My QJAE article is up

It takes a lot of balls for a Keynesian to defend Hoover in an article.

It also takes a lot of balls for anyone to defend Hoover in an Austrian journal.

And while the Review of Austrian Economics is primarily staffed by softies in Fairfax, Virginia who suffer a Keynesian every once in a while, it takes testicular fortitude of the highest order for a Keynesian to try to publish in an outlet run by those crazy Alabaman Austrians.

And yet I, your host at F&OST, have tackled all three of these feats in the most recent issue of the Quarterly Journal of Austrian Economics.

UPDATE: And Vedder and Gallaway have a response too. I'm sure one of them was one of my referees. I plan on writing a reply. I may post my response to the referee report here if anyone's interested in that (I don't think there's any privacy concerns associated with my response).

UPDATE 2: I'm really starting to wonder if V&G read either my article or Rose's article when they wrote theirs. Perhaps they did but with a predetermined view of what it was I was arguing. Please - don't take what they say about the Rose (2010) article to heart, especially. It's a great piece and it seems like they only read through the first of several models. Rose (2010) addresses the points they claim he doesn't address.

Probably a dumb question...

... but it seems like various things I think about lead me back to it from time to time, so it's worth asking: "what reason do we have to expect that a market economy will operate at its full potential?"

And to clarify, I think in a lot of cases the market economy does operate at close to its full potential. I don't doubt that's the case. I think it's just important to have a sensible answer to the question of why it does.

If the answer is of the "people don't leave profit opportunities unexploited" variety, I think I accept the premise but not the conclusion. It's true. People don't leave profit opportunities unexploited. But this just turns it into a chicken-and-egg problem. Profit is revenue minus cost. Revenue is what people are able and willing to pay for a product in the market. Let's assume for the sake of argument that our wants are unlimited, but our ability to satisfy those wants clearly isn't. So the existence of a profit opportunity to exploit is contingent on ability to pay.

So what guarantees that ability to pay is such that profit opportunities are such that the market economy will operate at its full potential?

Since ability to pay is a question of income, and since income and output are the same thing in the aggregate, we're right back to the same question we started with.

As I've said before, Say's Law properly understood and with allowances for hoarding and such certainly has its uses. Someone unconcerned with the caveats and qualifications can even say that Say's Law guarantees a balance will be struck between supply and demand.

But I'm not sure why I should care about that balance in and of itself. Say's Law says nothing about whether the balance will be struck at a full employment level.

Glasner on 1920-21

David Glasner cites both of my articles on the 1920-21 depression in this post. He also adds some thoughts of his own, which is one of the things I've really appreciated about the blogosphere.

After my RAE article, I got a lot of additional insights into the period. Don Boudreaux highlighted what was going on with international trade, and Paul Krugman and Brad DeLong both talked about what was going on with private debt levels (which has implications for the impact of a deflation). Here, David points to the operation of the gold standard. Because the U.S. held so much gold, we effectively had control of the value of the dollar.

I know in a draft I had some discussion of Keynes and Hayek's views on the U.S. policy of gold sterilization and our large gold reserves but I know I cut a lot of that discussion out because the article was initially too long. Anyway - whatever I had in a draft or in the final certainly wouldn't have explained the relevance as clearly as Glasner does here. He also has an interesting story about Rothbard:

"On at least one occasion, no less an authority on Austrian Business Cycle theory than Murray Rothbard, himself, actually admitted that the 1920-21 Depression was indeed a purely monetary episode, in contrast to the Great Depression in which real factors played a major role. In the late 1960s, when I was an undergrad in economics at UCLA, Rothbard gave a talk at UCLA about the Great Depression. All I really remember is that he spent most of the talk berating Herbert Hoover for being just as bad as FDR. Most people were surprised to find out that Hoover was such an interventionist, though anyone who had read Ronald Coase’s classic article on the FCC would have already known that Hoover was very far from being a free market ideologue. I had just started getting interested in Austrian economics – while my contemporaries were experimenting with drugs, I was experimenting with Austrian economics; go figure! I sure hope no permanent damage was done – and was curious to hear what Rothbard had to say. But it was all about Herbert Hoover. Later, I asked Axel Leijonhufvud, who had also attended the talk, what he thought. Axel said that Rothbard was a scholar, but didn’t elaborate except to say that he had chatted with Rothbard after the talk asking Rothbard if there had ever been a purely monetary depression and that Rothbard had said that the 1920-21 Depression had been purely monetary. So there you have it, Rothbard, on at least one occasion, admitted that the 1920-21 Depression was a purely monetary phenomenon."

So much for "non-interventionist foreign policy"

More goodies on Ron Paul.

HT - Guinevere Nell

Cheap Shot on Romney and "Very Poor"

It's been a busy morning with a few personal things, but I've gotten around to reading some news and I have to say it's disappointing to see how people on Facebook and many blogs are treating Mitt Romney over his comments about the "very poor". The full statement is provided here.

What he's clearly saying is that the very poor have a lot of initiatives designed for and directed at them. Poverty is always going to be a problem, but it's a problem that we address. And over the last twenty years, we've tweaked out programs for the very poor by structuring them in a way that makes it less likely for the poor to get trapped in a cycle of poverty through perverse incentives that discourage work. As Romney says - we have a safety net. Romney also notes that he'd fix the safety net where it needs fixing (and there are always fixes to consider).

His point was clearly that he wants to focus on those who aren't very poor or very rich and who therefore have less of a net to catch them when hard times come. That's an eminently reasonable position to take, particularly if you explicitly say you're going to pay attention to any frays in the safety net for the very poor! Most Americans, who are not very poor or very rich, really need two things. Once they have these two things they can do most things for themselves. They need:

1. Dependable access to a solid education, and
2. A job

Romney isn't the best candidate to help them achieve those things, but he's better than most of the other GOP options.

We should be glad that Romney even recognizes (1.) that it's good to have a safety net, (2.) that it's good to fix that safety net, and that (3.) there are things a president can do to help the middle class. I don't know if you could get Ron Paul to say any of those things, and I'm not sure you could get Newt Gingrich to say the first two.

SAVE THE WINE!!!!

HT - Evan, although since lately he seems too good for F&OST posts, I'll post it here.

He got this from the Lynfred Winery FB page. Lynfred is outside of Chicago, and I visited there when I was out to see Evan once. Surprisingly good for how far it is from the Blue Ridge foothills :)

The oldest wine I ever had was a Lynfred Winery wine. They had a 1995 Cabernet for something like $35 when I was there a few years ago. For all I knew it would be bad, but at that price I had to give it a shot. I'd never had one anywhere near that old. We had it with friends last year, so I suppose that's a sixteen year old wine. It was fantastic. The cork crumbled a little, but it tasted great.

I've said it before, and I'll say it again

These idiots better not wake up a Shoggoth.

Natural scientists thinking about their own behavior is no substitute for good social science

Speaking of human capital...

...yesterday I was reading this post about a new report on the biomedical workforce which looks quite interesting. I've been thinking a lot about science and engineering labor markets lately, and biomedical is especially fascinating because over the last decade or two that market has gone through a huge glut. It's an important cautionary tale for people who want the government to stimuluate the supply of S&E workers.

But I had to laugh when I read this in the report: "In the report, the working group notes that "Supply and Demand" comes out ahead "because it affects all the other issues.". As a labor economist, the only issues in the biomeical workforce are "supply and demand" issues. When you code people's responses to interview questions and then say that the "supply and demand" responses were the most common it tells me exactly nothing about what the real issues! The factors influencing S&E labor supply and the demand for S&E labor are very different - and estimating the scope and scale of one or the other can of course be a tricky task.

It's still nice they're thinking about these issues and writing reports like this. And actually when you read the report it's easy to re-classify the comments yourself into "short-run supply inelasticity", "lagged supply response", "information problems", "demand externalities", etc. - I just find it interesting how what is billed as such a key finding of the report can be so utterly useless in telling you anything about the subject matter!

Nevertheless - this is why we have a scientific division of labor, and the interviewing they looks very interesting.

Human capital is extremely important for the U.S. economy

A great post with a great graphic from Alex Tabarrok on human capital.

The BEA estimates that a $738 trillion human capital stock dwarfs the $45 trillion physical capital stock. Even if you estimate human capital stock more conservatively, the difference is still massive.

Still putting some ideas together, but I hope to be exploring these issues in more detail with a grant proposal I'm writing to the Sloan Foundation with my co-author on the NBER engineering work. If we get this (he already has a relationship with and grants from them, so I think its a good bet), I will hopefully be able to replace my teaching assistantship stipend with this grant money and have a stream of support through my dissertation writing too.

The literature I'm interested in is science and engineering occupation and schooling decisions, questions of whether expectations about the return on those investments are myopic (some of the earlier work by Richard Freeman) or more rational (more recent work by Sherwin Rosen). In addition to data on actual labor market conditions in these fields, our data has information on student expectations of their own labor market outcomes, as well as detailed information on how they finance their education. Anyway - we are moving out of the industrial age. Human capital stock is what really matters in economies like ours.

Now that I've given that summary, I'm also curious - does anyone know of any applications of Tobin's q to thinking about human capital investments? It seems like it would be really straightforward to apply it, but so far in a little searching around I haven't turned up anything.

Four great statements

Emphases are all mine.

"The question is not whether the EMH is “true,” how could it be? Almost no economic model is precisely true. The question is whether it is useful. I find the EMH useful, and anti-EMH models to be almost completely worthless. I’m still looking for the model that will tell me how to beat the stock market. Just when I was starting to warm up to Shiller’s model, he missed the huge bull market of 2009-11." - Scott Sumner

"Problems of capitalism are not justification for post-capitalist utopia.And problems of government are not justification for any anarchist worker's paradise." - Prateek Sanjay

"This is a great division between academics and--let's call them journamalists. Academics think that their arguments are stronger and thus that they are stronger and more persuasive when they cite and link. Journamalists think that if they give their readers a whisper that there are other, perhaps better sources of information, then--OH NOES!! THE REEDRS GO READ SOMETHING ELSE!! TEHRE GOEZ R ADVERTIZING REVENUE!! This makes academics think that journamalists are immoral, mannerless cads--the type of people who you invite to dinner who then urinate on your bedspread. Journamalists, by contrast, are puzzled: "What's the big deal?" they ask. "Everybody does it."" - Brad DeLong


And perhaps the wisest thing I've read in the last twenty-four hours:


"I decided to expand my “library”" - Jonathan Catalan