Right Reason

Kling on Coordinated Specialization

In "Co-ordinated Specialization," Arnold Kling meditates on the problems of teaching economics from an emergent perspective. He departs from a quote taken from the textbook, The Economic Way of Thinking, that he lauds as progress from Samuelson's seeing-like-a-state textbook. In the quote, the authors, Paul Heyne, Peter Boettke and David Prychitko, argue that economics is a theory of choice that studies the unintended outcome of purposive action within the market order:

I prefer something more Smithian and less Misesian. I would be inclined to start with something like this:

The most striking economic feature of modern society is that we can consume the products and services requiring millions of tasks while performing only a few tasks ourselves. Obviously, this requires some form of coordinated specialization. How can this coordination take place? Consider three possible extremes.

1. Decentralized decisions, but with no prices and profits. People just spontaneously decide on their own what would be most useful to society.

2. Centralized decisions, made by an expert planning bureau.

3. Decentralized decisions, guided by prices and profits, and regulated by competition.

The problem with (1) is that you will get imbalances. Suppose that getting milk to urban consumers requires both dairy farmers and truck drivers. If too many people would rather be truck drivers than dairy farmers, then there won’t be enough milk to transport. If too many people would rather be dairy farmers, then the milk will spoil on the farms. More generally, the jobs that no one wants to do will tend to go undone. Computer programmers will all work on video game hacks, not on inventory control systems. Basically, (1) only works when there are very few tasks to be divided among a small number of people who all get along.

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Returning to Heyne-Boettke-Pryhitko, I would prefer not to put as much emphasis on the methodological dogma that people choose in response to expected benefits and costs. Instead, I prefer to emphasize the question of how a society can operate with each individual performing a few tasks while consuming the products of vast multitude of tasks.

I lean towards Mr. Kling's sentiments on this matter. Unlike orthodox Austrians, such as Boettke, I don't see economics first and foremost as the study of human choice. Rather, I think that the scope of economics is the study of economic order first and foremost.

Economics is about the study of human choice insofar as that choice is a cause of economic order, but we shouldn't let the focus on the emergent order, which cannot be expressed from the point of view of any single maximizing agent, drift from view. The ecological features of economics are most pronounced in this study of coordinated specialization. Just as species adapt to the different niches that other species have taken in an ecosystem, so do people adapt to the different specializations that people have taken in a commercial society. Here, the effects of variation and selection, be it market or natural, are to be emphasized above individual choice. 

The Smithian emphasis on the concatenation of activities within the market order, as illustrated by his parable of the workman's coat in The Wealth of Nations, must come before the Misesian emphasis on the logic of human action, as illustrated by the first hundred pages of Human Action. 

Deleveraging: A Matter of Coordination

 

A trifling debt makes a man your debtor; a large one makes him an enemy.

-Seneca the Younger

 

 

Yesterday, the, dare I say, always-worth-reading Paul Krugman wrote on the on the hazards of deliberating in “Nobody Understands Debt”: “Why is deleveraging a problem? Because my spending is your income, and your spending is my income, so if everyone slashes spending at the same time, incomes go down around the world.” Mr. Krugman provides the orthodox Keynesian diagnosis of deleveraging in terms of aggregate demand and it doing so reveals the flaws of the aggregate-demand approach: It ignores the ecological qualities of the markets. 

 

To really understand whether people’s spending reflects the wealth of the nation, we have to understand the context in which people are trucking, bartering and exchanging. The economy is a coordination problem where profits are to be had by bringing people’s future plans into greater coordination with each other. Wealth, in turn, is fit order that correctly anticipates people’s future appetites and is thereby coordinated with them.

Any process of deleveraging therefore needs to be understood in a coordination perspective. Such a process, however painful, can be necessary if there is widespread mal-coordination within the economy. In a 2010 study, “Debt and Deleveraging: The global credit bubble and its economic consequences,” the authors, Roxburg et al., addressed such mistaken activity when it wrote about how the level of debt in most mature countries aggressively expanded after 2000 due to “unusually low interest rates and risk spreads…” (Roxburgh et al. 2010: 10). Later in the study, Roxburgh et al. specifically point to the leverage of households as being an economic problem post-2008:

Taking a more granular view of leverage within sectors of the economy, we find that households increased their borrowing substantially, particularly through home mortgages. Rising housing prices meant that the ratio of household debt to assets appeared stable in the years prior to the crisis. But household debt compared with disposable income increased significantly, which should have raised a red flag long before the crisis. (Ibid)

Leverage just isn’t a data point; rather, it’s the manifestation of economic life. Whether it’s a manifestation that adequately corresponds with the demands of life is another matter. The markets can and do lead to situations where the patterns of specialization and trade that have hitherto evolved are, for one reason for another, unsuited to the demands of life. Roxburgh et al. write of a credit bubble that led to households holding an unsustainable level of debt, compared to their income, once economic reality reasserted itself. 

 

Mr. Krugman is correct in asserting that debt per se is nothing, “it does not directly make the economy poorer (and paying it off doesn’t make us richer)” What makes us poorer or richer is how our economic life, the patterns of specialization and The moment that people realize the departure of the two is, like most sudden revelations, a moment of crisis—the crash of the housing market was certainly devastating for those who had based their economic life on it.

 Once such bubbles have burst, spending needs to go down so that people can figure out the most profitable ways of doing business with one another. Deleveraging can be a necessary part of that natural process. The way forward isn’t to deny that people borrowed too much, it’s to accept that people have to adapt themselves to the demands of economic life and deleveraging, as described by Roxburgh et al., can be a necessary part of that process. Economic life, after all, is a coordination problem. Even if that coordination problem may be somewhat of a mass hallucination, it is still a mass hallucination that people have to adapt to if they desire to flourishing.

 

Insofar as deleveraging reflects the aftermath of the extinction of unprofitable patterns of specialization and trade, it reflects an event that enhances the wealth of the nation by bringing people’s economic decisions into better coordination with one another. It is bad when it doesn’t it doesn’t enhance that coordination, which can be the case when there are monetary disturbances—but that’s a topic for another day. The connections created between people through business are complex and ecological, not simple and hydraulic. 

Mr. Krugman’s repetition of the tired line that “We owe debt to ourselves” encapsulates the latter perspective. People don’t owe money to themselves; rather, different people in their own distinct stations of life owe money to different people. There’s a politically pertinent reason for not wanting to look at loans in such simplistic terms: The adage that he who holds the purse holds the power is all too true. 

The fall of Prime Minister Silvio Berlusconi’s government in Italy following pressure from the bond markets on his government’s finances in 2011 and the rise of Mario Monti’s government of unelected technocrats, just a week after Monti had been appointed a senator for life by President Giorgio Napolitano, should be a lesson in the power of the bond markets as a faction. A modern government cannot operate without access to well-functioning bond markets, which means that bond-holders are a potential faction that can override an otherwise democratic government’s wishes. As long as people have different appetites and different ways of life, then the slogan “We owe it to ourselves” is a delusion. There is no ‘us.’ There’s only a heterogenous population of different people all with their own ends in life, and only a fool bets that people will be publicly spirited when crisis is around the corner.  

Smith and Orwell on Language and Coordination

 

From Adam Smith's "Considerations Concerning the First Formation of Languages":

The assignation of particular names to denote particular objects, that is, the institution of nouns substantive, would probably, be one of the first steps towards the formation of language. Two savages who had never been taught to speak, but who had been bred up remote from the societies of men, would naturally begin to form that language by which they would endeavour to make their mutual wants intelligible to each other, by uttering certain sounds, whenever they mean to denote certain objects.

 

Language is obviously very important for the mutual coordination of human activities. Especially within an abstract extended order, there are very few focal points which can be expressed without the use of complex languages with grammars, and subtleties taking lifetimes to master. The intense level of cooperation within modern societies would be impossible if it weren’t for the coordination facilitated by shared linguistic associations of focal points. George Orwell’s outcry against the abuse of language in “Politics and the English Language” thus takes an ever more critical resonance when we read it in terms of the conditions for preserving mutual coordination in society.

 

If a group of people were ever to meet at a nearby location, they would have to be able to agree on where that location is, and would have to therefore be able to communicate between themselves that they intend to meet there. For that to happen, they would have to share a language with shared associations between words, and places so that when Sally says that she intends to go to Northside Social, Sue knows she means that specific coffee shop in Arlington. Without those shared associations in language, they will not be able to coordinate their activities since they lack the capability to communicate where they intend to be. The breakdown of the ease of mutual coordination that language made possible between two people with the loss of shared associations in language would have even more horrific effects on the overall orderliness of society’s extended order. 

 

Orwell’s “Politics and the English Language” deals with the dire topic of the loss of clear association of words with their intended objects within the world. As he writes in the article: “A man may take to drink because he feels himself to be a failure, and then fail all the more completely because he drinks. It is rather the same thing that is happening to the English language. It becomes ugly and inaccurate because our thoughts are foolish, but the slovenliness of our language makes it easier for us to have foolish thoughts.” The corruption of the English language, whether that is in the repetition of phrases to the point of them becoming meaningless or the regular use of euphemisms, reduces the association between words and things in the world. Such linguistic deterioration thereby reduces people’s capability of mutual coordination, whether in finding their way to a destination or in political dialogue.