Thursday, February 19, 2015

Climate change - a quick follow up.

Add this to my previous musings on this question.

HT: Steve Horwitz: Steve suggests we ask the climate alarmists the following question. But don't expect they will give you and answer any time soon.

What would it take for your belief in "climate change" to be falsified?

Do they even have an answer? Is it a null set? Where is the burden of proof?

Thursday, January 29, 2015

Some Puzzles About Brian Arthur’s Views on Complexity

I just finished reading this important paper by Brian Arthur (‘Complexity-economics: A Different Framework for Economic Thought’). I noted my irritation earlier on Facebook that he has no reference to Hayek or any of the Austrians, and wondered how one could write about complexity in economics without mentioning, indeed examining, Hayek’s work. Now that I have read the paper I have a better appreciation of it and think that it is quite well done and is a valuable contribution. Of particular note is the penultimate section, ‘Discussion’ which contains Arthur’s analysis of the place of complexity-economics within economics generally. He provides both methodological and historical perspective. Here is my quick paraphrase of part of that section, focusing on what I find noteworthy.

According to Arthur, complexity-economics is about open-ended systems that are in the continual process of forming and in which the arrival of novelty is on-going. This means that the methods of traditional quantitative economics, concerned mainly with allocation of ends to means in a closed system, and amenable to mathemization, are inapplicable. Other methods have to be found. In particular, time in complexity-economics is real-time as we experience it and not linear, reversible time as expressed in traditional economics. Complexity must deal for example with events that are essentially non-repeatable.

So, while the familiar Marginalist economics (what Austrians call the “pure logic of choice”) has a role to play in economic education it is only one aspect of a much bigger picture, one only now beginning to fully emerge.  In an important way, complexity-economics is close to old-fashioned political economy. There is a synergy between them. “Complexity-economics allows us to explore the world of formation theoretically and systematically; political economy allows us to explore it intuitively and empirically” (17).

So far so good. Quite encouraging. And he does include a passing shout-out to Hayek as a political economist, though no reference. Austrians will see much to agree with albeit they will wonder if Arthur came to all this (the ‘literary’ side of things) never having read Hayek, or Lavoie, etc. He speaks of “nonequilibrium” not “disequilibrium”. Never mind. But then he turns to “policy implications”. And as satisfying and reassuring as the discussion so far has been it now becomes incredibly irritating and bewildering. To wit:

“Certainly, complexity teaches us that markets left to themselves possess a tendency to bubbles and crashes, induce a multiplicity of local attractor states, propagate events through financial networks, and generate a sequence of technological solutions and challenges, and this opens a role for policies of regulating excess, nudging towards favored outcomes, and judiciously fostering conditions for innovation. Colander and Kupers (2012) express this succinctly as getting meta conditions right. (18, italics added)”

So the principle lesson he draws from his perceptive, and expert, understanding of complexity is that “markets left to themselves” exhibit bubbles and crashes that open the way for benevolent regulation? How can this be right? No mention of the amazing self-regulating properties of the market. Where is the ‘invisible hand’? No mention of “complex adaptive systems” or converging network effects, never mind “spontaneous order”. Now maybe I am being picky, but in a contemplative piece on the place and significance of complexity-economics surely the first and foremost of characteristics to note are the convergent and homeostatic properties of many complex social systems. Am I wrong in thinking that this is a big part of the complexity literature? But they are nowhere to be found in this paper.

It gets worse. He goes on to blame an inability to see the benefits of and necessity for regulation on equilibrium economics. (And here we all thought that the neoclassical perfect general equilibrium edifice lent itself to the advocacy of central planning a la Oskar Lange. Does Arthur even know about that?)

“I believe we can make a stronger statement. The failures of economics in the practical world are largely due to seeing the economy in equilibrium. If we look at the economic crises of the last 25 years—the debacle that followed the freeing of markets in Russia in 1990, the extensive gaming of California’s energy market after the lifting of regulations in 2000, the collapse of Iceland’s banks in 2008, the ongoing Euro crisis, the Wall Street meltdown of 2008—all these were caused in no small part by the exploitation of the system by a few well-positioned players, or by markets that careened out of control (Arthur, 2010a). Equilibrium thinking cannot “see” such exploitation in advance for a subtle reason: by definition, equilibrium is a condition where no agent has any incentive to diverge from its present behavior, therefore exploitive behavior cannot happen. And it cannot see extreme market behavior easily either: divergences are quickly corrected by countervailing forces. By its base assumptions, equilibrium economics is not primed to look for exploitation of parts of the economy or for system breakdowns.

Complexity-economics, by contrast, teaches us that the economy is permanently open to response and that every part of it is open to new behavior—to being exploited for gain, or to abrupt changes in structure. A complexity outlook would recommend putting carefully thought out controls in place, much as authorities put sensible building codes in place in seismic regions.” (18, italics added).

And herein lies the explanation for his neglect of Hayek and similar approaches. It does not fit into his topsy-turvy mindset, his view of the social universe in which complexity applies to everything in that universe except government regulation and policy-making. He refers to “the exploitation of the system by a few well-positioned players” in the market, but seems oblivious to the much greater danger of such well-placed players in government. Knowledge and incentive problems don’t seem to exist for him. He is in the grip of the Keynesian presumption that all that is necessary is to put the right people (the complexity economists) in charge of designing the system of regulation.

Many, I am sure many complexity-economists included, will see this as precisely the wrong lesson to learn. The correct lesson, surely, is that policy in a complex world should be humbled by the inescapable unpredictabilities implied by ongoing formative social processes in real time embodying novelty; should incline toward the setting of general abstract rules at the constitutional level, less amenable to exploitation than ad hoc regulation, as so clearly explained by Hayek, Buchanan and others (Lewin, 2014).

For me this was a revealing lesson in power of mindset. Forgive my naiveté.

Arthur, W.B., 2010a. “Exploitive Behavior in Policy Systems,” Mss., IBM Almaden.
Arthur, W.B., 2013. Complexity-economics: A Different Framework for Economic Thought’ SFI Working paper: 2013-04-012, Sante Fe Institute. 
Colander, D, and R. Kupers. 2012. Laissez-Faire Activism: The Complexity Frame for Policy, Princeton.
Lewin, 2014. “Policy Design and Execution in a Complex World: Can We Learn from the Financial Crisis?” working paper,

Sunday, January 25, 2015

Pondering Piketty – A Simple Analytical Framework


When Thomas Piketty’s book (Piketty, 2014) burst upon the international scene less than a year ago, I felt pressure to write a comprehensive review of this aggressive attack on free-market economics. After all, it was based, as its title implies, on an exposition of the essential nature of “capital” – as in “Capitalism” – and had I not spent a lifetime in the grip of capital theory?

So I got the book and began to plough through it. It proved much more tedious than the reviews I had already read had prepared me to expect. Piketty lays out his premises and conclusions in the first few chapters. So, I already realized that his approach was full of fallacies, that it was fundamentally flawed. How does one then proceed to go through the remaining part of the 655 pages knowing there is no redemption, in fact that the rest will be either irrelevant padding or a piling-on of further fallacies.

By the time I made it through the book, the reviews, scholarly and more informal, had accumulated. It is a fair bet that, numerous though they are, all of the criticisms that could be made of the book have been made somewhere. Thus the marginal value of any review I could offer is probably now close to zero.[1] However, as I was thinking about it, I realized that many, if not all, aspects of Piketty’s approach can be expressed in a simple framework which might be of use to some. I cannot say that this has not been done  before, in some form or other, only that I have not seen it, and that, in any case, it may be of value.

I will, therefore, say very little about the details of the book – how it is written and organized. I have already elsewhere delivered a sweeping evaluation, to wit: Piketty is wrong on the data, the economics, and the policy, otherwise this is a valuable book. You might think it a bit too scathingly smug. But, what I have read since writing that, has enforced my view. In addition to his dubious use of aggregates (about which I will have something to say) it now appears that a strong case can be made that Piketty has distorted and/or fabricated data (Magness and Murphy, 2014). And his economics is surely abysmal, to the point of evincing basic misunderstandings of the workings of supply and demand (McCloskey, 2014, 91). On the matter of policy, I need no confirmation of my conviction that his recommendation borders on insanity.

There are, however, two general comments I want to make about the book. First, many, though by no means all, of the reviews I have read, including some by highly critical authors, suggest that Piketty’s book is, for all its faults, admirable; that it is the work of a serious author with integrity and the best of intentions - Intelligent, industrious, but mistaken and misguided. Perhaps I lack the capacity for charitable interpretation, but I do not see it in this way. The book strikes me as pretentious and almost completely devoid of merit. Its tone, for all the superficial self-effacing expressions to the contrary notwithstanding, is arrogant, something particularly galling coming from someone who has not taken the time (in the purported twenty years of incubation that this book endured) to properly understand his subject.

Secondly, and more importantly, the book is clearly mistitled. It should be titled “Inequality in the Twenty-First Century”. It is from start to finish a book about the evil of growing inequality. Yet, while the book mounts a mountain of evidence to support the assertion that inequality is growing (a project that ultimately fails, as many have shown) there is no real effort to support the assertion that inequality, in itself, is bad. Some reviews have addressed the ethical question of how this concern with inequality elevates resentment and envy. But I have not seen any discussion of the fact that time and again Piketty tries to bolster his case by asserting, without a shred of evidence, that social inequality results ultimately in “social instability” (for example, 10, 21). Indeed, Piketty recognizes that inequality in itself may not be a bad thing, but becomes bad when it is unjustified and against the “public interest” (33). And, of course, he knows what is in the “public interest.”

A simple framework

Piketty’s framework consists of a few basic categories that can be captured using the following.

Y = rK + wL

This is an accounting identity, where Y is national income, r the rate of earnings of capital, K, and w is the wage rate, the rate of earnings of labor, L.

Piketty divides the set of all productive resources into two (exhaustive) categories capital, K, and labor, L, whose owners earn r and w per unit respectively. Thus the earnings of K and L are rK and wL respectively. And the shares of K and L are rK/Y and wL/Y respectively – which we may write as sK and sL respectively.

Piketty’s project is to show that the laws of capitalism imply that sK/sL rises without limit, thus destabilizing the society. To do this he posits the fundamental equation that i > y, where i is the rate of interest, also the rate of earnings of K (i = rK/K), and y is the rate of growth of total incomes ([1/t]dY/Y = gY, explained below).[2]

Piketty reasons that if the earnings of K grow more rapidly than earnings in general, this must imply that K’s share is growing, thus increasing inequality. QED.

Let’s consider sK and sL in a little more detail.

As a tolerable approximation we can write

g(sK) = gr + gK – gY


g(sL) = gw + gL – gY

Where g is the instantaneous percentage rate of growth operator (aka, dlog/dt).

If r is constant so that gr = 0 and gK  > gy, sK will rise.

But if w is constant or positive and gw + gL > gY, sL will rise.

Clearly, the variables are connected.

g(sK/sL) = (gr + gK) – (gw + gL).

If gr = 0, income inequality (sK/sL) will rise iff gK > gw + gL, that is, iff capital grows faster than labor plus the increase in wages.

So even with this simple, really simplistic, framework[3], Piketty’s conclusion does not follow unless one discounts the effects of a large increase in the real wage of pure labor. Indeed real wages have risen astronomically over the period of Piketty’s analysis, but presumably he would argue not sufficiently relative to the earnings of capital – a really astounding claim, that suggests further analysis of this framework is necessary.

What Do These Variables Mean? 

The conflation of personal and functional income distribution

By using only two categories, K and L, Piketty stacks the cards. In examining the income earned by K and L he is conflating the personal distribution of income with the functional distribution of income. To say that K earns income is at best a metaphor. It really means the owners of K earn income. And the same is true of L. Labor rents out its services in return for wages. By drawing conclusions about inequality of incomes from this, Piketty seems to think that all capital-owners own only capital (from which they derive their earnings) and, more importantly, all workers own only labor – no capital – exclusively from which they derive their earnings. What happens if workers own capital (for example by way of their pension investments)? Then the earnings of capital relative to the earnings of labor cannot be taken as coterminous of the earnings of capital owners relative to the earnings of workers. He does have a lot to say about who owns capital, but it is confused.

The neglect of human capital

This conflation is particularly egregious, potentially fatal to his argument, for the case of human capital. Piketty explicitly (and cavalierly) excludes  human capital from his consideration. Yet, human capital is arguably the single most important factor in explaining personal earnings. If we include the accumulation of human capital in capital accumulation as a whole, the tendency would clearly be toward a reduction in inequality – even in the narrow sense in which Piketty presents it.

What does capital mean?

Piketty has a sub-section with the same title (45). His answer is patently inadequate.

To use these kinds of aggregates is always to risk incoherence. This is especially true in the case of capital. A nation’s physical productive capital refers to its non-human instruments of production – machinery, raw-materials, minerals, buildings and land (some have a separate category for land). Beer-barrels, blast furnaces, harbor installations and hotel-room furniture are all capital (Lachmann 1956 [1978]). They are “capital-goods.” Clearly this is a category of diverse and heterogeneous items. In fact there are thousands of different sub-categories of physical capital goods and, owing to the persistent improvement of technology, the number is growing even while the composition of sub-categories changes.

Why are capital-goods valuable? They are valuable only because they are able, when grouped in appropriate combinations, and used together with labor services, to produce goods and services that people (consumers) value and are willing to pay for. But the value of any single capital-good is a matter of speculation. What someone will pay for it depends on his forecast of the value of the stream of future revenues that can be earned by employing this capital-good in a productive capital combination.

The value of the total of all capital goods is thus not an observable phenomenon. Yet this is what K is intended to convey. It is meant to be an index of the physical magnitude of the capital of the economy. But since this category of resources is composed of thousands of incommensurate items, the only way such an index can be constructed is by adding them together on the basis of their supposed values and deflating by some suitable price-index. Still, it is not a physical quantity of any observable entity. The value of any single capital-good depends on the flow of prospective revenue it is expected to produce, but, as this revenue is earned over time it must be discounted in order to arrive at the present value of the capital-good. In other words, an interest rate is already implicit in the construction of K; its magnitude depends on the interest rate used to discount the various income streams. Thus for Piketty to argue that the interest rate is the return to capital, is to commit an elementary but significant error (to be discussed further below).

In fact there is no such thing as a total of productive physical capital. There are only individual forecasts of what each capital-project (composed of capital and labor combinations) will earn. Only in the idealized theory of neoclassical economics, where all of these individual forecasts are identical and exactly match what will actually transpire, a world of equilibrium, can one meaningfully talk of such a total. In the real-world it is precisely the differences between these forecasts, between the visions of different and competing entrepreneurs, that drive the market-process in which many production plans fail and some succeed. It is a process of implicit experimentation, a dynamic process and there is nothing automatic about it.

What is the interest rate?

It follows that there is no such thing as a return to capital in general, an r, that is the rate of earnings on K that is equal to interest. Interest is a reflection of time-preference, of the discount applied, under various circumstance (notably different degrees of perceived risk) to future incomes. It is the cost of borrowing, the price of credit. It is the cost of financing productive projects and represents the sacrifice made for not consuming value now in favor of waiting until later. If such a sacrifice is to be made it must be deemed worth it. So, for a productive project to be undertaken it must earn at least the value of financing it, after all other expenses are paid. Interest is not the return to capital. It is the cost of financing. It is a separate cost of production.

What then does capital earn? Capital earns a rental rate. If the capital-goods were rented from a third party rather than owned, their earnings would be the rents paid for them. If they are owned it is as if the owner is renting the capital-good to himself. It is no different with labor. The value of a worker, in terms of capitalized earnings, depends on how much he can sell his services for over time. Since he is the exclusive owner of himself, his capital-value cannot be alienated from himself, the employer must rent him, he must purchase the worker’s services. If we consider labor to be human-capital, then all capital earns a categorically identical rental rate. The interest cost is never equal to the earnings of “capital” except in the sense of “financial capital” which may be used to finance both capital and labor.

Rather than just two (different types of) categories of earnings, there are very many categories all of the same type, namely, they are all potential sources of income. And their earnings depend on the nature of the productive environment in which they are created and deployed and not on any fundamental and immutable laws of capitalism.

What is profit?

In real-world economies successful entrepreneurs earn profits. Very successful entrepreneurs can earn fortunes – that they sometimes bequeath to their heirs. Profits are a disequilibrium phenomenon. There is no positive equilibrium rate of profit. In equilibrium profits are zero. Profits are the return for being right in an uncertain world. They are a residual after all other expenses have been accounted for – including contractual payments to workers (wages), capital-goods owners (rental earnings) and financiers (interest).  If the entrepreneur is also an owner of the capital-goods she uses, and part-financer of the project, these sources of income will, in practice, be inextricably comingled.


In the light of the realities of the dynamic economic processes that increased the standard of living of millions of people by magnitudes of thousands, it is hard to see what relevance Piketty’s i > y could possibly have. In truth, his is a bankrupt vision, based on a set of flat-earth dogmas that should never have been accorded the esteem it now has.


Lachmann, L. M. (1956 [1978]). Capital and its Structure. Kansas City: Sheed, Andrews and McMeel. .
Magness, P. W., & Murphy, R. P. (2015, Spring). Challenging the Empirical Contribution of Thomas Piketty's Capital in the 21st Century. Journal of Private Enterprise.
McCloskey, D, N. (2014), Measured, unmeasured, mismeasured, and unjustified pessimism: a review essay of Thomas Piketty’s Capital in the twenty-first century. Erasmus Journal for Philosophy and Economics, 7, 2: 73-115.
Piketty, T. (2014). Capital in the Twenty-First Century. Cambridge: Harvard University Press.

[1] I created a folder on my desktop called Piketty Pieces. At this moment it contains 77 separate files, being various reviews (critiques) including a 10-part review by The Economist.
[2] Piketty uses r and g to write r > g, but we need a different notation for reasons that will become obvious.
[3] It is a Ricardian-Marxist (classical) framework with land thrown in with capital.

Tuesday, January 6, 2015

When art is spoiled by propaganda

Just finished watching this four-part mini-series. It provoked a mix of very powerful emotions that, no doubt, will become the spur for an audacious blog on the situation in general, if I have the courage. For right now, let me just note this.
In the decades leading up to the 1967 six-day war the mythology surrounding the establishment of the state of Israel was full of romance and euphemism that buried or glossed over the traumas and injustices done to the Arab population, who we now refer to as Palestinians. Israel was the idol of the left, a phoenix risen from the ashes of Auschwitz - heroic testimony to the resilience of the Jewish people, a symbol of human potential, a confirmation of the validity of optimism. And the Palestinians were mostly ignored. Their plight was seized as a tool for Pan-Arabism and later radical Islam, so that rather than dealing with the problem it was deliberately perpetuated by the power brokers in the Arab world. The UN has been continuously implicit in this insofar as it has continued to recognize all of the descendants of the original refugees as refugees by inheritance. This is unique and totally unprecedented in the many cases of refugee populations with which the UN has had to deal. UNWRA (, the agency specially created to deal with the Palestinian refugees continues to this day to encourage a state of dependence and hostility at the expense of the taxpayers of member-countries.
After 1967, with gathering momentum, the pendulum began to swing back as the economic and technological gap between Israel and Palestine widened and Israel became a country with an army of occupation, until today when the picture, the mythology, is exactly at the opposite end of the spectrum. Marx or Hegel would be pleased by this dialectic. The prevailing mythology is one that vilifies the Israelis beyond redemption and glorifies the suffering and resistance of the Palestinians no matter how barbaric it may seem - to leave no doubt that the underlying problem is the illegitimate establishment of Israel itself. We are left to figure out what the obviously implied next action step is.
This mini-series is a fairly sophisticated and very effective instance of this genre of mythology. It contains hard-truths, half-truths and lies, all mixed together, indistinguishable to anyone not very familiar with the real history. It is a clever story about a grandfather (a British soldier in Palestine during the occupation) and his granddaughter (living in England in present day, who goes to Israel to find out about his experiences there). The two stories are told in parallel, flashing back and forward in time. It should be just a very compelling story, but instead it is accompanied by insidious, seductive propaganda that will surely leave the innocent viewer with the conviction that Israel is an evil entity, albeit perhaps grown from a noble but futile dream. So, acts of terrorism are ultimately justified as acts of desperation, comparable to the acts of terrorism perpetrated by the Irgun against the British occupation - a clear case of moral equivalence - except that the Irgun are depicted as unscrupulous thugs, while the Palestinian terrorists remain out of site. We hear almost nothing of Hamas or any of the other terrorist groups and we see only one Hamas fighter very briefly towards the end of about eight hours - who happens to be a radicalized young boy. The depiction of the British occupation makes it seem like the Irgun was *the* Israeli resistance to the occupation, whereas, in truth, it was a very minority group of radicals, who were strongly condemned by the Israeli establishment and army of the time, the Haganah - even to the point that the Haganah outlawed and fought against the Irgun. The Irgun's tactics were never approved by any but a minority of the Israeli population. Can we say the same about the attitude of the Palestinian population about the acts of terror carried out by its radicals? Check the polls.
With regard to the present day, there are some hard-truths, like the brutalization of young Israeli soldiers (just kids, boys and girls) stationed in the midst of large hostile populations, inevitably hardened and morally compromised, and the arrogance and sense of entitlement of some of the radical settlers. It seems that some of the scenes in the series were there simply to make these points rather than to advance the story. But there are also half-truths and omissions - like the depiction of Israeli society as unbelievably affluent and decadent. The Arabs in the movie are always honorable victims and the Israelis are either monsters or hypocrites - even the peace activists.
The truth of the situation is tragic enough. Why the need to concoct these elaborate lies? Why the need to deny Israel of any credit for what it has achieved, and what the Palestinians and Israelis could achieve together in a different world where the power brokers have to defer to the desire for peace by enough people on both sides of the divide? It saddens and frustrates me.

The Promise is a gripping, political thriller that examines the origins of the Middle East conflict in events that took place under British rule sixty years ago.

Friday, November 28, 2014

The Logic of the Free Market in China

I sometimes encounter a particular version of “cultural relativism” which asserts that the benefits of free markets are culturally specific. For example, I am told that cultures that are more collectivist in nature do not react well to the kind of American individualism that we are used to, and that different cultures need to develop their own kind of open-market society, some that are necessarily more “community oriented” than ours; and that such constraints will not limit their economic growth and development.

About to be published in January 2015 is the second edition of the English translation of an amazing book by the Chinese economist Weiying Zhang that gives the lie to this perspective. It is aptly entitled The Logicof the Market and its English version subtitle is An Insider’s View of Chinese Economic Reform. The message is simple - the logic of the market is universal. Yes, it has its particular expression in different cultures, but, its basic logic is the same for all people always and everywhere.

Zhang’s exposition is, in a word, “beautiful”. His simple but elegant style comes through in the translation as he weaves simple, intuitive truths together with profound insights into the miraculous working of the market process, drawing equally and effortlessly form the likes of Adam Smith and Confucius. The book is full of examples from contemporary and historical Chinese thought and experience. Its potential audience is thus enormous, including readers all over the world. For someone like me, teaching economics to Chinese students studying business in America, it is an invaluable resource. I am going to recommend to them that they buy both the English and Chinese versions, and thereby improve both their English and their economics.  

The content is wide in scope. After an expansive introduction (added to this edition and worth reading by itself if that is the only part of the book you have time to read), the book is divided into four parts. Part one, “the nature of the market” is a comprehensive statement of the workings of the market process – the explanation behind the astounding economic developments of the last 200 years in the West and the last 30 years in China. Zhang tackles head-on the relationship between market and morality. He makes no apologies. The market is simply the most efficient and the most moral of social systems, the most compassionate and democratic. The market is a property-based system. China’s predominant historical experience has been with position-based systems. Position-based systems are inefficient and privilege those with social status to the detriment of the rest of society. China’s state-based system is a class-based system. He warns against the ominous anti-market sentiment that has lately developed in China. By way of numerous illustrations Zhang covers labor markets, housing markets, anti-trust, and much more.

In part two “the logic of China’s reform” Zhang examines in more detail the nuances of the transition that China has experienced in the last generation and emphasizes the need to maintain the momentum towards greater freedom. Part three looks at “the origins of the financial crisis” in which he examines the logic and illogic of much of macroeconomic thinking and the dangers of China’s Keynesian response to the crisis.  Part four ends the book with “the prospect of China’s future”.

Zhang is clearly worried, if not pessimistic. Given the prominence of China in the world economy today, his concerns should be our concerns. Somewhat controversially perhaps, he believes that the role of economists everywhere is to understand and safeguard the market economy. And with this book he has certainly made it a lot easier for those who wish to adopt this mission.

Sunday, October 26, 2014

Israel is still very socialist - Friedberg Economics Institute Fellows Seminar - Fall 2014

My trip to Israel was sponsored by The Friedberg Economics Institute (HT: Bob Borens). I was participating in the second fellows seminar. Simply stated the Institute, like the partner organization the Jerusalem Institute for Market Studies (HT: Corrine Sauer and Robert Sauer), is dedicated to promoting an appreciation of the importance of economic freedoms and the market process in the hope that such an appreciation may lead to movement toward greater economic freedom in Israel. Here is the official statement.

The Friedberg Economics Institute was founded in Israel in 2014 as a non-profit organization with a mission to advance, in Israel, appreciation for the principles of economic freedom and the potential for improving growth and prosperity through application of these principles.

The Friedberg Economics Institute sponsors seminars, bringing the world’s best economists and economic policy makers to Israel to teach ideas of free-market oriented economic thinking and principles of economic freedom.

The Institute’s initial target audience is Israeli university students. Over time we hope to broaden our audience to include thought leaders in government, business, and the press.

My two lectures were concentrated on describing what might be called ‘an alternative economics’ – alternative to the standard technical fare that is taught in all but a few economics departments and business schools around the world. I pitched my content at both economics students and intelligent non-economists (of which there were a few). The first was specifically on the “closing of the economist’s mind” starting with Ricardo, but more especially since WWII as economics became more “scientific” aka scientistic. The vision of Adam Smith inquiring into the nature and causes of the wealth of nations was lost. Why and what are the consequences?

In my second lecture I talked about methodology, epistemology, ethics and political economy. More specifically I focused on how popular presumptions and mindsets determine where the burden of proof is put in any policy action.  I used Hayek’s views on knowledge and complex phenomena to explore a few themes relating to policy design and implementation that I have been working on.

There was also a discussion panel with the four lecturers, Deepak Lal, Leszek Balcerowicz, Michael Sarel, and me, as well as lots and lots of informal discussions.

I think my remarks were well received although they were regarded as very controversial and provocative in the extreme. This did not surprise me much. It is well-known that the fundamental principles underlying popular perceptions of society and how it works and ought to work are socialist in nature. Israel was born out of a blending of Eastern European socialist ideology with Jewish national aspirations. These principles run deep and span all classes of society. Even where they are opposed, as from the religious right, there is no well-articulated alternative. But, what I was surprised to find, was the extent to which formal economics teaching in all of the universities – as far as I could tell – reinforces this. Economics teachers have abandoned any attempt to foster an appreciation of that system of natural liberty to which Adam Smith referred. Hayek is never mentioned and disequilibrium is banished with a wave of the hand. Not much either about public-choice. It is standard technical fare. It seems that anyone not hewing to the party-line would not be able to get tenure or last very long in any institution of higher learning. The objective is to produce quantitative virtuosos. Any resemblance between the economics of the class room and real-world economies is purely coincidental.

I found this quite alarming. While the Israeli economy has moved significantly away from its all-pervasive socialist structure (though not nearly far enough as these still permeate most of it) to become a highly innovative, high-growth economy, the mindset has hardly changed at all. In truth, the entrepreneurial sector encompasses a minority of the population and for the rest it is socialist business as usual. The aim is to get Israelis to begin preaching what their most successful entrepreneurs practice. Perhaps with this seminar we made a small beginning and more will be done with similar events in the future.  See also here.

Saturday, October 25, 2014

Jerusalem 2014

Touchdown Tel Aviv. It’s always a bit emotional for me. So many memories from important periods and events in my life. So much recent misplaced vitriol and the frustration of not knowing how to deal with it.

While I was growing up and into my early adulthood, Israel was the darling of the world’s intellectuals across the political spectrum. This beleaguered nation built by ghetto refugees of Eastern Europe, further propelled by survivors out of the ashes of the holocaust, defying the odds to become a viable democracy and home for Jews from every corner of the globe, including 800,000 from North Africa who had been expelled from their homes. It was a heroic, romantic story of hope and achievement in the post WWII period when people were looking for a brighter future.

All this changed after the 1967 war. Suddenly, Israel’s very success in defending itself, and every success thereafter, became a cause for condemnation and vilification – not to mention wholesale historical revisionism.

I arrive soon after the latest military confrontation with Hamas – a polarizing media and maven event, but, one in which at least Israel’s public persona was clear, unapologetic and persuasive to many, though clearly not to all or even perhaps most. The disproportionate media attention, the misconceptions, the distortions, and the motivationally suspect have left a bad smell with me. What will I find this time – how will I feel?

On my second day I go on an unusual tour of Jerusalem, a tour seen from the position, first, of the security – the lives – of the people living there, and, second, from the point of view of the accurate history of the city. The tour is organized by a highly partisan  organization and the tour guide (an ex-South African who hails from my childhood city of Johannesburg) glosses over some uncomfortable details about the 1949 war and violence against the Arab population in various places. Though much of this history is still highly disputed, there seems to be little doubt that the Israeli forces were guilty of bad things. Both sides were. So he distorts this by saying that all of the Arab refugees of that period left in response to exhortations from Arab state leaders. Many did, but many were brutally driven out. That is disappointing, to say the least.

But, overall the picture he presents is undeniable and highly relevant to the debate over Jerusalem. The world media has quite simply been duped into thinking that Jerusalem was once an Arab city, important to Islam, that the Israelis appropriated, and that the moral thing to do would be to return it to its rightful owners. Not only is this false on the national level (something which Libertarians would find irrelevant and obnoxious even to say) but it is false on the individual level as well. There simply was no large Arab population that was displaced from Jerusalem. And, importantly, Arab and Israeli neighborhoods are so intricately intertwined now that it would be impossible to separate the city into Arab and Jewish sections. Here are some important facts:

Jews have been living in Jerusalem continuously for nearly two millennia. They have constituted the largest single group of inhabitants there since the 1840's. Today, the total population of Jerusalem is approximately 800,000. 

It is a popular misconception that East Jerusalem has historically been populated only by Arabs. In the mid- 1800's, the entire population of Jerusalem lived behind the Old City walls (what today would be considered part of the eastern part of the city). Later, the city began to expand beyond the walls because of population growth, and both Jews and Arabs began to build in new areas of the city. By the time of partition, a thriving Jewish community was living in the eastern part of Jerusalem, an area that included the Jewish Quarter of the Old City. This area of the city also contains many sites of importance to the Jewish religion, including the City of David, the Temple Mount and the Western Wall. In addition, major institutions such as Hebrew University and the original Hadassah Hospital are on Mount Scopus — in eastern Jerusalem. 

The only time that the eastern part of Jerusalem was exclusively Arab was between 1949 and 1967, and that was because Jordan occupied the area and forcibly expelled all the Jews.

So, to treat Jerusalem as part of the so-called “settlements” is just wrong in so many ways. The city is a modern city with a vibrant Arab and Jewish population, and some Christians, including a successful high-tech area. The attempt to make Jerusalem part of any overall settlement is a strategic ploy designed as a first step in the dismantling of the state of Israel. It is the “heart” of Israel. Destroy Jerusalem and you destroy Israel. “East Jerusalem” is not east Jerusalem – it is a ring of territory surrounding what used to be the city within the city wall. As both Arab and Jewish populations have grown the supply of housing has become an increasingly binding constraint to the point that rental prices now rival those of Manhattan.  Achieving some sort of normality in the housing market – with transparent titles and security – would lead naturally to an ordered expansion available to both Arabs and Jews – but the absence of a unifying legal structure – and some places with no structure – has meant that the situation is highly precarious and dysfunctional. The interests of the Palestinian Authority quite clearly do not match the interests of the Arabs who live in Jerusalem – Israeli citizens and, increasingly, non-citizen residents. They come to Jerusalem in large numbers for a better life under Israeli authority and they would opt to live under Israel if given the choice. Many have for generations now.

This tour saddens me but adds to my previous impressions. I try to remain optimistic and to marvel at the beauty and resilience of the city – to the seamless mixing ancient and modern in an open and vibrant market system. I am here to try to explain to Israelis the importance of economic freedom, a topic I will turn to in my next blog. 

Friday, October 24, 2014

From the Friedberg Economics Institute Fellows Program, 2014 - 2

Peter Lewin
October 20 at 5:31am
Today I had the pleasure and privilege of hearing Leszek Balcerowicz talk about economic freedom, both as a concept and as a strategic objective in real-world situations. He is a rare individual who combines theoretical knowledge and knowledge and vision of how to implement the theory's implications. He is a passionate and optimistic believer in freedom.
Leszek Balcerowicz is a Professor of Economics and Head of the Department of International Comparative Studies at the Warsaw School of Economics. He is considered the architect of Poland's economic reforms initiated in 1989 - he designed and executed the radical stabilization and transformation of Polish economy since the fall of communism in Poland. In September 1989 Leszek Balcerowicz was appointed Deputy Prime Minister of Poland and Minister of Finance in the first non-communist government in Poland after the Second World War. He retained his positions in the government until December 1991. From April 1995 to December 2000 he was the President of the Freedom Union, a free market - oriented party and from October 1997 to June 2000 he was Deputy Prime Minister, Minister of Finance In 2001-2007 he was the governor of the Central Bank of Poland.
A recipient of numerous awards and honors, including the 2014 Milton Friedman Prize for Advancing Liberty and Poland's highest decoration - Order of the White Eagle - for his contribution to the systemic transformation, he is active, as a Chairman and Founder, with the Civil Development Forum Foundation, a think tank based in Warsaw.

From the Friedberg Economics Institute Fellows Program, 2014 - 1

Peter Lewin at Neve Ilan Hotel
October 19 at 1:54pm ·
Michael Eisenberg, seen here at tonight's gala dinner, gave the keynote to kick off the event. Guess what he talked about? The SHARING ECONOMY. Look at his bio below. He is an investor in Airbnb among other companies. His rushed away to catch a flight to NY where he will be for two days.
In his talk he unintentionally channeled my thinking about the significance of the sharing economy, except perhaps more articulately and emphatically. I said in
a post and elsewhere that I thought it was the most significant development towards free markets in a hundred years. He thinks it is the basis of a revolution that is just getting started that is as big as the Industrial Revolution. No need to quibble about who is right, it is an important transformative phenomenon.
He then went on to explain, as I have, the tremendous resistance to it and how it could be derailed through expanding government regulation protecting vested interests - the taxis, hotels, freight shippers, etc. But he added significantly that, since this is a global phenomenon, it cannot be blocked worldwide and those economies that do not make their peace with it will be left behind and will pay a higher ultimate price for the transition.
He believes that the transition will come and will be painful - that the sharing economy revolution will leave no industry untouched and that many people will be rendered economically obsolete - many more than the expanding companies can absorb. He called for corporate philanthropy and individual outreach to promote retraining, etc.
This is where I would venture to disagree. There is no way he can know this - though his hyperactive, charismatic, personality might make him think he should and does. My own suspicion is that, with minimal intrusion, the market process would adjust much more quickly and rapidly than we might expect. I intend to address this in my two lectures, touching on Hayek, spontaneous order and the propensity to innovate in crises.
One of his conclusions I do believe we cannot escape - all change is painful for some and large changes are painful, sometimes devastating, for many. There will be pain. The only question is when and how much - if we try to regulate it away it will come later and it will be more.
This is what makes the case for free markets in the face of this phenomenon so difficult to sell. That is why I am here.
Michael Eisenberg is a Partner at Aleph, a $140MM early stage venture capital fund, which he co-founded with Eden Shochat in 2013. Michael joined Benchmark Capital as a general partner in July 2005 and continues as the partner responsible for Benchmark’s Israeli portfolio. Michael joined Benchmark from Israel Seed Partners where he was a general partner from 1997. Eisenberg began his career at Jerusalem Global where he started and led the firm’s successful investment banking group and partnership with Montgomery Securities. Michael has focused on Internet investments since 1995 and has invested in and sat on the board of Israel’s leading companies and start ups, such as (Nasdaq SHOP, acquired by EBAY), Conduit, SeekingAlpha, Gigya, WeWork, Wix, (Nasdaq ANSW), Tradeum (acquired: VERT), and Picturevison (acquired: EK).

Sunday, October 5, 2014

Free markets are difficult to sell

First, distinguish between correct and salable. Free market economics may be (is) correct but may not be salable. Put another way, free market economists as a group, or on average, get paid less than interventionist economists - who, maybe because of this are in the large majority. In a nutshell scientism leads to statism (HT: Pete Boettke). The kind of quantitative closed end economics that most economists do feeds nicely into the aspirations of politicians who have promised their constituents utopia. Free market economics is definitely a harder sell. 

The absolutely crucial point to make here is that it is precisely because free markets do not rely on the good intentions of individuals to achieve social benefits that they are superior to government policies designed to do what markets do automatically, and that, government policy being, by definition coercive, the presumption should be against them. The natural inclination of most people is to think that since free markets are peopled with individuals who intend only their own good, the government is needed as a corrective to these bad or indifferent intentions. But, this is to misunderstand in two ways 1. for free markets the right intentions are neither necessary nor sufficient to produce the "right" results - quite the contrary, acting in a self-interested manner most often produces socially beneficial results when the underlying institutional conditions are right - it is not from the benevolence of the butcher that we get our meat. and 2. for government policy good intentions are absolutely necessary but absolutely not sufficient. With the best intentions in the world governments, being basically limited human beings acting in a complex world, are very likely to fail. And most often they do NOT have the right intentions, because they predictably, even excusably' act in their own interest - Adam Smith pointed out individuals never spend other people's money as carefully as they spend their own, they have an incentive to inflate their budgets not economize on them - and to fake results to claim spurious successes - and there is no market feedback to check them. 

Saturday, October 4, 2014

Rituals and Beliefs

Last night a student asked me off the record what my personal religious beliefs were. I said that although I was a convinced agnostic, I did very much appreciate the beauty and function of many of the traditions in which I was raised and live. These rituals, I suggested, enabled us, among other things, to celebrate together and to grieve together. We are not at a loss about what to do, what to say, etc. because it is all scripted for us and the meaning and significance is understood by us all. These ritual events nudge us to take time out from the every day forest to take a look at the beauty and wonder and sometimes sadness of the trees. Rosh Hashanah to Yom Kippur starting next Wednesday night are traditionally known as the days of awe - days of appreciation, of self-reflection, when we are urged to ask those whom we may have offended to forgive us (only they can, not even God can).

These are beautiful traditions, that require action not belief. And they certainly do no harm.

Anti-Zionsim and Anti-Semitism

The fallout from the Israel-Hamas conflict makes me realize that there is a lot of misunderstanding as to what Antisemitism is. A lot of people think it is simply another kind of racism - a sort of irrational prejudice based on color or religion. It is that, but it is more - there is a history in which "the Jew" as an object of fear and aversion was a vital necessity for the viability of both Christianity and Islam and this has spilled over into the secular descendants of those cultures. Hence, in the story below, Jews, not Israelis, are banned from the university campus, and many Palestinians make no distinction.

Yom Kippur 2014

A custom among many Jewish families on the night preceding Yom Kippur - the holiest, most reflective night of the year - parents invoke the blessing of the high priests as found in the bible and "give" it to their children.
For me it says 'I love you and I hope with all my heart for a happy and prosperous year for you. I just want you to know that.'
In the synagogue service when the high priests say this they raise their hands, put their thumbs together and separate the first and second fingers from the third and fourth - five points for the five books of Moses.
The most important application of this is the blessing invoked by Mr. Spock in Star Trek, who raises one hand in this way (with the V separation) and intones 'live long and prosper.' Leonard Nimoy, Spock's alter ego, is Jewish and introduced this into the series as an adaptation of the priestly blessing. Maybe you did not know that.
Here is the blessing. It is also part of many Christian liturgies.
Then God spoke to Moses and said, Tell Aaron and his sons,
דבר אל אהרן ואל בניו
This is how you are to bless the children of Israel. Say to them:
May God bless you, and keep you;
May God shine his face on you,
And be gracious to you;
May God look at you,
And give you peace.
So they shall invoke my name on the children of Israel, and I shall bless them.
(Numbers 6:22-27)

Monday, September 8, 2014

"Capital and its Structure" is being translated into Chinese - My preface and introduction.

It is an honor to be able to write this upon the occasion of the translation into Chinese of Ludwig M. Lachmann’s Capital and its Structure. Ludwig Lachmann was my teacher, the one who introduced me to Austrian Economics, and the inspiration for my work as an economist. Professor Lachmann was a dedicated teacher and an honorable man. And though his academic contributions are, relatively speaking, not very large, he was a scholar of profound insight and prodigious learning. His personal network of scholars from around the world was impressive. 
Lachmann came to capital theory when as a student at the London School of Economics he was able to work with Friedrich Hayek. Hayek himself was actively working on capital theory in order to bring to English speaking readers an appreciation of the Austrian Theory of Capital, which he felt was necessary for an understanding of the shortcomings of the provocative work of John Maynard Keynes. It was from Hayek that Lachmann derived the inspiration for his own capital theory, which took Hayek’s work in a different direction. During the 1930’s and 1940’s, Lachmann published many articles on capital theory and this book is the unification of that work in its most mature form.
Perhaps most notable about Lachmann’s vision is the centrality of expectations. He agreed with Keynes that expectations were important but felt strongly that Keynes had neglected to account for the them sufficiently, particularly in regards to the theory of investment. Keynes and all other theorists tended to gloss over the heterogeneous nature of capital goods and to treat capital as a homogeneous stock rather than a structure of complimentary items, some more substitutable than others. It was primarily around this insight that he built his capital theory.
By the time this book was first published in 1956, the Keynesian revolution was triumphant and interest in capital theory had faded. Lachmann had left England for South Africa. Its early reception was, therefore, disappointing. It was mostly ignored. By the time of the publication of the second edition in 1978 however, the Austrian School’s star was rising again. Hayek had been awarded the Nobel prize in economics and work in Austrian economics was increasing. Since then it has gained momentum until today and is now a vibrant research program across the world. This book is now regarded as a classic within that program.
Ludwig Lachmann would be very pleased to know that a new audience of readers will now be able to read his work. I am equally pleased.

Dallas, TX

September 2014.

Though he could, with justification. be described as an ‘Austrian Economist,’ Ludwig Lachmann was born and educated in Germany, not in Austria. He became acquainted with and enamored of Austrian economics as a young student in his twenties, discovering the work of Ludwig von Mises. (He met Mises for the first time in 1932.) He spent his long professional life working within and fighting to promote and understanding and appreciation of the ‘Austrian School’ (Mittermaier 1992 ; also Grinder 1977b).
In 1933, after his early education, he left Germany (with his future wife Margot) for England. He thus evaded the rise of the Nazi party for whom, being Jewish, he would have been a target for extermination. He was unable to find an academic appointment in England and thus decided to go to the London School of Economics as a student of Friedrich Hayek, even though he already had a doctorate from Berlin (Mittermaier 1992: 9). This placed him at the very center of the vibrant new ‘Hayekian’ school of economics, together with such scholars as Lionel Robbins, John Hicks, Nicolas Kaldor, Abba Lerner, George Shackle and others, and at the very center of the fast developing battle between the Hayekians and the emerging Keynesians. He already had an appreciative interest in Friedrich Hayek’s work on the Austrian theory of capital and the business (trade) cycle.
Thus, Lachmann’s interest in capital theory grew out of these topical preoccupations with the Austrian version of the business cycle, deriving from Mises, and from the Austrian theory of Capital which was a crucial building block for that theory. The Austrian Theory of Capital (ATC), originating with Carl Menger (1871) was the most well-known contribution of the Austrian School at that time, owing mainly to the extensive work of Eugen von Böhm-Bawerk on the subject. Böhm-Bawerk’s work had achieved world-wide recognition (1959, three volumes originally published in the period 1884-1912). In his influential work on the trade cycle (1933, 1935) Hayek had referred to, and made use of, a highly stylized version of the ATC. And much of his work in the 1930’s was dedicated to the attempt to elaborate and make this theory more widely accessible, especially to English speakers. In the process, he was led to a thorough reexamination of the ATC, writing a number of important articles (some of which are collected in Hayek 1939) and culminating in The Pure Theory of Capital (1941). It was this body of work that was the greatest influence on Lachmann, that crucially shaped his own subsequent work on capital theory and also his enduring preoccupation with the topic of expectations so prominent in this book.
Lachmann had for a while been troubled by the influence of people’s expectations on their actions, and felt that in Price and Production (1935) and Monetary Theory and the Trade Cycle (1933) and in his debate with Keynes subsequent to the publication of Keynes’s Treatise on Money (1930), Hayek had neglected to adequately address expectations in the trade cycle story offered as a counter-argument to Keynes’s. Reading Keynes General Theory (1936) upon its publication he was surprised to find Keynes’s extensive treatment of expectations. Lachmann came to the conclusion that the Austrians had given expectations insufficient attention and the implications of subjectivism for expectations became a theme that motivated his work for the rest of his life and is a distinguishing aspect of his work on capital.
His work on capital theory began in the late 1930’s, continued into the 1940’s and developed together with his work on expectations (Lachmann 1937, 1938, 1939, 1941, 1943, 1944, 1945, 1947, 1948). This work begins in the context of the Hayek-Keynes debate and the onset of the Great Depression, with Lachmann exploring the nature of ‘secondary depressions’ but soon develops beyond this. It culminates ultimately in this book Capital and its Structure published much later in 1956 (Lachmann 1978 [1956]) by which time he was far away and interest in capital theory had disappeared with the triumph of the Keynesian revolution.
            Lachmann’s capital theory is clearly Hayekian in spirit. It is, however, also closely connected to the work of Böhm-Bawerk, whose insights Lachmann sought to carefully and critically reconstitute in a form applicable to modern real world production contexts. His approach reflects what he saw to be the inextricable connection between capital, knowledge and expectations, the implications of which he thought needed to be spelled out clearly in order to provide a satisfactory answer to the Keynesian challenge.
In a famous quotation Lachmann explains:
The generic concept of capital without which economists cannot do their work has no measurable counterpart among material objects; it reflects the entrepreneurial appraisal of such objects. Beer barrels and blast furnaces, harbor installations and hotel room furniture are capital not by virtue of their physical properties but by virtue of their economic functions. Something is capital because the market, the consensus of entrepreneurial minds, regards it as capable of yielding an income. . . . [But] the stock of capital used by society does not present a picture of chaos. Its arrangement is not arbitrary. There is some order to it. (Lachmann 1978:xv).
The value of the capital-stock, being dependent on individual expectations and evaluations is not an objectively observable phenomenon. Only in equilibrium, where all individuals’ expectations were consistent one with the other, would such a value have any meaning. He thus offers a theory of the capital-structure rather than the capital-stock and emphasizes the heterogeneity of capital. The fact that capital goods are physically very dissimilar is significant precisely because of the existence of disequilibrium. Physical heterogeneity could be reduced to value homogeneity if the values of the various capital goods could be simply added together. Where disequilibrium means that individuals have different and frequently inconsistent expectations, one cannot simply add together individual valuations. This means that aggregate measures of the capital stock are no coherent and cannot be understood to indicate the objective worth of the economy’s productive capital.
            According to Lachmann, though the capital-stock is heterogeneous, and cannot be meaningfully aggregated, it is not amorphous or meaningless. The various components of the capital-stock stand in a sensible relationship to one another because they perform specific functions together. That is to say, they are used in various capital combinations. If we understand the logic of capital combinations, we give meaning to the capital-structure and, in this way, we are able to design appropriate economic policies or, even more importantly, avoid inappropriate ones.
Understanding capital combinations entails an understanding of the concepts of complementarity and substitutability. These concepts pertain to a world in which perceived prices are actual (disequilibrium) prices, in the sense that they reflect inconsistent expectations and in which changes that occur cause protracted visible adjustments. Capital goods are complements if they contribute together to a given production plan. A production plan is defined by the pursuit of a given set of ends to which the production goods are the means. As long as the plan is being successfully fulfilled, all of the production goods stand in complementary relationship to one another. They are part of the same plan. The complementarity relationships within the plan may be quite intricate and no doubt involve different stages of production and distribution.
Substitution occurs when a production plan fails (in whole or in part). When some element of the plan fails, a contingency adjustment must be sought. Thus some resources must be substituted for others. This is the role, for example, of spare parts or excess inventory. Thus, complementarity and substitutability are properties of different states of the world. The same good can be a complement in one situation and a substitute in another. Substitutability can only be gauged to the extent that a certain set of contingency events can be visualized. There may be some events, such as those caused by significant technological changes, that, not having been predictable, render some production plans valueless. The resources associated with them will have to be incorporated into some other production plan or else scrapped—they will have been rendered unemployable. This is a natural result of economic progress which is driven primarily by the trial-and-error discovery of new and superior outputs and techniques of production. What determines the fate of any capital good in the face of change is the extent to which it can be fitted into any other capital combination without loss in value. Capital goods are regrouped. Those that lose their value completely are scrapped. That is, capital goods, though heterogeneous and diverse, are often capable of performing a number of different economic functions.
Lachmann’s analysis of capital in terms of complementarity and substitutability are linked to the theory of investment (which he points out must contain an implicit theory of capital) and specifically to Keynes’s marginal efficiency concept (which lacks any recognition of such a theory). The effect of an increase in investment on the demand for capital depends, in his account, on the shape of the already existing capital structure and the degree of its complementarity with the new investment.
The relationship of this book to the work on capital theory by his mentor and colleague Friedrich Hayek is of some interest. When asked about his Pure Theory of Capital Hayek once remarked, “I think the most useful conclusions drawn from what I did are really in Lachmann’s book on capital” and he suggests that what Lachmann said is perhaps as much as could be said. Hayek continues: “Like so many things, I am afraid, which I have attempted in economics, this capital-theory work more shows a barrier to how these things I’ve stressed – the complexity of the phenomena in general, the unknown character of the data, and so on- really much more point out limits to our possible knowledge than [are] contributions that make specific predictions possible.” (quoted in Kresge and Wenar 1994:142).
            Lachmann’s capital theory, as expressed in this book, in chapters one through six, is well-known and much admired by scholars working in the Austrian tradition. Chapter seven is something an outlier, however. It contains puzzles in that the policies that Lachmann recommends do not seem to fit well with his view of capital in a dynamic economy. Many have ignored this chapter and a few have tried to explain it. Chinese readers can now add their voices to this discussion.
            The concept of capital is central to an understanding of the “capitalist” economy. Ludwig Lachmann’s Capital and its Structure is a work of striking originality and insight. Its translation into Chinese is to be celebrated.  


Böhm-Bawerk, Eugen, von (1959), Capital and Interest (3 vols in 1), South Holland: Libertarian Press.
Grinder, W. E. (1977a), Capital, Expectations and the Market Process, Essays on the Theory of , the Market Economy,  Kansas City: Sheed, Adrews and McMeel
Grinder, W. E. (1977b), ‘In Pursuit of the Subjective Paradigm’ in Walter E. Grinder (ed.) (1977a), 3-24.
Hayek, F.A. (1933), Monetary Theory and the Trade Cycle, London: Jonathan Cape.
Hayek, F.A. (1935), Prices and Production, London: Routledge and Kegan Paul.
Hayek, F.A.(1939), Profits, Interest and Investment, London: Routledge.
Hayek, F.A.(1941), The Pure Theory of Capital, Chicago: University of Chicago Press.
Keynes, John Maynard (1930), A Treatise on Money, Cambridge, Macmillan
Keynes, John Maynard (1936), The General Theory of Employment, Interest and Money, Cambridge, Macmillan
Kresge, S. and Wenar, L. (eds.), (1994) Hayek on Hayek: An Autobiographical Dialogue, Chicago: University of Chicago Press.
Lachmann, L. M. (1937) ‘Uncertainty and Liquidity Preference’ Economica 4 (August) 295-308; reprinted in Lavoie, D. (ed.), (1994) 29-41.
Lachmann, L.M. (1938) ‘Investment and Costs of Production,’ American Economic Review 28, September: 469–481; reprinted in Lavoie, D. (ed.),  (1994)  42–56.
Lachmann, L, M. (1939) ‘On Crisis and Adjustment,’ Review of Economics and Statistics 21 62–68; reprinted in Lavoie, D. (ed.),  (1994) 76–90.
Lachmann, L, M. (1941) ‘On the Measurement of Capital,’ Economica 8, May: 367–377; reprinted in Lavoie, D. (ed.),  (1994), 91–106.
Lachmann, L. M. (1943), ‘The Role of Expectations in Economics as a Social Science’ Economica 10; reprinted in Grinder, W. E. (ed.),  (1977), 65-80.
Lachmann, L, M. (1944) ‘Finance Capitalism,’ Economica 11, November: 64–73; reprinted in Lavoie, D. (ed.)  (ed.), (1994), 107–123.
Lachmann, L. M. (1945) ‘A Note on the Elasticity of Expectations’ Economica 8 (November) 248 -253; reprinted in Lavoie, D. (ed.), (1994), 124-130.
Lachmann, L, M. (1947) ‘Complementarity and Substitution in the Theory of Capital,’ Economica 14, 108–119.
Lachmann, L. M. (1948) ‘Investment Repercussions,’ Quarterly Journal of Economics 63, November: 697–713; reprinted in Lavoie, D. (ed.), (1994) 131–146.
Lachmann, L. M.(1978) [1956] Capital and its Structure, Kansas City: Sheed, Andrews and McMeel. [Chinese edition, 201-].
Lavoie, D. (ed.)  (1994), Expectations and the Meaning of Institutions: Essays in Economics by Ludwig Lachmann, New York: New York University Press.
Menger C. (1871), Principles of Economics. Translated by James Dingwall and Bert F. Hoselitz. New York: New York University Press, (1976).
Mittermaier, K. H. M. (1992), ‘Ludwig Lachmann (1906–1990) A biographical sketch’, South African Journal of Economics, 60  (1), 7-25.