Arnold Kling  

My Research Program for Ph.D Students

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This weekend, I attended a Liberty Fund seminar on Austrian economics vs. neoclassical economics. One point that was made was that the important thing is to have a productive research agenda. In the past Austrians might have been accused of merely engaging in ankle-biting criticisms of others' research. Over the past twenty years, this has changed.

Leaving labels aside, if I had a platoon of Ph.D students, my suggestions for research would be based on what I see as the following shortcomings in mainstream economics.

1. Too much emphasis on characterizing equilibrium conditions in mathematical terms. Not enough emphasis on the processes of economic and institutional change.

2. Too little role for entrepreneurs. In Austrian economics, entrepreneurs can be arbitrageurs/equilibrators (Kirzner) or creative destroyers (Schumpeter).

3. Too much knowledge attributed to economic agents. Mainstream economics misses the role of markets as a learning mechanism; instead, it posits economic agents who have little or nothing to learn.

4. An assumption that when incentives are poorly aligned (aka "market failure"), government involvement is necessary and sufficient to address the problem. As a result, mainstream economics does not allow for institutional entrepreneurs--entrepreneurs who develop new solutions to incentive problems.

With that as background, let me suggest some research avenues.

1. Institutional change. Douglass North has focused on this. But there is a lot more to be said about the conditions that give rise to institutional change, the actors who bring it about, and so on. The work of Vernon Smith and others on institutional design is also relevant, but I am more interested in how the market goes about creating new institutions than in how an economist would advise someone to design an institution.

2. Long-term growth. Yes, plenty of people look at this issue. But as Robert Lucas famously said, once one sees the magnitudes involved it is hard to think about anything else. And it's fair to say that de Soto, North, William Lewis, William Easterly and others have only begun to develop theories and evidence on this issue.

3. Employment fluctuations. We have much more interesting data now, with statistics on gross flows in the labor market, which are much larger than the net changes in employment and unemployment. This data ought to be exploited by researchers who think in terms of disequilibrium, market learning, and creative destruction.

4. Innovation, especially financial innovation. Again, there is a lot of room for useful work to be done in a framework that does not start by assuming away the main problems--local knowledge and the need for trial-and-error learning. Local knowledge, in my view, is the key to understanding financial markets--and why "transparency" is a false goal. Even outside the financial sector, the innovation process is poorly understood. Amar Bhide and William Baumol have made useful contributions, but there is much more useful work to be done.

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CATEGORIES: Austrian Economics

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The author at The American Mind in a related article titled Economics Links–05.12.08 writes:
    The Law of Demand strikes oil. Oil’s high price caused Chinese imports to decrease. Bond insurer MBIA reported $2.4 billion in losses for the first quarter. So far, Super Bowl XLII has been an economic black hole for Glendale, AZ. Arnold Kling h... [Tracked on May 12, 2008 6:44 PM]
COMMENTS (5 to date)
Bill Stepp writes:

"Why I am not an Austrian Economist"?
Hmmm...sounds like you meant "Neoclassical."

Peter Chicago writes:

Frankly, I do not see anything novel in the shortcomings you point out. And regarding your first two points for research avenues many neoclassicals are working on it. Overcoming the so-called shortcomings by improving its tools.
Another thing that is salient from your post is that most of your research avenues points mention people who are not identified as Austrian Economists. This make me realize that even though core Austrian like Boettke, Salerno keep saying that they are making contributions. Your comments imply that AEs are not contributing but taking from what others contribute. which reveals their bad state.

fundamentalist writes:

I think the research plan is excellent! But I would emphasize Kling's point that for it to work, mainstream econ needs to relax the assumptions about knowledge and equilibrium.

Also, mainstream econ needs to develop a better understanding of capital as well as incorporate better info on the effects of the money supply. A couple of years ago the San Francisco Fed had a good research article in which they concluded that oil shocks do not cause prince inflation, but are instead a symptom of monetary policy. That's a good start. The paper is available on their web site.

On development econ, I don't see how they will improve much on Bauer.

Mr. Econotarian writes:

I agree that the work by Douglass North needs to be further examined and expanded.

It seems to indicate not so much a "poverty trap" as a "cultural trap" that holds countries in poverty.

Mehul writes:

Can you please explain what exactly you mean by local knowledge as to why transparency is a false goal?

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