Vol. 13 in The Collected Works of F. A. Hayek has just been released and is available from Amazon.

The volume is titled Studies on the Abuse & Decline of Reason: Text and Documents, and is edited by Bruce Caldwell.  Amazon currently has only 3 copies left in stock.

Here’s the synopsis:

Studies on the Abuse and Decline of Reason is a series of fascinating essays on the study of social phenomena. How to best and most accurately study social interactions has long been debated intensely, and there are two main approaches: the positivists, who ignore intent and belief and draw on methods based in the sciences; and the nonpositivists, who argue that opinions and ideas drive action and are central to understanding social behavior. F. A. Hayek’s opposition to the positivists and their claims to scientific rigor and certainty in the study of human behavior is a running theme of this important book.

Hayek argues that the vast number of elements whose interactions create social structures and institutions make it unlikely that social science can predict precise outcomes. Instead, he contends, we should strive to simply understand the principles by which phenomena are produced. For Hayek this modesty of aspirations went hand in hand with his concern over widespread enthusiasm for economic planning. As a result, these essays are relevant to ongoing debates within the social sciences and to discussion about the role government can and should play in the economy.

And here is the table of contents:

I’ve added a new “Hayek quote” feature over in the right hand column —->

I’m guessing I’ve missed a few.  What are your favorite Hayek quotes?

I’ll take a few weeks hiatus blogging, and let’s see what I missed.  Comments are open.

This post will stay on top.

A primer on Hayekian macro and the current economic crisis, from the author of Meltdown.

In The Independent.

A central theme in The Road to Serfdom is that the interventionist state transforms the character of the people.  Mark Steyn puts a highlighter pen to the issue in his autopsy of the Greek collapse.  Heres a snip, the whole thing is a treat:

When seeking to ingratiate himself with conservative audiences, President Ford liked to say: A government big enough to give you everything you want is big enough to take away everything you have. Which is true enough. But theres an intermediate stage: A government big enough to give you everything you want isnt big enough to get you to give any of it back. That’s the point Greece is at. Its socialist government has been forced into supporting a package of austerity measures. The Greek peoples response is: Nuts to that. Public sector workers have succeeded in redefining time itself: Every year, they receive 14 monthly payments. You do the math. And for about seven months work: for many of them the work day ends at 2:30 p.m. And, when they retire, they get 14 monthly pension payments. In other words: Economic reality is not my problem. I want my benefits. And, if it bankrupts the entire state a generation from now, who cares as long as they keep the checks coming until I croak?

We hard-hearted small-government guys are often damned as selfish types who care nothing for the general welfare. But, as the Greek protests make plain, nothing makes an individual more selfish than the socially equitable communitarianism of big government: Once a chaps enjoying the fruits of government health care, government-paid vacation, government-funded early retirement, and all the rest, he couldnt give a hoot about the general societal interest; hes got his, and to hell with everyone else. Peoples sense of entitlement endures long after the entitlement has ceased to make sense.

Tim Harford:

A new reality television show, Undercover Boss – which has migrated to the US after airing on Channel 4 last summer – tries to tap into the dissonance between bosses and front-line staff by filming as a senior executive works incognito in the trenches. It is a delicious premise.

When bosses must don a disguise to learn about how their organisations really work, trouble is in store. One of Friedrich Hayek’s obvious-once-pointed-out observations is that society is full of local knowledge, often of a subtle nature and only fleetingly exploitable. That is one reason why decentralised market processes tend to work well. When a hierarchy has to exist, Hayek’s insight is the reason why bosses should want to receive truthful assessments of what is going on the shop floor (they don’t) and subordinates should be happy to provide them (they aren’t).

What makes matters worse for any organisation is that the same dynamic is taking place at every level. Each middle manager is a fresh obstacle to the flow of truth up a hierarchy of wastebaskets. Sensible managers try to let information flow freely, but many are happy to reinforce the barricades for their own peace of mind.

The results of barriers to communication can be catastrophic. H.R. McMaster’s influential study of decision-making during the Vietnam war, Dereliction of Duty , is packed with examples. The joint chiefs of staff were warned by their chairman, Maxwell Taylor, that Lyndon Johnson did not like “split advice”. Johnson’s defence secretary, Robert McNamara, argued that government would be ineffective if department chiefs were to “express disagreement” with the president. Not disobey, but “express disagreement”. Johnson trusted McNamara implicitly and relied too heavily on the advice of a man he praised as a “can-do fellow”. Isolating himself from dissent, the president made a series of disastrous decisions.

Most economists think that macroeconomic disruptions, such as the current recession, can be understood in terms of aggregate indicators such as total employment, the price level, and the money supply. But this view is misleading, particularly in the current economic situation. Worse yet, it misleads us into counterproductive economic policies.

.. an economy matches a population’s desires to the available resources and production technology. When an economy is operating efficiently, expectations are largely fulfilled; desires, resources, and production technology are well matched; and people are reasonably satisfied with their plans, relations, and contracts.

But if the world evolves in a markedly unanticipated direction, people’s existing plans, relations, and contracts require revision. The existing matches between desires, resources, and production technology deteriorate. While this revision occurs, resources are diverted from production, which is less efficient and less well matched with consumer desires, resulting in a reduction in the value of output – a recession.

This “realignment theory” helps explain the current downturn. From 2000 through 2007, millions of American homeowners entered into mortgage contracts to finance their homes. Securities based on those contracts ended up, in part, in the hands of financial institutions. But the adequate servicing of the debt and, therefore, the performance of the securities, were based on expectations of continued rises in housing prices that proved to be unrealistic. When housing prices fell, so did the value of the mortgages and the securities based upon them.

Because financial institutions held much of these securities, their market values declined as well, leaving balance sheets in need of restructuring, particularly given their highly leveraged capital structures. Awaiting that restructuring, financial institutions could not perform as usual, which impeded financial intermediation and called into question plans, relations, and contracts – such as corporate and residential investment or refinancing.

Meanwhile, consumers who held a substantial fraction of their wealth in housing were forced to revise their consumption plans in the face of declining values. This affected all the producers, distributors, and retailers whose plans and contracts were based on now-obsolete expectations.

And so it goes. Eventually, the required restructuring became so widespread that it impacted virtually every sector of the economy. The current recession is as deep as the misalignment of specialized plans, relations, and contracts is extensive. Construction workers cannot become software developers overnight. Automobile companies cannot adjust immediately to a change in consumer preferences regarding what type of cars they want to purchase, or how frequently. Would-be financiers cannot adjust to these plans overnight ..

– Cal Tech economist Bradford Cornell

The whole thing is worth a read. Or listen to it as a podcast.

Few economists have a sophisticated theoretical education in macroeconometric modeling — many are the equivalent of children playing with a computer game they really don’t understand.  Arnold Kling is not one of these.  In a series of essays Kling has been sharing a practitioner’s inside view of the lost knowledge of a generation which had spilled scientific blood in the effort to come to grips with the scientific limitations and deceptions of macroeconomic modeling.  In his latest autopsy of the “science” of macroeconomic modeling Kling provides advanced versions of arguments about complex phenomena and statistics found in Hayek against the feasibility of “scientific” macroeconomic modelings of the economy across time.  Here’s a taste of Kling:

Economists cannot construct controlled experiments to test all of our interesting hypotheses. We have abundant data, but we did not create the circumstances that produced the data. In statistical jargon, we are making observational studies.

An observational study can be of scientific use if the conditions are right. One condition is that there are many observations relative to the number of factors that must be controlled for. In statistical jargon, this is known as the degrees of freedom.

In macroeconomics, there are more factors to be controlled for than there are observations. There are negative degrees of freedom, which should cause your statistical software to give you an error message.

Instead, the modeler limits the way that factors enter the model. For example, the modeler probably will not control for changes in the educational attainment of the labor force over time. That is not because the educational attainment over time does not matter. It is because the modeler does not want to put in so many factors that the computer spits out an error message.

There are thousands of ways to specify the “consumption function,” which is the equation that predicts consumer spending. Should durable goods spending be separated from spending on nondurable goods and services? Should previous periods’ income be used in addition to current income, and with what weight? Should a measure of anticipated future income be used? How should wealth enter the equation? Is there a way to account for the role of credit market conditions? How do tax considerations enter? Are there different propensities to consume out of wage income and out of transfer payments? How do consumers respond to changes in oil prices? How do they form expectations for oil prices in the future? What factors that are trending over time, such as population changes and shifts in the mix of consumption, need to be controlled for? Which time periods are affected by special factors, such as the recent snowstorms along the east coast?

If you have about 80 quarters of data to work with, and you have thousands of factors to control for, there is no conceivable way for the model’s specification to reflect the data. Instead, the specification depends on the opinion of the modeler.

The conditions under which statistical techniques are scientifically valid are not satisfied with macroeconomic data. There is no reason to take model results as reflecting anything other than the opinion of the modeler.

UPDATE:  Kevin Hassett explains how a 3rd grader with a pencil and ruler easily outperforms the “professionals”:

The large-scale Keynesian forecasting models were discarded by most of the profession because they didn’t work. One of the first to demonstrate this was Charles R. Nelson of the University of Chicago, who in 1972 showed that forecasts based on simple extrapolations significantly outperformed theory-laden macroeconomic models in competitions.

About a decade later, Virginia Tech economist Richard Ashley performed a similar exercise that found the big macro models “so inaccurate that simple extrapolation of historical trends is superior for forecasts more than a couple of quarters ahead.” To paraphrase Ashley, all you need to outperform the fancy models is a ruler and a pencil.

Kevin Williamson on why “We cannot make intelligent reforms without real prices, because we are blind without them.”

HT Michael Cannon.

Glenn Reynolds talks public domain economics and rap video with George Mason economist Russ Roberts:

Bruce Caldwell in the Washington Post:

.. Hayek [is] reemerging as a bestselling author. A new edition of Hayek’s seminal book, “The Road to Serfdom,” was published in March 2007 by the University of Chicago Press as part of a series called “The Collected Works of F. A. Hayek,” for which I serve as editor. For over a year-and-a-half, the book sold respectably, at a clip of about 600 copies a month.

But then, in November 2008, sales more than quadrupled, and they haven’t slowed down since. What’s more, the Kindle edition went on sale in late May 2009 and is now the best-selling book that the University of Chicago Press has offered in that format. This would be a pretty good sales record for a contemporary author, but it is nothing short of amazing for a book originally published in 1944, and by an economist, no less.

What accounts for it?  …

First off, the November 2008 sales spike date certainly suggests that Obama’s election and the passing of control of both houses of Congress to the Democrats may have been an initial factor. The Republicans had been walloped, and some sought principled arguments that could be used to combat the policies of the party in power.

Even though Hayek himself disdained having his ideas attached to either party, he nonetheless provided arguments about the dangers of the unbridled growth of government.

Another early impetus may have been the characterization of the health care debate as being about socialized medicine. Hayek, whose book is perhaps the most famous attack on socialist central planning, would naturally be invoked by the health plan’s opponents.

But perhaps the biggest stimulus to sales was, well, the stimulus package. The macroeconomic analyses of John Maynard Keynes had gone quickly out of vogue in the 1970s, when a decade of stagflation delivered a death blow to the notion of Keynesian fine-tuning of the economy. But in early 2009, people were talking about Keynes again, and indeed the fiscal stimulus package, to the extent that it had a theoretical underpinning, would find one in Keynesian economics. (The Fed’s policy of flooding the financial system with liquidity, on the other hand, finds its grounding in the economic analysis of Milton Friedman, the father of monetarism, a doctrine that used to be portrayed in introductory macroeconomics classes as the chief rival to Keynesian thought.)

Because Keynes and Hayek actually did have a great debate over their rival theoretical models of a monetary economy in the early 1930s, just as the Slump of 1930 was turning into the Great Depression, it seemed natural for opponents of these policies to turn to Hayek’s writings. (For those who are interested in this episode, I recommend a perusal of volume 9 of The Collected Works, Contra Keynes and Cambridge.)

Not only is “The Road to Serfdom” still relevant in our own time, it has something else going for it, too. It is actually readable. Anyone who has tried to master Keynes’s “General Theory,” or for that matter Hayek’s rival title “Prices and Production,” will find the going pretty tough.

Not so for “The Road to Serfdom,” a book that was condensed by Reader’s Digest in April 1945, just as the war in Europe was ending. Plus, “The Road to Serfdom” is, simply put, a great, evocative title. And with 10 percent unemployment, people certainly have more time to read it.

In the end, however, I think that the underlying reason for the sustained interest in Hayek’s book is that it taps into a profound dissatisfaction in the public mind with the machinations of its government. Both Presidents Bush and Obama have presided over huge growth in the size of the federal government and in the size of the federal deficit, with little obvious effect on unemployment. Things seem out of control.

Furthermore, a recurrent theme in the news is that, in contrast to the millions who are suffering, the politically connected are doing just fine. The examples are everywhere, from bailed out financiers getting huge bonuses to public union employees getting hefty pensions, from auto companies that are nationalized instead of going belly up to politically savvy firms that get government subsidies to produce products that would be otherwise unprofitable.

For people upset by such trends, “The Road to Serfdom” opens a window onto another time, when debates about how best to restructure an economy emerging from wartime were taking place. Such debates, as the strong sales of the book clearly show, still have resonance today.

– Bruce Caldwell is a professor of economics and director of the Center for the History of Political Economy at Duke University and general editor of “The Collected Works of F. A. Hayek.”

Edmund Phelps on “Hayek and the Economics of Capitalism” at the Hayek Institut Jan. 29, 2008:

F. A. Hayek’s The Road to Serfdom has cracked Amazon’s top 100 among all books sold by the retailer.

The new “Definitive Edition” has sold 40,000 copies since its release in 2007, in addition to those sold in the “50th Anniversary” paperback “Milton Friedman” edition, which is still in print.

Here is a clip from John Stossel’s show on “The Road To Serfdom” broadcast Thursday night on Fox Business.  The show will be re-broadcast Friday night at 10 p.m. Eastern:

And here’s a clip of Stossel wrapped in chains promoting the “Serfdom” program on The O’Reilly Factor.

Stossel published an accompanied article on the topic at Reason.

UPDATE:  Hayek’s The Road to Serfdom is currently #92 among all books at Amazon.

Is U.S. on The Road to Serfdom?: http://bit.ly/aUc44q

New Bruce Caldwell Interview: http://bit.ly/djd3vs

Hayek provided some of the first arguments against politically driven and centrally controlled “science”.  I’m guessing he would have enjoyed this “Army of Davids” pushback against the organized scientific crime which is the international global warming racketeering operation of Al Gore, U. of East Anglia and the IPCC.

The second-hand dealers in ideas constantly make a hash of things.  Justin Fox is a multi-time offender when it comes to spreading falsehoods about Hayek’s economics, and his latest is to get Hayek’s post-bust economics all wrong.  Hayek explicitly opposed allowing a secondary-deflationary downward spiral and he explicitly endorsed efforts by the central bank and the central government to act to stem a vicious downward spiral of contracting money velocity, contracting money supply, money hoarding, bank panics, and pathological system-wide declines in investment and consumption purchases — and Hayek explicitly said so as early as 1931, in every decade of his life after that.  In fact, Hayek always argued that central banks MUST act to prevent bank panics — that is the job of a central bank — and he argued this in the early 1930s and he argued this in the 1960s, and he argued it throughout his economic career.

So journalist Justin Fox is simply spreading false non-sense about Hayek when he bleats out the following in an interview with David Kuo at The Motley Fool:

David:

So if Friedrich Hayek was here today, what do you think he would recommend to governments to do?

Justin:

He would be saying, you should have let all the banks fail, and you should just let markets sort it out, and I just don’t think he’s completely right about that, I think there’s a huge amount of wisdom in Hayek’s work, but I just don’t buy that.

Part of the NewsHour’s coverage of the American Economic Association convention:

The two discuss Hayek’s ideas on money, credit, and the business cycle.