

Speaker 2:

What is knowledge as opposed to information? What is knowledge as opposed to information? Information? I mean, this is not exactly consistent with our everyday language, but information is kind of a stock and knowledge is a flow. Knowledge is something new, refreshing coming in. Information is kind of what we already have and already know, and so if we have only the known, then the task is how do we gather the known right? Rather than the idea of how you discover something that someone had previously not even thought about before, and so I think that that's. I don't know if I'm exactly getting at the depth of the question you're asking. You know the depth of what you're the question you're asking, but to me, I think this is issue of what prices do. Is they guide us for our future behaviors, rather than the idea that they're summaries of our past decisions? Right, and so yeah.

Speaker 1:

The thing that's interesting about prices and I think what's hard to understand about prices is that people always it's a cliche prices are a signal wrapped in an incentive. So it's a piece of information, but it comes in the form of an incentive. If there is scarcity, that is, there is not enough of this stuff at the existing price, then three things happen Because prices go up. When prices go up, consumers buy less, producers make more and entrepreneurs try to think of ways to make substitutes. No one tells them to do that. That is, it doesn't take direction. And then so the question is what happens to the price after that? So we can start with the existing price, the existing amount, and say, oh, there's a shortage, well, we're going to need to raise the price. But then what happens then? That's something that the neoclassical economists ask, that the planners generally don't, because what happens is those three things Consumers buy less. The reason that consumers buy less is that the increase in prices gives me a reason to care about the welfare of other people or to act as if I do. I go in during COVID. Toilet paper is $2 a roll, I can buy all I want, because other people must not need it. If it's $7, $8 a roll. I think I should leave this for someone else, because in a time of scarcity, you aren't buying it from the producer, you're buying it from the consumer who is behind you or out in the parking lot, and you don't know who that is, and the planner doesn't know who that is either, because we can't judge whether or not they need those things. Producers start to make more. Well, how much will it cost them? I don't know what their marginal cost is, because in order to increase production, they're going to have to change the things that they're doing. Now. I can measure it after the fact, but I can't set the price to that conjectural marginal cost at this point. And then, once you say entrepreneurs start to make substitutes, it's completely wide open. I don't even know what the substitute is, much less what its production function or cost curves look like. There's no way, then, that planners can carry out at least the second and third of those. They probably can't even the first. That is, how much less are consumers going to buy? I can impose rationing, but then I'm denying myself all of the information that would have come from the price system.

Speaker 1:

So you mentioned this and I wanted to go back to it and see what your thoughts are. The reason I had a little pedagogical piece at AIER called the socialist generation debate and I'm often trying to be too clever by half Part of it is that I want to claim that we should talk about generation instead of calculation. But it's also a generation in the sense you said. Price theory is coming back, peter. Socialism's coming back. If you ask young people, 50% 55% say that not only is socialism desirable, they firmly believe it is a viable political economic system. There's no evidence for that. If you look at countries that have tried socialism at scale, they've all either collapsed or have widely shared poverty. So what is it that is making socialism come back? Because the 50s and 60s, if you talk about um, as you said, uh, about, was it apple bomb, the, the, the age of the economist yeah, uh-huh so the, the, that wasn't the time of neoliberalism, that was keynesnesianism and planning, and basically that lasted right up until at least the mid 80s.

Speaker 1:

So that was. That's the time of the economist. Yeah, there was a triumphalism in the 1990s. The Cold War is over and the University of Chicago won. Where is this socialism coming from? This that it's like a zombie? It has risen. And this idea that we can use planning, I want to say that it comes in part from this notion of calculation. We have better computers, we have better AI. Sure, it was hard before. Why aren't we going to solve this problem now? Why are you such a traditionalist and won't recognize that the new information science, now we can solve the problem?

Speaker 2:

All right. So let me just make a very quick Well that was a 10-minute question, so I apologize. Yeah, I know, but let me just just let me make a quick point about the debate itself. Mises and Hayek were very clear, going back to the ipso facto, that under static conditions there would be no problem for socialism, and so socialism is not a general equilibrium problem in the context of Well, there's no logical problem.

Speaker 1:

Interestingly, there actually is no logical problem with that model.

Speaker 2:

In that model. Their problem was is that for us to make advances in economic theory, we have to take subjectivism seriously, we have to take time seriously and therefore we have to take change. Change is—Socialism has no static problem. And so, in Mises' strongest argument form, what he does is he says I'm going to assume that the planner has full technological knowledge, and a lot of people misunderstand this because he doesn't say full economic knowledge. If he said full economic knowledge, then he would be saying that God wouldn't know how to solve an arithmetic problem. Right, which is silly. But what he says is that the planners have the full technological knowledge of this day. They still don't know how to get the economic, so they don't know how to go from the desirable to the feasible, to the viable. And the market is that test that moves you from our imagined desires to what's in the feasibility set, to then what's out of the feasibility set, what's in the viable set. Ok, so it's about dynamics and change. The other way to think about this and this is very relevant to your transaction cost discussions is one of the great papers in transaction cost economics is Stephen Chung's the Fable of the Bees, and a lot of people focus a lot on the equilibrium outcome of that, that there was an optimal contract that took place between the apple growers and the bee herders. Right, but so. But to a Hayekian, what's fascinating is all the stuff that went on before the contract was formed. This is your Doug North issue, right. It's like all that evolution of where they try different ways to solve their social conflicts and then they come about and they eventually get to there. That focus on that activity is crucial. So one I think intellectually we need to reorient the world, because that's the generative process as opposed to the equilibrium outcome.

Speaker 2:

Now to your other point. First, the triumphalism caused a huge lack of creative energy in understanding the economic system as opposed to how can I succeed in getting policy implemented? All right, and I think that that left us not investing enough in our intellectual activity. This is not central control, but just, in general, people that care about how markets operate, in understanding the nuances of markets and challenging the standard approach to economics in that regard, in the world in general, the kids today, an 18-year-old in a freshman class in economics today doesn't even know that 9-11, they didn't experience 9-11, let alone the collapse of communism.

Speaker 2:

And so to them, all they've ever experienced is the global financial crisis, and so to them. All they've ever experienced is the global financial crisis, and then COVID and a permanent war economy, right, and so to them. The solution is always going to be to turn to. They had to turn to government because the global financial crisis did what right? And then what did COVID do? And so to them, government has to be a solution. But they can be optimistic now because the computer is allowing us to now what we previously couldn't do, the computer is now going to allow us to achieve. Compare that to when I went to college. So what happened when I go to college? Right, I was 14 when Nixon was forced to resign, so I was just barely becoming politically conscious.

Speaker 1:

Okay, so the gas shortages 75, 78. Right, I'm not a crook Gas shortages.

Speaker 2:

Jerry Ford, which is an amazing confusion of things probably the greatest athlete that's ever been president of the United States was portrayed by Chevy Chase as a klutz, so we all came to believe he was a klutz, an object of ridicule. Jimmy Carter again the pictures of him were lampooning, him with the big teeth and the bunny, and he jumps out of the canoe and all these things like that. So the idea that your politicians were anyone that you would turn to for any kind of, you know, savior thing in my tacit presuppositions just wasn't possible. It's the opposite for the kids today, and so these tacit presuppositions look to the government as a salvation. The modern computing tools, they're told, are the mechanism by which that salvation can now be effective. And so that's what's going on among the intelligentsia.

Speaker 2:

Of course, by the way, if we talk outside of the intelligentsia, people are angry as hell, because what's happened in response to the global financial crisis and the COVID was the very wealthy were protected and the working class and middle class have been decimated, and Washington doesn't seem to have ears to pay attention, and so, as a result, you have populism and all this other stuff coming up, but the kids that you're talking about? They're the leaders for the future and they're the ones in the intelligentsia and they believe that computers and AI can do what you know. And why wouldn't it? I go to chat GDVC and I do this, and I can write my papers for me and I can get an A at Harvard or whatever right. So you know why wouldn't I do that?

Speaker 1:

I threw you a softball and you're too modest to take it. All of those background conditions are true, yeah, but you have made a distinction between mainstream and mainline economics. And so all of these smart kids, they're taking mainstream economics. That isn't that different. Abram Berkson would recognize it. I see that this is the it's. It's like none of this other stuff ever happened. Yeah, so we're not teaching mainline economics, we're teaching mainstream economics, and it's hardly surprising that when you hear about socialism and calculation, it immediately oh, then all we need is better computers. Wait, we have them. And so I think part of it at least is this weird refusal to teach what you have called mainline economics. And I know you could talk about this for hours, but can you say a little bit about that distinction?

Speaker 2:

Yeah. So I mean, the distinction is the difference between what were the core principles. Imagine you're a Martian and you came to the earth in 1779. And if you came to the earth in 1865, and you came to the earth in 1925, and you said, what's an economist?

Speaker 2:

And we kind of know what people thought economists were because we can read the critics, like Charles Dickens, right, mr Goddard's law, the philosophy, philosophy of fact as opposed to the philosophy of the heart, and you know they stress scarcity and they you know trade-offs and all these things like that. That are the basic principles and that kind of has all this line of thought that works around those edges from Adam Smith to Vernon Smith, and I call that mainline economics. Okay, mainstream economics is whatever's currently fashionable at the moment. And another clue of this is that John Maynard Keynes, when he developed what he called the new economics okay, he said, I'm going to reach into the rogues gallery of economists. Those are his words, not mine. I'm going to reach into the rogues gallery of economists. That all argued that these general principles don't hold at all times. And so that transformed. So you combine the loss of faith in the kind of organizing principles of the invisible hand with these new techniques that were developed, that call you science and that has stayed the same since Paul Samuelson embodied them all the way up to Maskellel, winston and Green.

Speaker 2:

So when people criticize Econ 101, I always look at them and I'm completely puzzled. Because again, here's how you learn Econ 101. You do now learn. When you and I were students, macro came before micro, but since then now micro is back there. But what do you learn? You learn about, basically, that individuals maximize their behavior. Then we learn oh, maybe they don't really maximize their behavior. Then we learn that they engage in mutually beneficial exchange. But wait a minute, they don't really realize all those exchanges because they face a litany of distortions, imperfect information, monopolistic structure.

Speaker 1:

A fair number of people start with market failure. Yes, they literally start with market failure.

Speaker 2:

And they rarely, it has been pointed out by people, our friends, when they study things like okay, so how many textbooks actually talk about public choice?

Speaker 1:

Entrepreneurship there's a list of they're not even in there.

Speaker 2:

They're not even in there, and so that's what the kids learn economics as, and so you're a hundred percent right that they are trained within the tools of economics, and I've been involved in a lot of programs that have tried to do interdisciplinary work as well, and as much as people hate economics and a lot of programs that have tried to do interdisciplinary work as well, and as much as people hate economics and a lot of people will clearly tell you that they hate economics. They rely on these theories of market failure all the time. You know they'll invoke even the terms public goods.

Speaker 1:

Externalities.

Speaker 2:

Anything I don't like it's an externality, and I hate economics, but I love these terms and what's fascinating for people like you and I is that we actually don't deny that there are imperfections in the world we're not doing a Jedi mind trick.

Speaker 2:

That's one of the problems maybe with the Chicago approach in a hardcore way which is like there are no inefficiencies and things like that, and I understand what they're doing. But there's three ways to respond to market failure arguments. One way is conceptual clarity, and it's important to be conceptually clear and a lot of loose thinking gets eliminated. But the second one is also to see that today's inefficiency is tomorrow's profit opportunity for the individual who's engaged in entrepreneurial action. And the third one is that there's hope in institutional transformation. Right, that is, is that you know, to say a situation is hopeless, as Knight used to say, is to say it's ideal. We look at the world, the world is not ideal. Therefore it must not be hopeless. If we can change the structural rules of the game under which we operate and we get people to agree to that, then we can realize better outcomes than we currently have. So, in response to these three responses to the standard litany of imperfect information, of basically high transaction costs rather than low transaction costs, all these different things, monopolistic structure, if we can see how individuals can creatively act, let me just make one point about that because I think that you would agree with me on this, one of the great, powerful insights of Eleanor Ostrom is that in governing the commons, she doesn't criticize the prisoner's dilemma model as flawed mathematically. She says the problem is the way you're setting up the social dilemma. Because the problem is the people are prisoners and I want to, instead of having them be prisoners, have them be able to have the autonomy to set those rules for themselves, the payoffs and everything that they have, so they can find their way out of these social dilemmas.

Speaker 2:

And I think that's similar to what we call economics from the inside out as opposed to economics from the outside in Bergson is outside, you're going to stand outside. You're going to have an ideal system that you're working at and then the point is to impose it, whereas instead, if you want to do is look at the way in which people coordinate their activity, you get generation. So you're going to have engineering or you're going to have this evolution towards a solution kind of idea, and mainline economics is all about those activities here and that's what highlights in your intellectual apparatus these kind of various different institutional evolutions, these entrepreneurial actions of discovery and innovation, whereas if you're in the other framework, it's all about tools of calculating and derivation and basically QED proofs versus demonstrative reasoning versus plausible reasoning.

Speaker 1:

Well, I appreciate that If someone wanted. You have written a lot about these various subjects and obviously one of the things people might look at is the new Betke et al book on the socialist calculation debate. But if they wanted to learn more about the mainline versus mainstream economics, where would they look?

Speaker 2:

So, you know, as is usual, I'm going to give too much information, but the main one is a book called Living Economics. So, as is usual, I'm going to give too much information, but the main one is a book called Living Economics. It was published by Independent, as well as the University of Francisco-Marroquin in 2012. And then I have a book of the Nobel lectures, of the people that I think are the mainline representatives, and that would be Hayek Buchanan, Coase, North Vernon Smith and then Eleanor Ostrom, and that's called mainline economics essays in the Smithian tradition. And then there's an applied book that I did with Matt Mitchell, called Applied Mainline Economics, which tries to summarize in a very concise way what are the core principles, and in that, what we do is we go through what you talked about before about incentives, about institutions and about culture.

Speaker 1:

Yeah Well, Peter Betke of George Mason University, thanks for being on Tidy C.

Speaker 2:

Thank you very much, mike, it's great.

Speaker 1:

Thank you very much, mike. It's great Whoa. That sound means it's time for the twedge. I have three twedges today and I tried to find some that maybe you hadn't heard before about the Soviet era. There's a communist plan for the new economy. The goal Make people rich and happy. Oh, and here's a list of the people. Second, an old Soviet joke man walks into a shop. He looks around and then asks the clerk angrily you don't have any meat. The clerk says oh, don't be an idiot. Can't you read At this store, we have no fish. If you want the shop that has no meat, that's across the road.

Speaker 1:

Man walks into a Moscovich dealership a car dealership with a wad of rubles, slams the cash down on the desk and says I'd like to buy a car, please. He does all the paperwork. It takes him four days. Finally, the dealer says, well, okay, that's finished. You can pick it up in seven years. Wait, what Says the man? Seven years? He pauses for a moment. Is that in the morning or the evening? And the car dealer says well, what difference does that make? And the buyer says well, that's the morning. The plumber can come out.

Speaker 1:

This month's letter. Hello, I've been thinking about labor market dynamics and how frustrating it is that people feel the need to change jobs to be paid what they're worth. Why don't companies just pay their employees enough to not leave? Isn't turnover expensive? The answer is transaction costs. My hypothesis is the following Every person hired has a chance to be a superstar. A superstar can be worth two or three times what they're paid. Current employer has good information about a given employee's value good information about a given employee's value but a potential employer anticipates at least a 10% chance that it'll be 2.5 times the employee's true value. The modal outcome is slightly negative, that is, you're slightly overpaying in expected value, but it's still positive because some of them are worth three times what you're paying them. So everyone looks more valuable to potential employers than to current employers due to the information asymmetry. Would love to get your thoughts on the original question in my hypothesis and if there's any relevant research pointing. Either way, thanks A from Ohio. End of letter.

Speaker 1:

Well, a, there certainly is something to that. I think prospective employers likely look at prospective workers and say we're just going to pay them enough more to attract them rather than trying to guess what they're actually worth. But you're quite right that they're looking for people who are underpaid at their current jobs. The problem is that most people feel underpaid at their current jobs. Everyone probably overestimates the value of their work. The interesting thing about what your hypothesis is the conjecture is that what I'm really buying is a distribution, and I'm looking for people that are way out in the right tail, that are far more productive than their current pay is. But if it's really true that the current employer knows the real distribution and they know who's a superstar and who's not, it would almost never work that I would be able to hire them away. But it is true that that might explain why I only give raises to people who give outside offers. Universities are notorious for this, but I think that the explanation is actually the reverse of what you said. Notorious for this, but I think that the explanation is actually the reverse of what you said. Universities don't know who's any good because they can't tell who, to the outside world, is famous or worth hiring, and so they wait in order to get information about the value of the employee. The outsider makes an offer and then the universities is oh, that person's worth more than we thought, and they use that information to make a raise. If there's any listeners that I'm not a labor economist. There may well be a large literature on this. I expect there is. Please do send us an email and I'll talk about this more for A from Ohio on a future show.

Speaker 1:

This month's Book in a month is another autobiography by one of my favorite authors and cartoonists, actually Bill Maldon. Bill Maldon was a World War II cartoonist. He had a famous book called Upfront and was a cartoonist for the Stars and Stripes, which was the large army newspaper in Europe. The book is called Brass Ring, a Sword of Memoir. It was published in 1972. It's illustrated, of course, by the author himself. It was published by WW Norton. Well, the next episode will be released on Tuesday, march 25th. We'll have a new topic, some letters and, of course, a hilarious new twedge. Well, the next episode will be released on Tuesday, march 25th. We'll have a new topic, some letters and, of course, a hilarious new twedge. All that and more next month on Tidy C.