Interview with G.L.S. Shackle

The Austrian Economics Newsletter

Spring 1983

An Interview with G.L.S. Shackle

An often-controversial figure within the penumbra of Austrian economics, G.L.S. Shackle, through his books (which include Epistemics and Economics, Time in Economics, and Decision, Order, and Time in Human Affairs) and articles has developed a radically subjectivist approach to economics.

Born in Cambridge, England, in 1903, Shackle began his formal training relatively late in life under F. A. Hayek, his "discoverer," at the London School of Economics. This interview was conducted by Richard Ebeling in the fall of 1981.

AEN: When you were a student at the London School of Economics in the 1930s, I understand that you had an opportunity to participate in the Hayek-Robbins seminar.

SHACKLE: Yes. Well, It was really Hayek's seminar. There were two seminars, one on Monday afternoons, which was Robbins's, and a more work-a-day pedestrian affair. The high-powered one was the Hayek seminar on Thursday evenings. These seminars were star-studded, with marvelous lectures: Hayek was there, Robbins came once or twice, and there were also John Hicks, Nickolas Kaldor, Abba Lerner, and Ursula Hicks.

We had a constant stream of people of various degrees of eminence--some of them very eminent--coming to the school. They didn't come to the Hayek seminar necessarily, but they sometimes gave lectures in the afternoon. These were people many of whom were taking refuge from what was going on in Central Europe. Some of them were famous--Karl Popper, for instance. I heard him give the first lecture he ever gave in England. Then there was Gottfried Haberler, and Fritz Machlup; Paul Rosenstein-Rodan was also in London. That was the sort of seething excitement at the London School in those years. For anyone really hooked on the subject, it was absolutely thrilling.

AEN: What topics were discussed in Hayek's seminar?

SHACKLE: Well, of course, Hayek was writing the book which came out in 1941, under the title The Pure Theory of Capital. A student would write a paper with the topic largely of his own choosing; anything acceptable to Hayek would be discussed--money, and various aspects, I suppose, of capital theory--but I'm afraid I can't remember in detail now. Hayek used to give me the manuscript of The Pure Theory at Capital to read, as he was always rewriting the draft. I read several versions of it.

AEN: Sir John Hicks has portrayed the 1930s as a period of great intellectual battles between what he portrays as the "Hayekians" versus the budding Keynesians. What are your memories of that time?

SHACKLE: Well, I don't think it can really be said to have started until a small group of us went down to Cambridge on a Sunday afternoon in October 1935. That's where we heard Joan Robinson and Richard Kahn and really learned about Keynes's The General Theory. I didn't really understand what The General Theory was going to be all about until I heard Joan Robinson. I don't think you can say that a real battle began until after The General Theory had made some impact on us in that way--perhaps not even until after it came out. But up to 1935 there was a strong Hayekian influence at the LSE--people were greatly sold on Hayek's views as expressed in Prices and Production; I should say that included Hicks and Lerner and Kaldor.

AEN: If you go through the economics journals for the couple of years after the appearance of The General Theory in 1936 and read the reviews of the book, e.g., Hicks's first review, Frank Knight's, Joseph Schumpeter's, Jacob Viner's, Dennis Robertson's, and so on down the line, every one of them criticized the book severely. And if one compiles a list of all the criticisms made in those reviews, there is very little in Keynes's arguments left unchallenged. Yet, within a few years, the book became the volume guiding economic theorists. Given the opposition to it by so many leaders in the profession, why?

SHACKLE: Well, I think the opposition was because the book's object was to overturn the established theory of value, which it did. I think it's fair to say that the accepted, the received, theory of value and distribution in those days could not possibly account for involuntary unemployment because its premises included something very like perfect knowledge; and, if everyone had perfect knowledge, why should they have allowed a disaster like the early 1930s? It didn't make sense. The received theory of value and distribution up to the early 1930s was a theory of perfectly successful adjustment, perfect coordination. And, if things are perfectly coordinated, there's no reason why anybody should be involuntarily unemployed.

Keynes pointed out that there was this contradiction requiring an explanation and he explained it. His theory of involuntary unemployment is perfectly simple and can be expressed in a paragraph, or in a sentence. If you express it in a sentence, you simply say that enterprise is the launching of resources upon a project whose outcome you do not, and cannot, know. The business of enterprise involves investment, the investing of large amounts of resources--huge sums of money--in things whose outcome you cannot be certain of, which could perfectly well turn into a disaster or a brilliant success.

The people who do this kind of investing are essentially gamblers and they can lose their nerve. And if they decide to withdraw from trade, they sweep their chips up from the table. If they decide it's too risky, if their nerve gives out and they can't bring themselves to go on investing, they cease to give employment and that is the explanation. When business is at all unsettled--when there's any sign at all of depression--or when there's been a lot of investment and people have run out of ideas, or when their goods are not selling quite as fast as they have been, they no longer know what the marginal value product of an extra man is--it's non-existent. How can you say that a certain number of men have a certain marginal productivity when you can't know what the per unit value of the goods they would produce if you employed them would sell for?

AEN: Let me present an alternative for you. Let's take someone like Philip Wicksteed in his book, The Common Sense of Political Economy. Now from beginning to end almost every page in Wicksteed is loaded with the words "anticipation" and "expectations." He analyzes consumer's marginal utility evaluations as well as production activity, in terms of the forward-looking perspective of the actors. So there was a different tradition other than Knightian perfect competition in existence that used expectations in a process sense. Let me make a point about analyzing the Great Depression. The money supply was contracting in the early 1930s--a fact that seems to have been not clearly understood at that time, but which we now appreciate. It is possible to interpret this in a Wicksellian framework, i.e., of the money rate being above the natural rate. The structure of production was being artificially "shortened," so to speak, instead of "lengthened." Using Wicksell in this manner, within a Wicksteedian framework, one can analyze the Great Depression as a cumulative contraction in an environment of incorrect expectations--and without a Keynesian framework.

SHACKLE: Yes, yes I can see that. That certainly is very interesting indeed. Especially the reference to Wicksell. Yes, I do see that, but I must say I still think that Keynes didn't really get right home on his target until he wrote his 1937 article on "The General Theory of Employment" in the Quarterly Journal of Economics. There he put the whole weight on uncertainty and I still think that that is the real point. That "involuntary unemployment" merely means that there are people who haven't enough faith in their expectations to give employment.

AEN: An aspect that the Austrians have emphasized, particularly in the recent works of Israel Kirzner, e.g. his book Competition and Entrepreneurship, is that the market operates through the coordinating activities of the entrepreneur. The entrepreneur is the one who searches for opportunities, for profits from arbitrage. The market process over time tends to weed out the "poor" entrepreneurs, who suffer losses, while the "good" entrepreneurs reap profits and gain additional control over factors of production. As a consequence, the people who at any moment in time will be making production decisions will tend to be those entrepreneurs who are the "confident" entrepreneurs, i.e., who tend to see the future better than others. Why would you expect the sudden collapse of confidence, when the market is always tending to give control to those who show the most confidence?

SHACKLE: Yes, well, I think that I would say that they may have confidence, but it will have to survive some terrible shocks. I mean, there will always be shocks and things that really upset all calculations. I can't really quite believe in the idea of steady improvement, you know. After all, some of these men, they're very clever entrepreneurs, are not all working together, they're trying to undermine each other's positions, they're working against each other and trying to outdo each other.

AEN: There's an aspect of Keynes's analysis that Austrians find particularly unsatisfactory, that being his emphasis on analyzing economic phenomena primarily in "macro" or aggregate terms. Now, it seems that both in the Treatise on Money and in The General Theory, required micro-relationships are the very aspects Keynes glossed over in dealing purely at the macro level. The micro-economic relationships are surely the essential ones in an analysis to determine whether a "macro" situation represents a condition of equilibrium or disequilibrium.

SHACKLE: Yes, I'm sure you're right. Keynes, no doubt, in dealing with aggregates, was too "aggregated." I quite agree with what you say. I once used a little diagram in which a lot of arrows are going up vertically, with the arrows representing the value of particular investment projects, which will be invested in if the rate of interest goes down. Now, there'll be for each of these projects a level of cost of construction. Their value has to go up high enough to be above the cost of construction. If the rate of interest goes down far enough, it will bring some of them up into the realm of profitability; if it goes down even further, it'll bring more of them up, and so on. Well, there's no hint of that in The General Theory. The marginal efficiency of capital is just this thing you compare with the interest rate, isn't it?

AEN: The multiplier and the consumption function, it seems to me, suffer from the same problem. For certain analytical purposes, it may be useful to refer to the "total" level of consumption, but surely, again, what matters is whether the relative demands for and supplies of different consumer goods are "right."

SHACKLE: Well, you see, I think that one of the things that Keynes was best at was simplifying and encapsulating ideas like the consumption function. I think he would have agreed that economics is an imprecise subject and that the best you can do sometimes, if a problem is full of difficulties, is cope with it by wrapping it up tightly and saying "we're going to treat this as a whole." And I think that's what he did in the consumption function. I think, of course, he did so because he was very much concerned with refuting the idea that an increase of thrift will necessarily increase investment. So, I think his own answer would have been that you have to go in for these rather "black box" ideas, because they're the only way of coping with the intolerable complexity and the elusiveness of things.

AEN: You have emphasized the importance of expectations--that expectations are a product of an individual's subjective perception of opportunities laying before him. The argument is made that a problem with radical subjectivists is that it almost seems as if they aren't sure if reality exists, as if everything is just a product of the mind, totally unrelated to objective reality. How would you respond to that?

SHACKLE: I think that's the view some take. I can only speak for myself and I don't say that objective reality doesn't exist--this is a philosophical problem far out of my depth. But I do think that what we do in our actions is based on what goes on in our own minds, and one way I have tried to put it is that the things which you can choose amongst have to be made by yourself. You can only choose actions and acts. When people say, I'm choosing a new suit, or I'm choosing a house, what they're really saying is, I'm choosing which one to buy. It's the actions they're choosing. I think that the action must be formulated in one's own mind--it's a work of art, it's a work of imagination. Your list of choosable things has to be constructed or composed by yourself before you can choose

AEN: Some economists would respond by saying that you've made this conception so broad, so general, that there's almost no determinism left in it. You can't say whether this will happen or that will happen. How would you respond to that?

SHACKLE: In the most radical way, I'm afraid. I think there is pretty complete in-determinacy. I did spend a lot of energy trying to see if I could devise any theory of how expectations are formed and I ended with the conclusion that expectations are far too elusive and subtle to find out any principles or rules to explain their emergence. They're based on suggestions and you get suggestions from any mortal thing that happens--that you happen to read, that you happen to hear. You get suggestions from anywhere. No mortal person can say where they come from. That, you see, is the trouble.

Economics started as an attempt to imitate physics, Newtonian physics, and I think in doing so, it got off on the wrong foot. You could ask an historian to explain the institutions in England in the eighteenth century, but would you try asking him what is going to happen during the next century? He'd say, "my goodness, man, of course I can't tell you that!" He'd absolutely reject the notion of that sort of prediction. Well, if an historian can't do it, why should an economist be able to do it?

AEN: This ties in with your view of what "choice" means in neoclassical or mainstream economics.

SHACKLE: It really does right down to the philosophical bedrock because if we claim that every choice can be completely explained by or wholly accounted for via circumstances and tastes and if you like, by knowledge, then we are living in a determinist world. It may be that determinism doesn't exclude ignorance. The amount of ignorance that a person suffers from may itself be determined by his history, his educational history, and his circumstances. But I think if you can explain every choice completely, then you really are a determinist taking up a determinist point of view. I find it difficult to see the point of calling it choice, if it is completely determined.

If we can really explain any choice completely, we are saying we can point to causes which made this choice inevitable. It's the only thing that could have happened in the circumstances. We really are saying that the person who made the choice is merely a link in the machine, he's just a connecting-rod, which means he's not a maker of history in any real sense. Well, it may be that it's a foolish ambition to try to think of human history as made by human beings, but I see Man as a "beginning," a chooser which cannot be fully explained. He is an uncaused cause. I don't think you can really say much more.

AEN: I take it that you don't hold much confidence or faith in attempts at economic prediction through econometric techniques.

SHACKLE: No, frankly I don't. I shall be shot out of the profession even further than I have been already; this will be the end of my career, if it hasn't ended many years ago. However, I will be honest and say that I don't think that economics can yield constants of the kind that physics does. Physicists have constants, e.g., the acceleration due to gravity, the table of atomic weights. I don't believe that economics can have constants like that, You might make measurements which are all right for today. But, there are countless people whose interest it is to make nonsense of those measurements tomorrow. Well, now I have really been quite honest.

AEN: If one takes that position, then a question could be asked of you: Given what you have said, what should economists do?

SHACKLE: I think they should give up giving advice, except on the most hesitant, the most broad grounds. I think they should introduce an ethical element, a more than ethical element. If a man is asked whether public expenditure should be cut or not, he perhaps should say, "Well, if we cut it, we shall cause a great deal of misery; if we don't cut it, we don't know what the consequences will be, but we can't at least have this misery on our consciences". This sort of argument is not an economic argument, it's an argument with one's conscience.

For very many years I've not believed in welfare economics as a scientific construction. My idea of welfare economics is that you choose an administrator, a man with a conscience himself, and broad sympathy, with a generous mind and then you say, "Leave it to him!" I don't believe you can do any better. Those economists who are going to give advice, or who are going to be advisors either to government or to business, should have their training based in economic history, and they only need as much theory as you find up to the second year textbook.

AEN: How would you respond to the rebuttal that, aren't you, in a sense, suggesting that economics become historicism. General theory may exist, at a very simple or fundamental level, e.g., the concept of marginal utility, but, beyond that, all we ever have is the historical record and what was historically relevant in the past may not be for our period.

SHACKLE: No, it may not. And it won't be. Well, it's a very nihilistic position and I realize that.

AEN: In a sense, what you're suggesting is that a very large proportion of what has been built up in over two hundred years in economics as a discipline needs to be set aside, that it throws into question the very notion of what most economists view as what is required of economics to be a science?

SHACKLE: I've been saying for almost forty years that economics isn't a science, and we ought not to call it a science.