Greg Mankiw and Austrian Economics

Lynne Kiesling

One thing I like about Greg Mankiw is his sincerity. It resonates through all of the posts on his relatively new blog, which I am enjoying. It also fills in some of the areas where I don’t pay such careful attention in economics, because I think the intersection of his research interests and my research interests is pretty close to the null set.

One post that struck me in particular was this one from 3 April on Austrian economics. A student asks him if he’s read Mises Human Action, and he says no, with slight embarrassment. In addition to saying that we economists tend to read more recent work and less older work, he cites another for not having read any Austrians:

Second, at the mainstream schools where I have spent my education and career (Princeton, MIT, and Harvard), the economists of the Austrian school like Mises are often viewed as fringe figures. Rightly or wrongly, they rarely show up on reading lists. I am confident that while I was a student at Princeton and MIT, I was assigned not a single article by an economist in the Austrian tradition.

That judgment might well be unfair. Another prominent Austrian economist is Friedrich Hayek, who won the Nobel prize in economics. Cognizant of my ignorance of his work, a few years ago I read (and assigned in a Harvard freshman seminar) his classic book The Road to Serfdom. I thought it was terrific.

I’d love to hear some more about what he thought was terrific about TRTS, which I also find insightful and thought-provoking. His post prompts me to write up something in response to a question I’m frequently asked: what Hayek should all literate economists read?

• “The Use of Knowledge in Society,” American Economic Review, 1945. I assign this article in every course I teach. He starts from the premise that our knowledge is bounded and private; for example, only I know my preferences over shoes and pizza, given my budget (there is much, much more to it, but let’s go with that for now). The most valuable role that prices and market processes play is to aggregate that distributed, decentralized, private information through a deceptively simple decentralized mechanism: prices. Prices are a parsimonious tool for transmitting information about relative scarcity/relative value in alternative uses, and we contribute to that information every time we choose to purchase an item or not, or to produce an item or not, or to choose one method of doing it over another. This article is the culmination of a lot of the logic of the arguments in the socialist calculation debate with Oskar Lange.
• “Competition As A Discovery Procedure.” Not only is private knowledge private, it often isn’t even coherent until a context arises in which it forms. In other words, if you asked me out of the blue what my marginal rate of substitution is between shoes and pizza given my budget, I will have no clue of what to say to you. But if I am in a situation in which I am choosing whether to buy pizza or shoes, in that context I am able to formulate my marginal rate of substitution, given the observed price ratio between them. Maybe that’s the same as saying that revealed preference is contextual and subjective.
• Law, Legislation, and Liberty, Volume 1, especially chapters 1-3. The chapter on nomos and taxis as different types of order arising out of different types of social relations is brilliant, and is an antidote to the argument that we can replicate the village at a large, bureaucratic institutional level. The first time I read this, my head spun, and every time I reread it the insights are breathtaking.
• Constitution of Liberty, especially chapters 1-7 and 15. I find that reading these chapters makes me more sensitive to the importance of the legal institutions in which human social action is grounded. Chapter 15 on economics and public policy gives me humility in the face of the idea that some people know what’s better for other people (i.e., for “society”) than they do.