Econlog

Entries in this Category
In Praise of Temperance

In Praise of Failure

Squeezed Up

Hayek and the Internet

Town Vs. Gown

Paul Samuelson

Incumbents and Government

Incumbents and Government

Caldwell, Hayek, and Math

Caldwell, Hayek, and Math

Government vs. Private Debt

Government vs. Private Debt

Meeting the Enemy

Meeting the Enemy

Austrian Economics

Austrian Economics

Hayekians vs. Stiglitzians

Hayekians vs. Stiglitzians

Doubts about Planning

Doubts about Planning

Europe's Constitution

Europe's Constitution

Comment of the Week, 2003-05-07

Comment of the Week, 2003-05-07

Comment of the Week, 2003-05-07

Capitalism as a Benevolent System

Capitalism as a Benevolent System

Capitalism as a Benevolent System

Leftist Austrian Economics

Leftist Austrian Economics

Leftist Austrian Economics

Defending Imperfect Markets

Defending Imperfect Markets

Defending Imperfect Markets


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September 29, 2004

In Praise of Temperance

Deirdre McCloskey writes that economists no longer view underconsumption as a threat to full employment.

Nothing would befall the market economy in the long run, says the modern economist, if we tempered our desires to a thrifty style of life--one old Volvo and a little house with a vegetable garden and a moderate amount of tofu and jug wine from the co-op. ... if you focus on an irrelevant mental experiment, namely, that tomorrow, suddenly, without warning, we would all begin to follow Jesus in what we buy. Such a sudden conversion would no doubt be a shock to sales of SUVs at Ford and Toyota. But, the economist observes, people in a Christian Economy would at length find other employment, or choose more leisure...

All this is good news for ethical people. We don't need to accept avaricious behavior on account of some wider social prudence it is supposed to serve, allegedly keeping us employed. "Keeping us employed." Have you ever in your private, homely activities, doing the laundry or planting the garden, seen the main problem as finding jobs at which to be employed? Isn't the main problem the opposite one, a scarcity of hours in which to bake the bread, or fix the car, or play with the kids, or nurture friendships, or sing praises unto the Lord? If you agree, then you grasp the great economic principle that, as Adam Smith put it, "What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom." And you will grasp why it is not economic prudence to "keep us all at work" by spending on luxuries.

For Discussion. Is the theory that we need to consume to "keep the economy going" related to what Bryan Caplan would call make-work bias?

In Praise of Failure

Glenn Harlan Reynolds discusses the X-prize for private space travel using a rather Austrian viewpoint.

But in all sorts of areas -- from space and jet aviation in the 1950s and 1960s, to computers in the 1970s and 1980s, to the X-Prize today -- it seems that we make faster progress when we have lots of parallel efforts, with freedom to experiment, and to fail.

Take a closer look at how science, courts, democracy and markets actually work. In each arena, the process has two phases.

First, centrifugal structures help participants go off on their own, to organize and prepare in safety. Scientists have their labs, lawyers and their clients get confidentiality, politicians rally their parties, and businessfolk lead companies. People need secure enclaves to gather allies, make plans, and prepare for coming battles.

...What each of the older accountability arenas has -- and today's Internet lacks -- is centripetal focus. A counterbalancing inward pull. Something that acts to draw foes together for fair confrontation, after making their preparations in safe seclusion.

No, I'm not talking about goody-goody communitarianism and "getting along." Far from it. Elections, courtrooms, retail stores and scientific conferences all provide fierce testing grounds, where adversaries come together to have it out... and where civilization ultimately profits from their passion and hard work.

This process may not be entirely nice. But it is the best way we ever found to learn, through fair competition, who may be right and who is wrong.

For Discussion. What papers in mainstream economics capture the importance of trial and error learning?

September 20, 2004

Squeezed Up

The Washington Post (possibly more reliable link here) does not use phony documents, but the thrust of the story, including the headline "More U.S. families struggle to stay on track" is at variance with the facts that they present. The key chart, which is included on the jump page in an obscure way and never discussed in the article, reports on the change in the distribution of income, using 2003 dollars (I converted the data to tabular format).

The article's claim that it has become harder to stay in the income range of $35,000 to $50,000 is correct, if what you mean by "harder to stay" is that it has become difficult to avoid being squeezed up into a higher category.

UPDATE: More data and analysis, from Robert Rector.

UPDATE 2: Bruce Bartlett found similar problems with a New York Times story a few weeks ago.

For Discussion. In what ways do these data overstate or understate the degree of upward mobility in the economy?

September 18, 2004

Hayek and the Internet

Michael Van Winkle argues that the Internet's weblogs represent Hayek's concept of spontaneous order.

We've all heard critics of the Internet claim that, because no one "controls" it, no one can control it from disseminating the most outrageous rumors and conspiracies. A similar critique was leveled at Hayek's arguments about markets: Sure, markets (spontaneous systems) can deliver food at reasonable prices, but advertising and marketing often mislead people about which foods they should buy.

...Slowly but surely a loose network of bloggers is sometimes beating the designed, controlled systems of checks and balances at deciphering what's true and what's not. This is exactly what Hayek would've predicted.

For Discussion. In what ways does the Internet facilitate decentralizes markets?

September 12, 2004

Town Vs. Gown

Two recent articles discuss economic and sociological divides in politics. Joel Kotkin writes,

Kerry's challenge, Sperling and his three co-authors declare, is to convince voters in swing states such as Arizona, Colorado and the industrial Midwest that they should get hip by becoming more "metro" and less "retro."

Memo to Kerry: If only it were that easy.

There are lots of reasons why this analysis is wrongheaded. It's based on a significant misreading of many key economic indicators. And it doesn't recognize where Americans who aspire to upward mobility make their homes.

David Brooks writes,

There are two sorts of people in the information-age elite, spreadsheet people and paragraph people. Spreadsheet people work with numbers, wear loafers and support Republicans. Paragraph people work with prose, don't shine their shoes as often as they should and back Democrats.

Both Kotkin and Brooks point to data on the political proclivities of academics. Kotkin writes,

Harvard faculty are the second-largest source of direct campaign funds from employees -- behind the massive University of California faculty -- to the Kerry campaign, according to the Center for Responsive Politics in Washington.

Academics have had such an impact on the Democratic donor base because there is less intellectual diversity in academia than in any other profession. All but 1 percent of the campaign donations made by employees of William & Mary College went to Democrats. In the Harvard crowd, Democrats got 96 percent of the dollars. At M.I.T., it was 94 percent. Yale is a beacon of freethinking by comparison; 8 percent of its employee donations went to Republicans.

Ultimately, the answer to the Democratic Party's democratic deficit won't be found among the dons in Cambridge, the patricians on Beacon Hill or the celebrities in Malibu. It will be found in identifying and understanding the strivings of middle-class people living in unfashionable tract suburbs, working-class city neighborhoods and small towns across the country. Until the Democrats find a way to connect with these people, they will find their own fortunes receding in the face of an enormous field of opportunity.

One of the issues with which I struggle in teaching my GMU course is integrating my business experience with my academic learning. For example, take the topic of "profit maximization." In academic economics, it means solving a mathematical optimization problem. In business, you don't have the equation to work with. You're guessing about what will sell, to whom you can sell it, and how much it might sell for. You're guessing about how you can get technology to fit together, and how new developments could affect you. I never used calculus in my business career. And yet, I am not sure that it is right to ignore textbook economics altogether in teaching the subject.

For Discussion. Will the town/gown split be as severe in ten years?

September 10, 2004

Paul Samuelson

Since the name of Paul Samuelson came up recently, I thought I would toss out a few random impressions of him.

I only had Samuelson for one course, which I believe was in the Spring of 1977. It was part of the graduate theory sequence (gosh, I cannot remember if it was micro or macro--probably micro), and it covered capital theory. I think that what many students most enjoyed about the course was Samuelson's pronunciation of the last name of Austrian capital theorist Eugen Von Bohm-Bawerk, which Samuelson rendered as "Bame-Bah-verick." Both the pronunciation and the theory of capital as "round-about production" seemed exotic. My version of what Samuelson described of Austrian capital theory is given as part of my essay on The Sect of Austrian Economics.

Another salient memory from Samuelson's class was a time he told a Gauss story. I had read the story before, which was that as a young boy Gauss did not like eating peas. His parents told him to simply eat half of them. He did, and then they told him to eat half of the remainder, and at that point he realized that if he continued to do this he would end up eating all of them, and he burst into tears. Samuelson told the story as "As a young boy, Gauss was fed some peas. Then he burst into tears." Samuelson had no idea that he had skipped the entire middle of the story.

Samuelson's famous papers also typically contained mistakes or skipped steps in his proofs. His work is riddled with careless errors, but he was almost always correct in his conclusions.

Samuelson belonged to a generation of economists whose leading lights were as brilliant as the top stars in any field. In the 1930's, with the world economy in turmoil and the excitement created by John Maynard Keynes, economics drew a caliber of intellect that simply is not found in the profession today. Nowadays, a Samuelson or a Kenneth Arrow or a Milton Friedman would go into nanotechnology or computer technology or--most likely--biology.

Samuelson's accomplishments are probably worth 2-1/2 times those of the average Nobel Prize winner in economics. His Foundations of Economic Analysis was exactly that--the basis for the bulk of all of the work published subsequently. However, if you removed that from his resume, you would still have his international trade theory, his part in the development of the efficient markets hypothesis, and his development of the "overlapping generations model" of the role of money as a store of value.

Although he certainly can hold his own in debates within the profession, Samuelson would be awkward and uncomfortable in contemporary media and politics. One cannot picture him appearing with Lou Dobbs or Bill O'Reilly.

My guess is that Samuelson's forthcoming paper, on the possibility of foreign growth being bad for a home country, will not make the highlight film for his career. The response by Bhagwati and others is a gentle but firm put-down.

For Discussion. Are the greatest minds in economics over the past three decades comparable to those of Samuelson's generation?

July 26, 2004

Incumbents and Government

What does government do? Austrian economists fear that government simply serves to protect incumbents. In a long, informative review of a book by Hans Herman-Hoppe, Andy Duncan writes,

ask yourself if there are many large corporations in the US or large farming concerns, which would still be in business if not supported through subsidy, taxation, and regulation, by your various levels of government? Or if you may be developing families of elites who hand garnered privileges on from one generation to the next? Give it a couple of hundred more years and I think the European feudalism you escaped from may finally catch up with you

Incumbents and Government

What does government do? Austrian economists fear that government simply serves to protect incumbents. In a long, informative review of a book by Hans Herman-Hoppe, Andy Duncan writes,

ask yourself if there are many large corporations in the US or large farming concerns, which would still be in business if not supported through subsidy, taxation, and regulation, by your various levels of government? Or if you may be developing families of elites who hand garnered privileges on from one generation to the next? Give it a couple of hundred more years and I think the European feudalism you escaped from may finally catch up with you

May 10, 2004

Caldwell, Hayek, and Math

Francis Fukuyama reviews Bruce Caldwell's Hayek's Challenge, an intellectual biography of Friedrich Hayek.

As Caldwell notes, Hayek initially thought the dividing line between possible and impossible positivism lay in the distinction between natural sciences and social sciences, but by the 1950s he had come to understand that the issue was really one of complexity. A positivist, predictive science is possible only for phenomena, whether human or natural, that are relatively simple—particle physics, for example. One can never fully model and predict complex phenomena such as the spontaneous orders produced by the interactions of simpler agents. These orders include the human brain, whose higher functions cannot possibly be inferred from its physical substratum, as well as ecosystems and, of course, markets, cultures, and other human institutions.

...Thus, the highly mathematical and ahistorical turn that academic economics has taken in recent years would have been, for Hayek, as much an abuse of reason as the socialist planning of earlier generations.

If we believe that mathematics can establish the logical validity of an argument, and if we believe that econometrics can establish the empirical validity of an argument, then we have an approach to evaluating papers in economics. Otherwise, we do not appear to have clear criteria.

I believe that economic papers ought to be logical and scientific in spirit, with arguments expressed as precisely as possible. They ought to make falsifiable predictions. However, I believe that math and econometrics are neither necessary nor sufficient for establishing the validity of an economic argument. Thus, to borrow a Hayekian phrase, there is a "fatal conceit" to the sort of technical emphasis that was dominant when I was in graduate school.

For Discussion. If the mathematical approach to economics were eliminated, what would take its place?

Caldwell, Hayek, and Math

Francis Fukuyama reviews Bruce Caldwell's Hayek's Challenge, an intellectual biography of Friedrich Hayek.

As Caldwell notes, Hayek initially thought the dividing line between possible and impossible positivism lay in the distinction between natural sciences and social sciences, but by the 1950s he had come to understand that the issue was really one of complexity. A positivist, predictive science is possible only for phenomena, whether human or natural, that are relatively simple—particle physics, for example. One can never fully model and predict complex phenomena such as the spontaneous orders produced by the interactions of simpler agents. These orders include the human brain, whose higher functions cannot possibly be inferred from its physical substratum, as well as ecosystems and, of course, markets, cultures, and other human institutions.

...Thus, the highly mathematical and ahistorical turn that academic economics has taken in recent years would have been, for Hayek, as much an abuse of reason as the socialist planning of earlier generations.

If we believe that mathematics can establish the logical validity of an argument, and if we believe that econometrics can establish the empirical validity of an argument, then we have an approach to evaluating papers in economics. Otherwise, we do not appear to have clear criteria.

I believe that economic papers ought to be logical and scientific in spirit, with arguments expressed as precisely as possible. They ought to make falsifiable predictions. However, I believe that math and econometrics are neither necessary nor sufficient for establishing the validity of an economic argument. Thus, to borrow a Hayekian phrase, there is a "fatal conceit" to the sort of technical emphasis that was dominant when I was in graduate school.

For Discussion. If the mathematical approach to economics were eliminated, what would take its place?

January 20, 2004

Government vs. Private Debt

A reader points to a fresh post on the Mises.org web site of a decade-old piece by Murray Rothbard arguing that the Federal government should not be allowed to create obligations for future taxpayers. One solution he proposes:

I would advocate going on to repudiate the entire debt outright, and let the chips fall where they may.

There are many peculiar things about Rothbard's suggestion. What is most striking to me is that the people who really have an interest in repudiating the debt are too young to vote or not even born. On the other hand, the people who have the most to lose from debt repudiation (but not from repudiation of entitlements) are foreign lenders. The people who have the most to lose from repudiation of entitlements are dominant in the electorate. I don't think that they would let the "chips" fall on them.

For Discussion. Has Rothbard identified a genuine moral problem with the government issuing debt?

Government vs. Private Debt

A reader points to a fresh post on the Mises.org web site of a decade-old piece by Murray Rothbard arguing that the Federal government should not be allowed to create obligations for future taxpayers. One solution he proposes:

I would advocate going on to repudiate the entire debt outright, and let the chips fall where they may.

There are many peculiar things about Rothbard's suggestion. What is most striking to me is that the people who really have an interest in repudiating the debt are too young to vote or not even born. On the other hand, the people who have the most to lose from debt repudiation (but not from repudiation of entitlements) are foreign lenders. The people who have the most to lose from repudiation of entitlements are dominant in the electorate. I don't think that they would let the "chips" fall on them.

For Discussion. Has Rothbard identified a genuine moral problem with the government issuing debt?

December 02, 2003

Meeting the Enemy

What leads to bad economic policy? Bryan Caplan writes,

On the conventional view—widely accepted by economists, pundits, and the man in the street—the public demands policies in its own best interest, but the political system ignores their wishes. Bastiat and Mises dispute both parts of this story. They assert that democratic competition effectively drives politicians to do what the people want, but to their collective misfortune, many popular beliefs about economics are systematically mistaken.

For Discussion. The conventional wisdom as Caplan describes it blames special interests for bad policies. The Mises-Bastiat view blames public beliefs. Are those explanations mutually exclusive?

Meeting the Enemy

What leads to bad economic policy? Bryan Caplan writes,

On the conventional view—widely accepted by economists, pundits, and the man in the street—the public demands policies in its own best interest, but the political system ignores their wishes. Bastiat and Mises dispute both parts of this story. They assert that democratic competition effectively drives politicians to do what the people want, but to their collective misfortune, many popular beliefs about economics are systematically mistaken.

For Discussion. The conventional wisdom as Caplan describes it blames special interests for bad policies. The Mises-Bastiat view blames public beliefs. Are those explanations mutually exclusive?

November 11, 2003

Austrian Economics

After taking a quiz on Austrian Economics, I wrote about my agreements and disagreements with that school.

Much of what I believe about economics is based on the concept of imperfect knowledge. Imperfect knowledge implies that as we gain knowledge, our standard of living improves. However, we still have much to learn. We know how to treat strep throat, but we do not have a cure for cancer.

As a process for learning, free markets and private property are extremely valuable. The market system provides an incentive to experiment and to adopt successful experiments. To me, this core insight is the key contribution of Austrian economics.

For Discussion. Austrian economics was developed before what we think of as the Information Age. Has the revolution in data processing and communications produced an advantage for central planning or for decentralized markets?

Austrian Economics

After taking a quiz on Austrian Economics, I wrote about my agreements and disagreements with that school.

Much of what I believe about economics is based on the concept of imperfect knowledge. Imperfect knowledge implies that as we gain knowledge, our standard of living improves. However, we still have much to learn. We know how to treat strep throat, but we do not have a cure for cancer.

As a process for learning, free markets and private property are extremely valuable. The market system provides an incentive to experiment and to adopt successful experiments. To me, this core insight is the key contribution of Austrian economics.

For Discussion. Austrian economics was developed before what we think of as the Information Age. Has the revolution in data processing and communications produced an advantage for central planning or for decentralized markets?

October 27, 2003

Hayekians vs. Stiglitzians

I contrast Hayek and Stiglitz on the importance of imperfect information.

Hayek would have the government tolerate messy competition. His point is that with the optimal outcome unknown, government resolution of issues shuts off the learning process that market competition provides.

Stiglitz sees the messiness in real-world economies, and he claims to have the right solution in every case. ..Stiglitz's outlook is that markets are imperfect, but he is not. Where Marx offered dictatorship of the proletariat, Stiglitz would give us dictatorship of the Nobel Laureate. Between the two, we might be safer with Marx.

A new book from the Cato Institute, The half-life of policy rationales, leads with a quote from Hayek.

New methods may be found for making a service saleable...and thus make the market method applicable to areas where before it could not be applied. Wireless broadcasting is an instance. [T]echnical advance might well open the possibility of confining reception to those using particular equipment...

Hayekians vs. Stiglitzians

I contrast Hayek and Stiglitz on the importance of imperfect information.

Hayek would have the government tolerate messy competition. His point is that with the optimal outcome unknown, government resolution of issues shuts off the learning process that market competition provides.

Stiglitz sees the messiness in real-world economies, and he claims to have the right solution in every case. ..Stiglitz's outlook is that markets are imperfect, but he is not. Where Marx offered dictatorship of the proletariat, Stiglitz would give us dictatorship of the Nobel Laureate. Between the two, we might be safer with Marx.

A new book from the Cato Institute, The half-life of policy rationales, leads with a quote from Hayek.

New methods may be found for making a service saleable...and thus make the market method applicable to areas where before it could not be applied. Wireless broadcasting is an instance. [T]echnical advance might well open the possibility of confining reception to those using particular equipment...

October 12, 2003

Doubts about Planning

Jonathan Rauch argues that the absence of a plan for post-war Iraq is a feature, not a bug.

In truth, the planning mind-set is exactly wrong for Iraq. Anything might have happened after the war: a flood of refugees, a cholera pandemic, a civil war—or, for that matter, the discovery of an advanced nuclear program. The fact that the Bush administration keeps adjusting its course, often contravening its own plans or preferences, is a hopeful sign...

Only trial and error, otherwise known as muddling through, can work in Iraq. There is no other way. Muddling through is not pretty, but never underestimate America's genius for it.

UPDATE: for a business-consulting style argument for adaptability rather than centralization in the information age, see this Department of Defense report.

For Discussion. Central planning would seem to reduce the number of experiments. In the short run, this would reduce the number of failures. However, in the long run, it would limit success. Does central planning tend to work relatively better in the short run than in the long run?

Doubts about Planning

Jonathan Rauch argues that the absence of a plan for post-war Iraq is a feature, not a bug.

In truth, the planning mind-set is exactly wrong for Iraq. Anything might have happened after the war: a flood of refugees, a cholera pandemic, a civil war—or, for that matter, the discovery of an advanced nuclear program. The fact that the Bush administration keeps adjusting its course, often contravening its own plans or preferences, is a hopeful sign...

Only trial and error, otherwise known as muddling through, can work in Iraq. There is no other way. Muddling through is not pretty, but never underestimate America's genius for it.

UPDATE: for a business-consulting style argument for adaptability rather than centralization in the information age, see this Department of Defense report.

For Discussion. Central planning would seem to reduce the number of experiments. In the short run, this would reduce the number of failures. However, in the long run, it would limit success. Does central planning tend to work relatively better in the short run than in the long run?

Europe's Constitution (July 02, 2003)
Europe's Constitution (July 02, 2003)
Comment of the Week, 2003-05-07 (May 07, 2003)
Comment of the Week, 2003-05-07 (May 07, 2003)
Comment of the Week, 2003-05-07 (May 07, 2003)
Capitalism as a Benevolent System (May 02, 2003)
Capitalism as a Benevolent System (May 02, 2003)
Capitalism as a Benevolent System (May 02, 2003)
Leftist Austrian Economics (April 19, 2003)
Leftist Austrian Economics (April 19, 2003)
Leftist Austrian Economics (April 19, 2003)
Defending Imperfect Markets (April 08, 2003)
Defending Imperfect Markets (April 08, 2003)
Defending Imperfect Markets (April 08, 2003)