The Economics of Time and Ignorance, by Gerald O'Driscoll and Mario Rizzo
Time on Their Hands
Mises Review 3, No. 1 (Spring 1997)
THE ECONOMICS OF TIME AND IGNORANCE
Gerald P. O'Driscoll, Jr., and Mario J. Rizzo
Routledge, 1996 , xxxiii + 265 pgs.
For once a publisher's blurb does not exaggerate. The Economics of Time and Ignorance has indeed been "one of the seminal works in modern Austrian economics" and the book's welcome reissue, with a new introduction, offers an opportunity for its examination here (The new introductory essay, "Time and Ignorance After Ten Years" is the work of Professor Rizzo alone; but the book's coauthor has read it [p. xxix, n. 1]).
Assessment of the book is no easy task. Our authors, in their abundance, have given us not one book, but two. One of these is a valuable, if at times debatable, contribution to Austrian economics. The other is a philosophical account of time and ignorance, which might better have been titled "A Budget of Paradoxes." I shall endeavor to say something about both books, with greater attention to the second and its fallacious arguments. What else would you expect?
Economic actors constantly face uncertainty. This elementary fact, one would have thought, hardly needs stating. Anyone who has tried to make money in the stock market should be well aware of it. However obvious the pervasive fact of uncertainty, mainstream neoclassical economists ignore its implications. By contrast, Austrian economics (at least ideally) is well suited to incorporate uncertainty into its analysis.
This is the principal thesis of what I have termed the authors' first book, and they argue for it in convincing fashion.
Thus, a familiar neoclassical claim is that monopoly, in contrast to perfect competition, leads to a welfare loss. But the argument in support of this contention treats a monopolist "as knowing or being capable of discovering competitive equilibrium. ... If, however, we relax the assumptions of standard theory, it is not clear that we can distinguish conceptually between the behavior of competitors and monopolists" (p. 144).
The monopolist does not have a filled-in textbook diagram in front of him and ought not to be judged by the standards of an unrealistic model. The authors' point is well taken; but their use of it to indict neoclassical economics is weakened by the fact that Kenneth Arrow arrives at conclusions somewhat like their own (pp. 144 45). Since Arrow is one of the world's foremost neoclassicals, the entire school can hardly be condemned on this score.
As the argument just presented indicates, the authors view with great suspicion attempts to treat equilibrium as a really existing state of affairs. In some respects, as it seems to me, their criticism of the use of equilibrium constructs goes too far. In particular, their objection to Mises's use of equilibrium misfires.
They remark: "Mises developed what he called an argumentum a contrario"; the "equilibrium construct can be used as a foil against which to compare actual market situations. Thus, if conditions a, b, and c together imply a certain equilibrium, then the absence of that equilibrium would imply that at least one of the conditions does not hold. Economic analysis then focuses on the forces responsible for this situation" (p. 82).
Against this, they note that the conditions for equilibrium are sufficient conditions, not necessary ones. But this prevents Mises from offering a "logically sufficient explanation for the 'failure' of actual processes. The absence of sufficient conditions does not imply the absence of the result predicted by the equilibrium construct. ... Only the absence of all possible sufficient conditions (the conjunction of which is a necessary condition) would imply this" (p. 82).
Don't blame me, I didn't write this!
But Mises's point is perfectly in order. If Mises has correctly given sufficient conditions for equilibrium (a point our authors do not challenge), then the absence of equilibrium does indeed indicate that one of his conditions has not been realized. That is a perfectly valid (and obvious) argument by denial of the consequent.
That some other sets of conditions suffice for equilibrium is neither here nor there. Why should a theorist be interested in "logical sufficiency" in the sense our authors delimit? Surely the set of conditions to use are those the theorist finds illuminating, not "every possible set." After all, it is trivially easy to conjure up a set of sufficient conditions for equilibrium. The conjunction of Mises's set and "the moon is made of green cheese" is such a set. Must a theorist seek to incorporate it into an explanation of the failure of equilibrium to obtain? If not, what is the point of the authors' criticism?
In a further application of their leitmotif, the inadequacy of neoclassical economics, O'Driscoll and Rizzo criticize attempts to show that economic, legal, and political rules are "efficient." Much of what they say makes eminent good sense, and Richard Posner and his disciples would profit from study of their remarks.
But one of their arguments seems to me in error. They say: the "rules themselves are adopted, at least in part, by an a-rational process. To suppose that ... the legal framework is the product of rational choice only pushes back the question of the framework within which that choice was made. One would eventually be led into an infinite regress" (p. 122, emphasis in original).
I do not think that one would. Suppose the rules are chosen by persons attempting to maximize their utilities. Why must there be a further question about the framework within which their choices are made? One is simply given people with certain ultimate preferences, and that is that. But perhaps, our authors will say, just this is an example of the "a-rational process" they have in mind. The preferences are not themselves determined by a rational criterion. But whoever among the proponents of efficiency said they were? The exact nature of the authors' objection eludes me.
Exception might be taken to other statements in the book's economic analysis. Why, for example, do they advance "maximal possible plan coordination" as a normative criterion, when they themselves state what appear to be insuperable problems for that standard (p. 118)? In fairness to them, I am uncertain from their language whether they do adopt it. But I think they do; and counterexamples cannot be swept under the rug as "issues unresolved."
But, regardless of these objections, their economic analysis merits careful attention. Their chief problem lies in what I call their second book. Their economic work, taken on its own terms, is not enough for them. No; they must set forward the foundations of their position in a philosophical analysis of time. Though they deal with important issues, the main arguments they advance seem to me uniformly mistaken.
To understand what they have in mind, we must return to our starting point, the uncertainty that faces economic actors. To our authors, this is more than a common-sense fact. Philosophical argument shows that the future is necessarily uncertain.
Does it? Let us examine a few of the arguments they offer. "Our first argument is derived from Karl Popper's demonstration that it is impossible for an individual to predict his own future knowledge." "Suppose P (predictor) has complete knowledge of his initial circumstances at t1, ... and wishes to predict his knowledge at t3. Can this be done? P will take some finite amount of time, say until t2, in order to deduce his state of knowledge at t3. However, the knowledge gained at t2 will affect P's state at t3" (p. 25).
And should our hapless P try to incorporate the knowledge gained at t2 into his prediction, the problem recurs. In the time it takes him to do this, he has gained new knowledge, and so on.
Unfortunately, no support is offered for the key premise that P gains knowledge at t2 that affects his state at t3. What if he doesn't? I may have missed something, but Popper's argument seems blatantly to beg the question.
A second argument they give seems, if anything, worse. As near as I can make out, the contention is that, under certain assumptions, you cannot predict your future decisions. If you could, then you would know now what you would decide tomorrow. But then you would have already decided now to do the acts in question, and there would, against the hypothesis, be no future decisions. Hence self-prediction is impossible.
Well, let's run through an example. I claim to know that I shall decide to have cereal for breakfast tomorrow. Have I, as a result, decided now to have cereal tomorrow? For heaven's sake, why? I shall decide that tomorrow: this is precisely what I claim to know today. No reason at all has been given to think that believing correctly, at t1, that I shall decide to do something at t2 is to decide to do that thing at t1.
But suppose their argument is right. Where will that get them? I can, for all the argument has shown, perfectly predict my future actions. True, I would be deciding now to do them; but nevertheless I would know now what they are.
And why all the fuss about self prediction anyway? Suppose that you cannot predict your own future actions. Why can't someone else predict them? (Please do not respond: if he discloses the prediction to you, you might decide to act otherwise. If the prediction is correct, you will not.) In any event, the hated enemy, neoclassical economics, does not usually make predictions about particular actions of concrete individuals; what then is the relevance of our authors' arguments to economics?
I venture to predict that O'Driscoll and Rizzo will respond that I have totally misjudged the depth of their case. Profound metaphysical arguments, advanced by the French philosopher Henri Bergson, show that one must view the future as uncertain in order to experience time at all.
Individuals do not experience time in dimensionless points. "Hearing only one note of a melody, for example, is insufficient to capture the experience of music. This is because our perception involves memory of the just-elapsed phases (or notes) and anticipation of those yet to come. The actual experience is thus more than a mathematical constant" (p. 60).
So far, so good; I, at any rate, find nothing implausible in this. But, to our authors, the "dynamic continuity" of time has momentous consequence, as Bergson has brought out. Time is experienced as memory and anticipation; absent genuine novelty, then, time could not be experienced at all. "[T]he passage of time involves 'creative evolution'; that is, processes produce unpredictable change. ... If change is real, it cannot be completely deterministic: there must be scope for surprise" (p. 62).
A closer look at their musical example will at once show the fallacy. If I hear the opening bars of Beethoven's Third Symphony, I know perfectly well what is coming next. The fact that I know what is coming does not block my anticipation of what is to come: quite the contrary, it constitutes it. O'Driscoll and Rizzo (and, if they expound him correctly, Bergson) have confused expecting something to happen with being surprised by a future event. The content of a genuine surprise is just what cannot be anticipated. (I can, of course, expect to be surprised and turn out to be surprised by what takes place.)
Reviewers often criticize authors by saying: you did not cite a, you ought to have taken account of definitive work b, etc. This very often is unfair: a reviewer can practically always locate some obscure work that his victim (sorry: subject) has failed to consult.
Having said this, I fear that I am now about to indulge in exactly this sort of criticism with what degree of fairness my readers must judge. Although the authors are in general impressively erudite, they do not display familiarity with treatments of time by analytic philosophers. One misses or at any rate I miss reference to Grnbaum, van Fraassen, Putnam, etc. I venture to suggest that if they knew this literature, they would see that the case for Bergsonian time is not so simple as they make out. Adolf Grnbaum's discussion of the Bergsonian philosopher Capek, whom they cite extensively, would have been useful to take into account.
On occasion, unfamiliarity with the subject seems clearly in evidence. In his Introduction, Professor Rizzo gets exactly backward what William James meant by the "specious present." "The denial of time consciousness is inherently self-contradictory from the perspective of the agent. This is because the instantaneous (or mathematical) present is 'specious'" (p. xv). But the specious present is not the instantaneous present, on James's account. The claim Rizzo is so anxious to make, that we perceive time as a flow that incorporates past and future moments, is the Jamesian specious present. Rizzo, did he but know it, is himself an advocate of the specious present.
Fortunately for our authors, their confusions about time do not fatally disable the economic sections of their book. They regard their economic discussions as applications of their philosophical analysis; but in my view they are wrong to do so. (For this reason, I deliberately called their Part I their "second" book.) They would be well advised to give the philosophy of time a rest; otherwise they will continue "in wand'ring mazes lost."
Gordon, David. "Time on Their Hands." Review of The Economics of Time and Ignorance, by Gerald O'Driscoll and Mario Rizzo. The Mises Review 3, No. 1 (Spring 1997).