Arnold Kling  

If I Had More Time

What I Said... Concise Encyclopedia in the Ne...

I would comment more on the following links:
WSJ blog post about a warning that the average ratio of government debt to GDP could top 100 percent in Europe in the near future. That's ok. They can fix the problem by introducing a VAT. Oh, wait...

Speaking of fiscal messes, accrual accounting would show that our deficits are even higher. My guess is that this would be true in Europe as well.

Bill Woolsey is trying to sort out the controversy of Austrian business cycle theory. Just skimming his long post, it looks to me like he is focused on aggregates and equilibrium, in which case he is not talking about Recalculation.

Brandon Fuller of Charter Cities talks about advantages of agglomeration. My guess is that it easier for those advantages to emerge gradually then to suddenly create a big city where they appear. So I think this is a problem for Charter Cities folks. I also think it's a problem for Seasteaders.

In fact, I would be prepared to argue that the economic advantages of urban agglomeration are the biggest obstacle to libertarian reforms of any sort. The advantages of urban agglomeration weaken the "exit" option for citizens, which in turn gives government officals leeway to conduct all sorts of abuses. If Jews in Europe did not want to leave behind what was familiar in the 1930's in the face of Nazism, then most people are going to put up with a lot of government stupidity and over-reach here.

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COMMENTS (10 to date)
jsalvati writes:

I suspect the reason that macroeconomists don't talk about 'recalculation' is that you haven't offered any presuasive evidence for the theory: you haven't offered any empirical evidence and you havn't built a convincing model (it's easy to come up with reasonable sounding stories that are subtly incoherent or subtly rely on implausible assumptions). Meanwhile the money based theory of macroeconomics has convincing models and has solid empirical evidence (strong evidence enough price stickiness to generate the sort of recessions we see). What does recalculation offer?

dWj writes:

I have a theory -- not one to which I'm especially attached -- that agglomeration causes leftism, insofar as many actions, taken in cities, have externalities that they largely don't when population densities are lower. In more rural communities, you can choose the people you interact with; in an urban setting, you're likely to share walls with people you couldn't fully vet before moving in, and the number of people who can hear each car horn honking or even loud enough music playing is well into four digits.

fundamentalist writes:

It would really be nice if critics of Austrian economics would learn a little about it first. Martin Wolf comes the closest in Woolsey's article, but Krugman, Woolsey, Cowen and Caplan simply don't understand Austrian economics and are often dishonest by claiming Austrians claim something that they don't and never have.

I can simplify the debate for most people: if you want to side with the majority, then ignore Austrian economics and pretend it is gibberish. If you want to understand Austrian economics, then read Austrian economics without trying to use a crowbar to make it fit into mainstream thinking. Read it on its own terms. But don't bother reading critics of Austrian economics because none of them have bothered to understand it and some are downright dishonest.

fundamentalist writes:

What do you do with people like the late great Milton Friedman who called Hayek's book "The Pure Theory of Capital" incomprehensible? I have read the book three times because I thought it was brilliant, and I already had an MA in uncle Milti's econ before I read Hayek.

I don't know what to say. Friedman was a great man and a good economist, though not great. I can only guess that he tried to read Hayek as if he were writing mainstream economics. He wasn't. But even if you disagree with what Hayek wrote, if you merely but truly understand it you will know more than most PhD's in economics.

fundamentalist writes:

Woolsey's fetish with "interest rate elasticities" is amusing. He assumes that the rest of the world is as entranced by interest rates as he is. I seriously doubt that anyone considers the interest rate before buying a meal at a restaurant.

In fact, Hayek wrote in his "Profits, Interest and Investment" that businessmen hardly ever consider interest rates. He wrote the book to show how little interest rates matter and what might happen if they never changed at all. The business cycle would still happen.

Again, Woolsey assumes that mainstream econ is infallible and Austrian econ must fit within the mainstream model. If Austrian econ disagrees with the mainstream model, then according to Woolsey Austrians have forgotten something, are ignoring something, or are incromprehensible. Woolsey will never admit that mainstream econ is simply wrong.

I can guarantee you that neither Mises nor Hayek, no any modern Austrian for that matter, ignored anything or forgot anything. Mainstream econ has forgotten an enormous amount that most economists knew in the 1930's and debated. In fact, it's pretty easy to show that most of the "discoveries" of mainstream econ in the past 50 years were already dealt with by Mises or Hayek in the 1930's and forgotten by the mainstream.

Most of what has been "progress" in mainstream econ over the past 50 years has been the independent discovery of what Mises and Hayek wrote about 80 years ago.

Nichlemn writes:

"In fact, I would be prepared to argue that the economic advantages of urban agglomeration are the biggest obstacle to libertarian reforms of any sort. The advantages of urban agglomeration weaken the "exit" option for citizens, which in turn gives government officals leeway to conduct all sorts of abuses."

Shouldn't this be more or less internalised within property prices and thus not really make a difference? If average property prices in a city are $1 million each, bad policies should make the city less desirable and cause average property prices to fall to say, $900,000 each. If you own your own home, you can exit but there's really little benefit in doing so: the damage has already been done. Even if the damage done to you is higher than average or you think the market fails to recognise the extent of the damage of the policies, so it's better for you to leave, I don't see how the benefits of urban agglomeration would make a difference. You've already paid for it in higher property prices.

Patri Friedman writes:

I agree, the benefits of urban agglomeration are a big problem for any blank canvas movement like charter cities or seasteading. In the case of charter cities, I think it is not so bad, because in a badly run country (African, say) the badness of the rule system will probably outweigh the benefits of urban agglomeration.

Same goes for seasteads appealing to third world immigrants, but that can't happen until the cost of a seastead comes down. And the appeal of cities is definitely a problem for the first-world early adopters. Early seasteads will need close access to cities, many residents will be part-time, and the residents will need to be more enthusiastic about, say, libertarianism, than about the benefits of cities.

Nichlemn writes:

"early seasteads will need close access to cities, many residents will be part-time, and the residents will need to be more enthusiastic about, say, libertarianism, than about the benefits of cities."

Unfortunately, this demographic is disproportionately male (and nerdy). I suppose you could alleviate this with a minarchist government that price discriminates in favour of females - a "ladies' night" for seasteads. (Small taxes for males, none for females).

fundamentalist writes:

Hayek has an excellent chapter on money, loans and interest rate elasticity in Part IV of "Pure Theory of Capital." The book is free in pdf under the literature section of

But I think Woolsey's main problem is that he assumes the correctness of mainstream econ and tries to fit Austrian econ into that structure. That's pretty much impossible. Austrian econ differs too much. Austrians would never agree that the business cycle begins with a collapse in aggregate demand caused by an increased preference for holding money. In the ABCT, those are effects, not causes.

ThomasL writes:


Recalculation is hinged on the idea heterogeneous capital. Mainstream macroeconomics for all practical purposes treats capital as homogeneous.

Recalculation suggests that people may discover that more investment in "A" was made than is currently needed, and further find that there is no fast way to turn the workers and industries that made "A" into workers and industries that make "B".

When that transition from "A" workers to "B" workers is less than instantaneous--and it will be*--unemployment will result.

Where Recalculation really kicks in is by suggesting that this transition is further slowed by the unlikelihood of knowing what "B" is. The longer it takes to discover "B", the longer people will be unemployed.

Mainstream macro, be it of the Keynesian or Fisher stripe, is focused on aggregates like NGDP and ignores the entire possibility that it matters _where_ investment and production take place, as well as the amount that take place.

Yes, sticky wages and prices can complicate things, since we are relying on relative wages to draw workers into "B", but it really doesn't matter how sticky or unsticky a wage is if no one has the faintest clue idea what they'd want to hire one to do anyway.

*People get laid-off en masse, but hired piecemeal, causing a kind of queuing problem even in the best imaginable, non-Recalculation scenario where someone actually knew what they wanted all these people to do.

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