New Material on the 1920-21 Depression

Jonathan Catalan links to two new videos of Tom Woods expounding on the 1920-21 depression, here and here. I haven't gotten a chance to listen to them yet, but I'm sure the case is similar to past things that Woods has said on it.

Jonathan writes of me "Daniel Kuehn has been a vocal critic of the Austrian history of the Depression of 1920-21 (and will hopefully have something published on the topic soon)". I'm not sure about the likelihood of his parenthetical aside, but I'm hoping! I want to clarify. though, that I'm critical of a common interpretation of the downturn that has been propounded by prominent Austrians and libertarians (namely, Tom Woods, Bob Murphy, and Jim Powell). This is not to say that I think Austrian Business Cycle Theory properly conceived does a bad job of explaining the depression. I actually think ABCT does quite well at explaining this and many other credit-cycle driven, gold-standard era cyclical downturns (a point raised by no less than Barry Eichengreen and Brad DeLong in the past).

The critique of Woods, Murphy, and Powell that I lay out in the paper is two-fold:

1. First, that they get an awful lot of their history wrong, and
2. Second, that they misinterpret the implications of 1920-21 for Keynesianism

The mistakes on this history are wide ranging: their characterization of Fed policy, their characterization of the Wilson Treasury, their characterization of Harding's budget and Harding's role in the downturn, their characterization of Commerce Secretary Herbert Hoover, etc. All three of them engage in some of this, and Tom Woods engages in practically all of it. There was so much of this material that I actually had to cut a lot of it from the final paper and emphasize the second point. What's the most odd is that the right version of the history wouldn't have hurt the Austrian case. The only thing we get out of these distortions is an inappropriate critique of Wilson, an inappropriate lionization of Harding, and an inappropriate critique of Hoover. My feeling is that all three of these men did fairly decently during the crisis and there is no need to distort what they did in an effort to heighten the contrast between them. History is not a morality play and it does not require ideal-types for its telling.

The critique of Keynesianism is a little more detailed. My basic premise is that Keynesianism always has emphases that are unique from the Classics and the Austrian School, but it only really comes into great conflict with the Austrian School under certain macroeconomic conditions. These conditions did not hold during the 1920-21 depression, so it's really not a good episode to use to arbitrate between them. Essentially, both Keynesianism and the Austrian School (each properly understood) would have predicted roughly what we see in the data for the 1920-21 downturn, so while it is a fascinating episode in American economic history, it really doesn't get us that far in terms of economic theory.

Moreover, comparisons between the 1920-21 downturn and the Great Depression are especially bad! First, the macroeconomic fundamentals (mostly dealing with interest rates and wage and price expectations) are not comparable between the two episodes. But besides that, policy didn't really do what Keynesians say it should do in the 30s (despite what vulgar Austrians say), nor did it do exactly what Austrians say it should do (despite what vulgar Keynesians say).

Macroeconomic history is very interesting, but it's often empirically intractable (perhaps that's part of the reason why it's so interesting!). We're always so desperate to have an historical episode that perfectly makes our case. Well, usually we don't have that. The historical record, in my opinion, generally reinforces my Keynesianism - but I have no illusions at all about the fact that it's tough to prove anything with it. The most I can really say is that it is "consistent with my theoretical viewpoint". But I want to emphasize that ABCT highlights some very important macroeconomic processes as well. This is not an either/or question - this is a question of what theoretical framework is the most appropriate for explaining specific circumstances.

Anniversary of Constitutional Government in Virginia

Yesterday, June 29th, in 1776, Virginia adopted a constitution for the commonwealth. It was the first state to do so. Patrick Henry would serve as the first governor of the free and independent Virginia. For the better part of the following decade, Virginians would give their lives, their fortunes, and their sacred honor for the cause of American independence and union.

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More on "macro is hard"...

Yglesias, Konczal, Macroeconomic Advisors (this is on the older Kocherlakota essay I mentioned, not the new Athreya one), Sethi, DeLong, Krugman, and Henderson have more to add.

And while we talk about the nature of practicing macroeconomics, Evan blogs about the practice of theology.

Negative Externality at My Mother In-Law's House Due to a Corporate Construction Project that Will Remain Unnamed (this is the third time)

The whole backyard looks like this due to an entire commercial lot behind her that didn't properly prepare for run-off into neighboring properties. She's pursuing it with the county, and probably will get compensation from the company, which acknowledges she deserves it - but the point is, this shouldn't have happened in the first place (and certainly not multiple times, since last fall, with no compensation yet), and she shouldn't have to incur transactions costs or delay over this. It's killing her plants. Her backyard is basically made of red clay right now, and has been all spring. And she's trying to sell the house. She lives alone and isn't really able to do heavy yardwork in the heat (Kate and I live just a couple miles away so we can pitch in). You might not be able to tell, but this isn't just a little bit of water - it's doing damage to the yard at a really bad time for her, not to mention destroying the shed (not pictured).

And it's not just her - it's her neighbors too, and sediment is pouring into a storm drain that empties into the Chesapeake Bay.

Now, what is the more market-oriented solution? Pursue some sort of tort/legal route that ultimately only burdens her and hasn't been fruitful for months. Or, provide basic ground rules through emergent institutions like local governments in recognition that externalities are real and you've gotta anticipate this stuff and make sure contractors do things in a way that doesn't risk violating other peoples' rights?

Steve Carell and The Office

Most fans of The Office know that Steve Carell, who plays Michael Scott, the regional manager of Dunder Mifflin, Scranton, is going to be leaving the show after next season. Today The Atlantic aggregates various perspectives on what NBC should do next. Opinions range from celebration - his exit will save the show - to shutting it down while they're ahead.

The Office is tied with Fringe as my favorite show right now, and The Office provides the comedy, so this is serious business. I'm really getting into The Good Guys, with Colin Hanks and Bradley Whitford, so I may have an out - but it's still not quite up to The Office's level.

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OK, so my take is that I kind of agree that the show could be better without Michael. Michael Scott is great, but his appeal is based on the comedy of oblivious offensiveness. Whenever offensiveness is the basis of laughs, you have to one up yourself (or at least get more creative about it) every season. For satirical shows, like South Park, you can get quite a bit of mileage out of that because there are always new inputs. But there's not really a new input for The Office because it's sit-com humor, not topical humor. So Michael gets more and more outrageous and forced over the years. They've done a fine job with it - I'm not complaining. I liked the sixth season a lot, unlike many critics. They've managed Michael well, but at the same time I think his character type is inevitably going to peak before others on the show.

Because of his character type, Michael also overshadows a lot of the other funny characters. That's largely the point. The guy is like a five year old - he has to be the center of attention. But Dwight is easily as funny as Michael, and in a more sustainable way. Some of the funniest moments on the show are one-liners from Creed, Ryan, Jim, Kelly, or Oscar. Some of the best story-lines are (obviously) Jim/Pam, but also Dwight/Andy, Dwight/Jim, or Dwight/Angela. What ongoing storyline was Michael essential to? Pam's mom was pretty funny. But Jan? Holly? Who really cared about that? So there's a ton of great material that would go on fine without Michael. The show has also been very successful at incorporating solid new characters like Jo Bennett (or for that matter Andy, who's stayed for four seasons now!).

So although I don't want to see it die a slow, agonizing death, I'm definitely in the "keep the show" camp. The trick is extracting Michael successfully. The Office is founded on relationships between co-workers. That's what makes it tick. So the writers need to pull Michael back a little in his final season, let viewers get used to less Michael, and develop story lines without him. If they can do that, the cast and the plot can definitely handle it (and I'm sure he'd come back for guest appearances). The Office is good at prolonged absences - Pam in art school, Jim and Pam on the honeymoon, Phyllis on her honeymoon, Andy in anger management, etc. They can figure out a way to ease Michael out.

So I have hope - we shall see.

Oh, and for idiots out there like Evan, the British Office doesn't hold a candle to The Office. You can tell because everyone calls it "the British Office", and not "The Office". Deal with it.

Is Macroeconomics Hard?

This weekend, Greg Mankiw linked to a short essay by Kartik Athreya, an economist at the Richmond Federal Reserve, which argued that macroeconomics is considerably harder than most economics bloggers suggest, and that most blogging on macro is useless. He singled out Matt Yglesias, John Stossell, Robert Reich, Robert Samuelson, Brad DeLong, and Paul Krugman for criticism (the last two because they should "know better" - presumably the others don't know any better). His point was that it's hard to communicate good macro in a blog and you really need a PhD education in economics to communicate good macro anyway. The link is broken now for the essay, but I'm sure it will resurface soon. There has been a flood of commentary that I'll link to first, and then provide my own thoughts.

What they said

On my blogroll at least, EconLog's Arnold Kling started off the responses, tentatively agreeing with Athreya but adding that not only do bloggers not know much - trained economists don't know much either. This is a line that you hear from a lot of Hayekians - Russ Roberts and Don Boudreaux peddle it too. It's always slightly irksome because these are some of the most cock-sure economists out there, and they only ever apply this logic to economists they disagree with. Moving on!

Scott Sumner takes exception to Athreya's accusation, and even defends Krugman and DeLong. And speaking of Brad DeLong, he has a predictably great and biting rebuke (he was one of the named bloggers after all!), calling Athreya "Malibu Barbie" (for her famous ditzy line "math is hard!"). What was most interesting about DeLong's (first) post on Athreya was that he cited Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, who a little while back wrote an essay of his own explaining the failure of macroeconomic modeling. This is somewhat ironic because at the time bloggers received Kocherlakota's statement somewhat cooly, since he ended up defending the big, complex macroeconomic models run by the Fed. Now I suppose he seems wise next to Athreya - because at least he was honest about the limitations of these models.

Mark Thoma is also quite critical, and notes the irony of Athreya praising Greg Mankiw when Mankiw regularly links readers to Stossell and Samuelson - two bloggers/journalists that Athreya criticizes.

Jonathan Catalan, at Economic Thought, agrees with Athreya on the point that most bloggers are clueless on macro, but strongly disagrees with the idea that you need to have graduate training in economics to say anything useful. Catalan does make one really strange point that Athreya is "not biased" because he "criticizes all bloggers equally (including Krugman and DeLong)". I think this claim is non-sensical. Athreya's essay was clearly directed against liberal/Keynesian bloggers. Matt Yglesias, Robert Reich, Paul Krugman, and Brad DeLong were all singled out. The other two - John Stossell and Robert Samuelson - are media personalities that also happen to blog (although I didn't realize Samuelson did). Stossell is definitely a libertarian, but the guy is a Fox News talk show host for crying out loud! Catalan responds in the comments that Stossell is widely read, but you know what - so is Sarah Palin. Samuelson is sort of a gloomy, bearish columnist with lots of deficit worries. I suppose I'd guess that he's center-right, but he's not in deep with any side of the debate. So you've got two media personalities, four prominent liberal/Keynesians including two of the best Keynesian economists in the business right now, and oh ya - a Fox News commentator (no major libertarian or conservative thinkers to be seen). The point was blatantly obvious to anyone that knows the community or the discipline. Catalan cryptically responds to me "Given his background, I doubt that he is giving the libertarians a break". I'm not sure what that is supposed to mean - I suppose he thinks that central banks are chock full of liberal Keynesians. Again, I think that betrays an unfamiliarity with the community and the discipline. Or at least an inability to distinguish between a guy like Paul Krugman and a guy like Narayana Kocherlakota, who I think a lot of libertarian/Austrians would treat pretty similarly. I don't think Athreya is a libertarian, mind you. I think they're probably not on his radar.

Brad DeLong resumes the criticism, including a restatement of the history of the idea of a general glut... not sure why... he just kind of throws that in there whenever he can - which is good I suppose. CNN Money has a review here. I don't know if Robert Samuelson typed this up after seeing Athreya's essay, but he had a column out arguing precisely that economics is hard. Dean Baker disagrees with him. And finally, the best response I've read so far is Nick Rowe, a Keynesian who makes a Hayekian critique of Athreya.

What I say

Like a few of these commenters, I'm somewhat torn on Athreya's essay. First and foremost I have to agree with him, simply from a Smithian standpoint. Of course it's hard. That's (partly) why we specialize in it. That's (partly) why compensation for economists is so high relative to other jobs. That's why it takes five years to get an advanced degree in it, and why community colleges don't really offer it. Yes, it's hard.

It's also hard because of the empirical problems that plague macro. In microeconomics you have reasonable hope of getting a solid empirical estimate. We have experiments, but we also have quasi-experimental methods that do a decent job. And when we don't have that we at least have mountains and mountains of data and lots of variables so we can hold a lot of things constant. This plethora of empirical options makes bad interpretation a real danger, but at least it's there. We don't have experiments in macro. We have much less data and much fewer variables, and much fewer events to look at. Identifying counterfactuals is very hard. That means in macro it's very challenging to test theories.

Most of my educational and professional background is in labor economics and econometrics, not macro. However, I have taken graduate level macroeconomics (although I haven't gotten a PhD or anything). Most of what I write on here, though (which I like to think is at least fairly competent), I did not get from my graduate macro course. When the financial crisis hit I got very interested in macroeconomic questions very quickly, and what I write here is mostly derived from my own independent study of the subject. It's not that what we learned in class was bad necessarily - we just never really learned that much about the economics of depressions or the business cycle! We did a lot with growth models, overlapping generations models, the Diamond model, and if we did anything on economic downturns at all it was Real Business Cycle Theory (which of course is widely - although not entirely - considered to be discredited now). Needless to say, I don't reference that stuff all that much here. Graduate macro is much more than that, and I didn't go that far into it at all - but a lot of it is similarly useless at a time like this.

At a certain level, as an amateur blogger that blogs on macro, of course I have to disagree with Athreya. Part of it is simply that I do feel I grasp a lot of the issues pretty well, and you simply don't have to have a PhD to grasp the concepts. Part of it is that I read PhD economist bloggers who I think do a terrible job explaining the issues. And part of it is Nick Rowe's Hayekian point about the value of blogging. Each blogger contributes insights that on their own might not be particularly important or even right. But the point is they interact with each other and critique each other, which in the end fashions a better perspective. I think it's also a matter of robustness. I am a Keynesian, but I'm a slightly different Keynesian than anyone else out there. I've criticized many of them, and I hold slightly different assumptions from many of them. It's important to get a sense of what perspectives are robust to a variety of assumptions and perspectives. For example, regular readers of economics blogs may have noticed that there is a broad convergence across a variety of blogging perspectives on some sort of monetary disequilibrium theory of depressions. They all put a slightly different spin on it and have different solutions to it, but it's a common thread running through monetarists, Austrians, and Keynesians, although sometimes you have to read between the lines to see it. That's a very important thing to tease out and recognize.

I also have to agree (and disagree) with some of Athreya's specific naming of bloggers. Yglesias is worth reading for other things, but you can ignore his economics blogging, and the writing of Stossell, Reich, and Samuelson, and you really won't be worse off for it. Yglesias's economics is a tortured restatement of Scott Sumner and Paul Krugman on the Fed, and that's honestly about all it ever amounts to. I hate the stereotype of the tax and spend liberal Keynesian, but honestly that's all Reich amounts to. Samuelson is usually pretty safe, but he's a one trick pony (which means he's wrong when circumstances require a different trick). Stossell is entirely dismissible. So I agree that there's a lot of bad economics blogging out there. But don't we expect that? There's a lot of bad blogging out there period! You learn that over time. I simply removed Cafe Hayek from my blogroll and added and thoroughly enjoy Coordination Problem and ThinkMarkets. You learn who does bad economics and who does good economics. On the Keynesian side I removed Economic Perspectives and added Worthwhile Canadian Initiative. You learn these things. My most recent useless blogger that I'm encouraging everyone to stop reading is Wayne William Anderson.

I have to simply disagree with Athreya on Paul Krugman and Brad DeLong. These two are quite simply some of the best economic bloggers out there. I think naming them was the source of a lot of the criticism of Athreya, because as soon as he did it was very transparent about what he was doing and where he was coming from. If he had left it at the initial four I think more people would have nodded, said "I think you have a point", and moved on. It's fine not to agree with them (I don't always agree with them), but DeLong and Krugman are good at what they do and they write good posts.

So non-PhD bloggers (myself included) - keep blogging! You will get things wrong. You will be called out on it. The nice thing is, bloggers with PhDs (DeLong, Krugman, Cowen, Mankiw, Boudreaux, Sumner, Kling, Caplan, etc. etc.), and people with PhDs who don't blog and only write papers and books will get things wrong too, and you can call them out on it! It's a beautiful thing, and we're all better off for it. But when you engage in economics blogging - particularly macro blogging - you should be honest and straightforward about one thing that Athreya got right. Macroeconomics is hard. If you don't realize that when you get into it you're going to be more likely to be more confident in yourself than you should be (which, ironically, was really Athreya's own problem).

Roberts on Hayek

Russ Roberts's piece in the Wall Street Journal on Hayek today left a little to be desired, but I suppose there's only so much you can expect from an op-ed.

He asks: "Why the sudden interest in the ideas of a Vienna-born, Nobel Prize-winning economist largely forgotten by mainstream economists?"

Name me a single mainstream economist that has "largely forgotten" Hayek. Hayek is a major figure in 20th century economics. I think what Roberts means is that mainstream economists don't think of Hayek in the same way that he does. That's not quite the same as Hayek being "forgotten". Would it be accurate for me to say that Roberts has "forgotten" Keynes? Perhaps it would be, since he goes on to write: "First, he and fellow Austrian School economists such as Ludwig Von Mises argued that the economy is more complicated than the simple Keynesian story. Boosting aggregate demand by keeping school teachers employed will do little to help the construction workers and manufacturing workers who have borne the brunt of the current downturn." Keynes offers a simple view of the economy relative to Hayek and Mises? That's news to me! But then again, this sort of straw-man version of Keynes shouldn't be surprising to anyone who has seen Roberts's Hayek vs. Keynes rap.

It's also sad that Roberts writes something like this: "But now that the stimulus has barely dented the unemployment rate, and with government spending and deficits soaring, it's natural to turn to Hayek." No one who talks about Bastiat as much as Roberts does (not to mention anyone who teaches economics at the university level) should have to have the concept of a counterfactual explained to him. My guess is Roberts understands the concept perfectly, he just deliberately presents a disingenuous picture of the stimulus in this article because it furthers his own narrative. That's unfortunate. If you can't make a fair, honest case in an op-ed this short, that's understandable - but it doesn't give you license to distort the evidence to make a dishonest case.

Even David Henderson is a little hesitant on Roberts's claims about what Hayek means for Fed policy under Greenspan. But again, Roberts has his own narrative of how the crisis went down. For him it's a simple story, not a complicated one (which makes his earlier critique of Keynes espeically ironic) - and he's not going to let the evidence get in the way of that.

I'd dispute some reckless applications of this statement, but you can't really contest Roberts here: "Third, as Hayek contended in "The Road to Serfdom," political freedom and economic freedom are inextricably intertwined."

Also here: "The fourth timely idea of Hayek's is that order can emerge not just from the top down but from the bottom up. The American people are suffering from top-down fatigue." The point he's making in the first sentence is self-evident, but his application is shaky. I'd argue the election of Obama is just a culminating event in a bottom-up movement to retake American self-government in the wake of 1990s passivity and Bush-era top-down leadership. Even the opposition now (the Tea Party) is a grass-roots opposition to what is fundamentally a grass-roots governing majority (the Obama movement), in contrast to the Bush years where a top-down administration's only organized opposition for most of the first decade of the 21st century was a Democratic Party establishment that was largely complicit in the Iraq war and in most of Bush's domestic excesses as well. That started to change towards the end of Bush's presidency, and by the 2008 election we had a genuinely grass-roots movement behind Obama and a genuinely grass-roots movement on the Republican side that continues to this day.

I take issue with some of what the administration has done as being too centralized. The health reform package, for example, is not the package that I would have put together. But Roberts makes this bizarre case that anything emanating from the federal government is "top-down", no matter how "bottom-up" its origins are. Essentially, if you don't agree with Russ Roberts's libertarianism you're "top-down". If you do what he thinks should be done (namely, reducing federal spending and action), then it's bottom-up. This is patently absurd. It's another example of this weird phenomenon among libertarians where they can't comprehend their own propensity to ride roughshod over human liberty, despite the fact that it's blatantly obvious to the rest of us.

Liberalism and the Welfare State

This weekend I finished my book on the 1848 revolutions and started Roger Garrison's Time and Money (something of a restatement of Hayek's Prices and Production). The book was very good, but there was an interesting part at the end on the relationship between nineteenth century liberalism, revolution, the resolution of the "social question" (i.e. - unemployment), and the rise of the welfare state in the conclusion that I wanted to share. I know this might sound a little odd to some readers, but there is actually a contingent out there that believes that the American welfare state emerged out of Bismarkian authoritarianism, and that it wasn't derived from, say, long liberal struggles with the issue in the 18th and 19th century and an even longer history of poor relief in the colonies that was ultimately derived from Great Britain (here, here, here, and here for a start). They often ignore this broader history and highlight the work of German-ancestry progressives in the early twentieth century that contributed to an already robust reform movement (never mind the fact, of course, that a lot of these German immigrants - like the Kuehns who had left Hesse - were escaping conscription and repression in Bismark's Germany). Anyway, this was an interesting paragraph from p. 407 of the book:

"Namier's term, a 'seed-plot of history', can be applied to this aspect of 1848 because the revolutions of that year witnessed the fatal consequences of the perennial tension between, on the one hand, the liberal emphasis on political freedom and civil liberty and, on the other, the socialist stress on social justice, or the friction between the individual and society. Since 1848 this tension has provoked a wide range of responses, ranging from liberal capitalism to totalitarianism and all points between. Most modern democracies cope with the social question because it is debated within a constitutional framework on which all parties are (more or less) agreed and which protects democratic freedoms. In 1848, no such political consensus existed in most European countries. The 'social question' could therefore not be resolved within a peaceful, legal framework. So the revolutions faced the great challenge that confronts all modern states: how to integrate the masses into the state and to resolve the social question without provoking instability? Some states, such as the French Third Republic and Britain, managed to forge a political consensus by appealing to traditions (in the French case, to the democratic inheritance of 1789), which enabled them to offer some social reform through liberal, parliamentary systems. Others imposed reform from above through more authoritarian regimes, as in Bismark's Germany during the 1880s. A third solution was revolutionary, where integration of the masses failed, or was not even seriously attempted, and where alienation lead to a violent challenge to the old order, as in Russia, where the result was a totalitarian answer to the social question, in which the needs of society and, above all, the state took precedence over the liberty of the individual."

This probably won't move some people. There are of course those who see any constitutional expression of a social contract for solving social problems as threat to human liberty. Even among those who accept constitutional liberalism for whatever reason, there are those who will argue that Roosevelt and other 20th century progressives had more in common with Otto "iron and blood" Bismark than French and British parliamentarians. Nevertheless, I think the author's point that (1.) yes this is a tension, and (2.) it was resolved in a variety of ways, shouldn't be lost on people who claim the mantle of classical liberalism. Earlier in the text, the author notes that "the social question ulcerated the liberal regimes because there was no revolutionary consensus". Despite the absence of such consensus, claims are regularly made by modern libertarians that engaging this question is an abandonment of classical liberalism. A consensus on the social question, in other words, is retroactively imposed on the 19th century by these modern libertarians.

I'd also just note the strong Public Choice Theory/James Buchanan understanding of constitutionalism in the passage I presented above.

Paris

In less than a week, Kate and I are going to Paris for vacation. I have never been before, Kate has been several times and (thank God) speaks French. Does anyone have any suggestions on things we have to see or do? We're hitting the usuals, of course, but I'm curious if anyone knows of any gems off the beaten path (or good restaurants/cafes).

A Genealogy of Sticky Wages

In my post on sticky wages, Mattheus asks:

"Is the assumption of general wage and price rigidity a pillar of Keynesian economics? I always thought you had to assume wage stickiness to be a Keynesian, but I might be wrong"."

I think the short answer is “no, it is not a pillar of Keynesian economics, but yes, almost all modern Keynesians assume it in some form”.

It's a very odd story. Between Marshall and Keynes, economists had always highlighted wage stickiness as a reason for involuntary unemployment. The reason is obvious - if there can be no price adjustment, all the adjustment has to come through a shift in quantity. It's a very nice, very clean explanation with a lot of intuitive support (you simply don't see that much nominal wage cuts in real life - it's as if there's some sort of inherent psychological barrier to it).

In the General Theory, Keynes talks about wages in the chapter I linked. The chapter is specifically dedicated to what happens when nominal wages are cut, so there's clearly no blanket assumption of rigid wages there. One of the critiques he raises, though, is that in certain sectors wages are going to be more rigid than in other sectors (this is partly why he preferred modest inflation to reduce real wages than nominal wage cuts: inflation would fall on all workers relatively equally, and therefore avoid price distortions). In the General Theory, departure from full employment was driven entirely by liquidity preference and aggregate demand.

New Classical macroeconomics challenged Keynesianism from a microeconomic perspective, introducing "representative agents" with rational expectations in models that contradicted Keynesian findings. The Keynesian response had to be directed towards microfoundations (well, they thought it did at least). So guys like Stiglitz and Mankiw and Summers dreamed up all kinds of microeconomic frictions which, in representative agent models, would produce the same "Keynesian" results. Sticky wages came center stage again. Asymmetric information became very important. We had efficiency wages, insider-outsider models. Critiques of rationality assumptions aren’t exclusively tied to this literature, but they’re important for it. All of these frictions cobbled together is more or less what is known as “New Keynesian” economics, which is really the economics of just about everyone that calls themselves “Keynesian” today. You can think of it as what The General Theory might have been if it was written from a micro perspective rather than a macro perspective.

I think there’s a lot of good to say about a lot of New Keynesian economics. It has made economics considerably more realistic. Just the other day I was very favorably citing Stiglitz and Weiss’s credit rationing model, which has a distinctly New Keynesian flavor to it. I’ve blogged on efficiency wages in the past. And I think a lot of wages probably are pretty sticky. But I think people can legitimately call themselves “Keynesian” without a lot of this (people did for about three decades, after all!). Classical Keynesianism (that really feels oxymoronic to type!) has no need at all for sticky prices. The only people that need sticky prices are the ones who get their panties in a twist when guys like Lucas, Kyndland, and Prescott raise bogus (or at least weak) critiques. There’s a reason why Greg Mankiw is such a fan of A.C. Pigou. It’s because New Keynesianism is really New Marshallianism as much as it is anything else (and that’s fine – Keynes himself said of Marshall that he was “a true sage and master, outside criticism”).

Earlier I had said that New Keynesianism was what The General Theory might have looked like if Keynes has taken a microeconomic approach rather than a macroeconomic approach. I want to modify that a little. If Keynes had written from a microeconomic perspective, I think we would have gotten something more along the lines of the work of Edmund Phelps. Phelps worked on distinctly Keynesian themes: wage and price expectations at the microeconomic level, and uncertainty about future wage and price changes. I don’t know to what extent Phelps utilized sticky wages (his work was in the 1960s and 1970s, before sticky wages became a real staple), but it’s certainly never highlighted as essential to his work (I haven’t read any myself – I need to). I think if Keynes went the micro route, you would have seen something more like Phelps than Stiglitz – although I think Keynes (who always liked paradoxical conclusions) still would have liked and agreed with Stiglitz’s work especially, if not all the New Keynesians.

That’s my take on the intellectual history. It’s somewhat self-taught. My History of Economic Thought course (six years ago now!) stopped around Keynes, so this comes from what I’ve picked up since then. I’d be interested in hearing about any obvious mistakes, or even just differences of interpretation on all this.

A Sticky Situation

There have been a few posts on sticky wages recently, and I'm sure there will be more.

Tyler Cowen starts it off by pointing out that the highest unemployment rates are in low-wage, low-education areas where we've been hearing for years that wages have been stagnant or falling. Cowen asks: "Doesn't that mean...um...their wages aren't so sticky downwards? And thus Keynesian economics is not the final story?"

He can't even manage to convince his own colleague. Bryan Caplan calls him "completely wrong". He raises two points - first, that the wages for this subset of the labor force took decades to erode, and "even staunch Keynesians" think the economy could right itself in that time (somebody please tell Wayne William Anderson, who thinks Keynesians believe economies will never recover without the government). A fair enough point by Caplan. Caplan's second point is better, though - the downward pressure on wages in this subset of the labor force was primarily due to the slow erosion of inflation, not flexible nominal wages. It is nominal wage rigidity that Keynesians who cite rigid wages generally refer to. Then he gets into (well, links to lecture notes on) - you guessed it - unions and the minimum wage. Clearly the scourge of the American economy right now, right? I'm not particularly sympathetic to unions, but give me a break. When they were strong we were prosperous, they got weak and you're still citing them? Unions can do major damage, but it's barely worth mentioning as a contributor to what's happening. Everyone has their pet peeve, I suppose.

Anyway - I would add one things to Caplan before moving on to another Keynesian response. What makes Tyler and Bryan even think rigid wages are necessary in the first place? I refer readers to Chapter 19 of the General Theory, which discusses nominal wage adjustments. Keynes says quite clearly that sometimes nominal wage adjustments will clear the market, and sometimes they won't. Nominal wage rigidities as an explanation for unemployment preceded Keynes (A.C. Pigou wrote about them in 1926 in his book Industrial Fluctuations), and they've only become identified with Keynes since the New Keynesians. It's a useful thing to point out, but it's not what Keynes said drives depressions.

Nick Rowe agrees with Caplan that Cowen's post comes up lacking. Rowe points out that in a recession caused by sticky wages where the decline in demand for labor is carried entirely by quantity adjustments, firms make offers to high quality labor and unemployment hits low quality labor the hardest. So low quality labor with (as Caplan points out) rigid nominal wages, and falling real wages due to inflation has the highest unemployment rates by virtue of its lower quality. In other words - what we see is precisely what you would expect from sticky wages anyway.

I'd also add the point that our unemployment rate is self-reported and not necessarily consistent with the economic concept of "unemployment". If you think about a supply and demand model where demand shifts to the left and adjustment of wages is perfectly smooth, you'll move from one equilibrium with no unemployment (Q1, below), to another equilibrium with no unemployment (Q2, below).

Now, if the market operates as the simple model suggests that it should (and I'm not saying that it does in practice), then the Q1 minus Q2 workers are (1.) not employed, and (2.) will not accept employment at the new wage level. The problem is, the Current Population Survey (where we get our unemployment rates) doesn't tell them what the new wage level is (because the CPS staff doesn't know that!), they don't ask if they've been offered a job at that wage level and what there response was, etc. etc. They ask if they're employed or not, if they're looking for work, and if they are ready, willing, and able to work. That's all. The people sitting between Q1 and Q2 might be holding out for jobs at the old wage, not knowing that there's a new wage that economic theory says they should be refusing! Simple theory acts like the labor market is an auction. It's not - it's a search process. Some people may give up the search if someone told them what the new equilibrium wage was, but since they don't know that they keep searching. Or some people may work at the equilibrium wage if they knew they weren't going to find a better one. In the table above, there is no unemployment, but that doesn't mean people between Q1 and Q2 won't register as unemployed in the Currrent Population Survey! In other words, no unemployment as it is theoretically defined and lot's of unemployment in the CPS numbers can very easily coexist! The only thing the simple model tells us that we can reliably empirically verify is that even if there is no unemployment as economic theory defines unemployment, there will be less people with jobs. There comes a point where it doesn't matter if there is no unemployment according to theory - there is joblessness in actuality that we don't want (nor, I might add, that we are powerless to do something about).

NYRB on Hitchens

The New York Review of Books has a great review of Christopher Hitchens's new memoir.

The author actually represents my take on Hitchens pretty well. Lots of good to say about him. A little eccentric, a little too black-and-white sometimes, a little too willing to engage in his own brand of fundamentalism while legitimately criticizing that of others. I would only take issue with this review insofar as I think Hitchens has a point about the nature and importance of the threat of fundamentalist Islam to civilization. I would not follow Hitchens in extrapolating that insight into a justification for the Iraq war, but I do think the reviewer minimizes the importance and accuracy of that insight, and the clarity with which Hitchens has expressed it. Everything else here is quite good.

-1.9%

Yesterday I noted the revised growth figures for the first quarter (real GDP grew by 2.7%) and asked people what they thought happened to government spending. Here is the answer:

Government spending shrank by 1.9%.

Of course, that drag on growth has to be weighted by the magnitude of government spending in the economy to figure out its "contribution" to the 2.7 growth rate. That weighted contribution is -0.39%.

If any of you have been wondering why there has been an uptick in talk about "austerity", this is precisely why. Sorry it's so small, but below is a graph of the percent change in real (ie - inflation adjusted) GDP and the percent change in real government spending for every quarter going back to 2007. The blue is GDP, the red is government spending.

There is a lag in the impact of fiscal policy on GDP. Quick policy changes, like changes to tax withholding or transfer payments that take effect quickly, are thought to have lags of one or two quarters. Things like public works projects obviously stretch out over a longer period, but the exact lag depends on how quickly the project is implemented. This is why I was critical of liberals who complained about tax cuts in the stimulus bill. Generally they're right - they do have smaller multipliers - but they act more quickly, and that was important.

This chart doesn't prove (remember all the empirical reservations I've raised about macroeconometrics), but it is consistent with about a six month policy lag. The spike from the stimulus came in the second quarter of 2009. GDP bumped up by the fourth quarter of 2009. A lot of this was the inventory cycle too, but it is consistent with what we would expect from fiscal policy. Government spending (as everyone who has been looking at the numbers and not listening to the pundits knows) has been shrinking. It took about six months for the exogenous government spending shock to make itself felt. I'm quite concerned that this is not going to be a very pleasant autumn.

Does this support Keynesianism? It does and it doesn't. It certainly demonstrates that a demand-side view of the economy is meaningful. The counter-argument would be that we're just putting our thumb in the dike, and we're maintaining malinvestments that need to be liquidated. There may be truth to that as well. I'm inclined to believe that story at least insofar as we're propping up the housing market, for example. But that presupposes that this downturn was not precipitated by an aggregate demand shock. I think there's ample theoretical and empirical evidence that there is, so I maintain the importance of demand management despite the fact that there's probably also some restructuring and readjustment that needs to happen (and I think this graph illustrates the point). I don't see any reason to believe that the restructuring and readjustment is enough to cause this sort of drag on the economy.

Pop Quiz/Random Guess

And no referring to your National Income and Product Accounts tables!

The Atlantic just reported an announcement by the BEA that GDP growth figures for the first quarter of 2010 have been revised down from 3.0% to 2.7%. That's low growth to begin with coming out of a downturn, and it's getting revised lower.

Geez - those Keynesians really screwed things up, didn't they! It proves it - you use fiscal stimulus and its going to give you sluggish growth.

So your quiz is: what was the growth rate of government spending - the infamous "G" aggregate in that vulgar Keynesianism equation - in the first quarter? Give a guess, please. I'll let you know tomorrow morning.

Kling on a Budget Compromise... I hope he doesn't actually consider this to be as original as he seems to be considering it

It can be very strange to read Arnold Kling sometimes - sometimes I get the impression he is very disconnected from the world outside GMU libertarianism. He writes about the budget hawk/stimulus dove fiscal policy combo of:

"1 A larger deficit in the short term.
2. Specific, clear measures to reduce deficits over the next ten years, by trimming entitlements and raising taxes.
3. Linking (1) and (2) in a single piece of legislation."

And then says "I would think someone would articulate it"...

...ya Arnold - LOT'S of people articulate this. Paul Krugman, Brad DeLong, and Ezra Klein to name a few that advocated this sort of thing in the very recent past. All these liberal bogeymen fall more or less in line with what Kling describes, not as a compromise position, but as their preferred position. Krugman was talking about the long-term budget back in the Bush administration too, so its not just a matter of talking responsibly as a means of selling his stimulus wish-list. Instead of recognizing this for what it is - a differentiation between macroeconomically unsound boom-time deficits, macroeconomically sound bust-time deficits, and a completely separate long-term entitlements problem - critics of Krugman act like he flip flops from the Bush administration to the Obama administration. Scott Sumner attributed it to "Bush derangement syndrome" in a post that really makes you wonder how well Sumner knows his opposition. Sometimes - sometimes - reading posts by Kling or Sumner you get the impression that they think everyone out there that doesn't see things the way they do is a liberal, vulgar Keynesian that thinks we should always be spending tons of money. There's no recognition at all that this proposal he outlines is largely what a lot of left and center-left people have been saying for a very long time. It's always been my position. It's the position of the entire executive office here at the Urban Institute (Bob Reischauer, Rudy Penner, Gene Steuerle, the late Ned Gramlich, Len Burman (formerly of the Urban Institute)), all of them! Some of these guys are very, very liberal and I've heard considerably more serious talk from each of them about the long-term budget than I've heard out of all of EconLog commenters put together.

Talking past each other and second guessing each other is a very serious problem in economic and policy debates. It's part of the reason why I've consciously tried to take a firm, not-entirely-convinced, but receptive position on libertarianism and the Austrian School here on this blog. I think it's important to overcome this second guessing each other as much as possible (and sometimes there are legitimate disagreements that are simply going to stand). But it really makes me wonder how progress on something like fiscal policy is possible when someone like Arnold Kling doesn't appear to realize that the position he outlines is a very, very common one that I at least hear every single day.

There's a lot of distrust or sheer misunderstanding to overcome just among researchers and wonks - and we're not even the ones with constituencies and clients to pander to! Congress is a whole different can of worms!

Random request

- Does anyone know if any of H.P. Lovecraft's letters are available online (complete letters, not the excerpts that get cited)? I've only seen them available in books. I'm particularly interested in letters he wrote in the 30s, and those particular letters I've only seen available for sale in an edited volume that is epecially expensive (relative to edited volumes of some of his earlier letters). The guy is supposed to have written 100,000 letters in his lifetime - some of these have to be available online!

- Does anyone know any books or articles on the impact that the Great Depression had on literature? I'm aware of Paul Fussell's The Great War and Modern Memory about the impact of WWI on literature. I'm interested in a similar thesis, but about the Great Depression. Does anyone know of any?

Thanks

On Keynes...

Several interesting posts on Keynes recently. Scott Sumner writes about what he calls "the incredible shrinking General Theory". His point is that initially Keynesians said that fiscal policy was always important, then they said it was only important during recessions, and now they're saying it's only important in liquidity traps. I think historically speaking he's partially right about the direction Keynes has been taken, but I have a few concerns about this:

1. First, the General Theory needs to be read as a theory of output and the general glut, not as a theory of business cycles or as a policy manual. Keynes barely talks about policy, and in most cases when he does he writes about interest rate manipulation (i.e. - precisely the kind of policy Sumner is advocating!). There are points in the text where he says that in a lot of cases, adjustment of bank rates "should be sufficient". So yes, Keynesianism has moved away from fiscal policy over the years, but the point is this was never really that different from what Keynes said in the first place. That having been said,

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2. The really important thing about Keynes was precisely that he raised reservations about monetary policy and pointed out why demand (of which government demand is one component) is so important for output determination. We shouldn't lose that in our understanding of the General Theory. I'm personally in that first group Sumner describes anyway (which I suppose might even make me something of a post-Keynesian). I think in theory fiscal policy can always be important. To a large extent it's an efficiency trade-off. Crowding out problems are real, as is bureaucratic inefficiency, and sometimes these problems are more relevant than others. Sometimes crowding out is OK (if a sub-optimally under-invested in public good crowds out a sub-optimally over-invested in private good, who the hell cares?), but very often it's not.

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3. Much has been made of the liquidity trap recently (Jonathan Catalan thinks through it very carefully here). This is largely attributable to the work of Paul Krugman during Japan's Lost Decade. The liquidity trap for me introduces a situation where monetary policy is almost completely useless - that is its significance. I know of no reason why fiscal policy is only useful in a liquidity trap. I'm not sure how this meme got going. I always thought that the efficacy of fiscal policy was more dependant on the under-utilization of resources than on the trade-off between money and bonds. But what do I know? Certainly when interest rates are extremely low fiscal policy is obviously easier - but aside from that I'm not sure what people's point is when they cite liquidity traps. The relationship between fiscal policy, output, and employment doesn't seem to magically change in a liquidity trap.

Other things out there on Keynes recently:

- Jonathan Catalan thinks about why Keynes "avoided" the Austrians. Jonathan's point is first that he didn't. This is correct in my view. He doesn't treat it in detail, but it's in there. He also cites Bohm-Bawerk, and I believe even von Mises, and he engaged Hayek in debate throughout his life. I think the important thing to remember is that just because Austrians think of Keynesians as their opponents, it does not follow that Keynesians think of Austrians as their opponents. To a large extent, Keynesians are not focusing on Austrians - they're focusing on Classical and neo-Classical fallacies. Keynes's primary purpose was to vindicate Malthus in the Malthus-Say debates over general gluts, not to offer an alternative to a credit and capital based theory of the business cycle (as I've said in the past - Keynes isn't really interested in the business cycle - he's interested in output determination). I personally buy into a lot of the General Theory, and I also buy a lot of ABCT (I don't think it's necessarily important in explaining all downturns, but I think it has important and true insights). I maintain that while a few details probably clash, there's nothing inherently incompatible between ABCT and Keynesianism. There is something inherently incompatible between Classicism/new Classicism and Keynesianism. So of course that's where the attention gets directed.

- Paul Krugman puts forward his Dark Age of Macro thesis again, citing Keynes. I think the point is a little too strong - and much of the detour we went through in the late twentieth century at least had its origin in legitimate (if over-stated) concerns about Keynesianism as it was understood in the 50s and 60s - but the general point I think is still valid. Say's Law is more hueristic device than strict law now (less charitable writers use the word "straw man"), but its basic tenets are widely held. That's a big problem. People operate on the assumption that we're consistently on the Production Possibilities Frontier. We're not. We're simply not, almost never. Keynes explained why, but a lot of people have missed that and just thought of him as a counter-cyclical spending guru.

Concluding thoughts on the religion posts

Here, here, and here we engaged a lot of new commenters (who I hope will stay!) on the prospect of "knowing" God. This is way out of what I normally post on, so I'm going to leave it - but I had a few concluding thoughts.

First, in the comment section to his own post Evan says: "The thing that gets me is that "knowledge" is such a contested category to begin with, and I often feel like it's a waste of time defending the fort when all we're really fighting for is recognition of theological belief as "scientific" or "positive knowledge"."

I suppose I didn't see the debate that way because I never thought anyone ever thought of theology or religion as "scientific" or "positive knowledge" in the first place. My intent was not to knock down an understanding of religion that saw itself in these terms (because I never thought it did), but more to clarify points that I think are often left vague. A lot of the debate was around what was perceived as a stict epistemology on my part. This is why I wrote the second post - because I really don't have one. I'm a strong proponent of Berger and Luckman. I recognize social construction. I don't write off the prospect that our senses are fooling us and that we're just brains in vats. I recognize the fallibility of our perceptions (I critique the a priorism of the Austrian School of economics on these grounds all the time). I'm a fan of the pragmatist approach. My conclusions certainly don't follow (I don't think) from a strict epistemology. That's just a good first-draft way of looking at it. I tried to demonstrate in the second post that the prospects for knowing God don't improve when you start introducing these qualifications. They only improve if you invent ad hoc epistemologies specifically designed to assume your own conclusions (ie - Mike D's brief rendition of Platinga's model which uses the Holy Spirit - the existence and nature of whom we're trying to get at! - as a source of knowledge in its own right). Anyway, so I didn't intend this to be a stuck-in-the-18th-century epistemology flame war, and I hope it's progressed from that point. My point is only this: that belief in revealed religion is belief that we authorize ourselves to have, not belief that we are externally justified in having. This is faith and I still maintain that it's not that revolutionary of an insight.

My second concluding point is one that I haven't worked out completely, but that I'm thinking through. I think revealed religion is ultimately something of a Gettier Problem. A lot of this discussion has revolved not around substantive knowledge that anyone has of God, but around the prospect of substantive knowledge. The point, however, is that religions are not built on the prospect of knowing something. So we have a belief system that people hold to, that may very well be true, but where whatever justifications they think they have for believing what they do probably aren't valid justifications. All they really have is faith - self-authorization to believe - but that makes 21st century Westerners uncomfortable so they invent justifications for their belief which are not justifiable, but the belief itself may nevertheless still be true and justifiable by means of knowing that the believer isn't privy to. That sounds like a Gettier problem, which is ultimately a question of knowledge-semantics itself. But the dynamics of the Gettier problem - the question of who really knows what and on what basis, and the prospect of truth in the absence of justifiable evidence - seems to be relevant here. Does anyone know if anyone has done work on the Gettier problem as it relates to revealed religion?

OK - that's all for me on this subject for now.

The implications of zombies...

Daniel Drezner contemplates the implications of zombies for foreign policy. It of course impacts our understanding of economics as well. Discount rates and therefore interest rates could do a lot of things - they could go down (if zombies are going to be market participants), but they could also increase (you're going to place a high premium on the present if you could be eaten soon). Overlapping generation models are going to have to be completely recalibrated if agents can be reanimated. The impact on productivity is ultimately going to depend on whether we're dealing with fast zombies or slow zombies. There's a lot to chew on here. Any other concerns?

Weimar Memories

Evan recently was asking me about the source of German austerity and I gave him the standard line - hyperinflation in the 1920s. That's not wrong - that is what's on their minds - but Matt Yglesias does a good job at outlining why even that is pretty bad history.

Hyperinflation has a very well understood cause, and an equally easy to understand solution - it is caused by resorting to the printing press for revenue, and it is solved be refraining from resorting to the printing press for revenue. That's exactly what happened in Germany. Now, whether the Weimar Republic was as rosy after the printing press was reeled in as Yglesias says it was, I'm not personally qualified to say.

His point is that the real German disaster came with the Great Depression, and that this obsession with the hyperinflation isn't just a question of German experiences vs. Anglo-American experiences - it's actually a misreading of the German experience itself. We discussed the austerity program of Heinrich Brüning (pictured, right) in an earlier post (contra some claims about him by Jonathan Catalan), which worsened the Depression in Germany. And perhaps Brüning's actions were understandable, since he had the hyperinflation fresh on his mind. But nobody after him had that excuse. It was Brüning's disastrous austerity program that in part lead to the rise of the National Socialists.

So we need to be careful when we talk about the Germans. A lot of us say "well, they had some tough inflation that we've never had to deal with so ultimately it's just a cultural thing - that's just part of being German". An honest reading of the history suggests that that's probably not valid. Granted, their reasons for reading the history that way are still understandable. I'm not surprised that they remember the disaster of the early 1930s as something other than the onset of the Great Depression. It's understandable, but still a shame - because it was a demand-deficient economy that brought Hitler to power, not a hyperinflationary one.

A race to the bottom is no way to justify a cosmic order

There is a collection of related points that I had left unsaid and that came up in the comments that I wanted to address here.

Often in discussions, the strategy of choice isn't to elevate your point, but to bring the other person's point down. For example, in the comment section of this post, Mike D challenges what he alleges is my "classical foundationalism" on the ground that it is itself inadequate. Foundationalism itself, he argues, isn't basic or axiomatic. There's no obvious reason to take a foundationalist approach so it fails its own standards. I can agree with this to a certain extent. I'm not a strict foundationalist, and I've felt a considerable degree of safe harbor in a lot of pragmatist material that Evan has passed on to me. I'm pragmatically an empiricist and a rationalist, so I'll agree to the reservations that Mike D shares. So where does this leave us? Certainly without a proof God! Simply with a disproof of an argument for a lack of proof of God. Which if I've kept this all straight in my head is still a lack of proof of God. My claim was that we have no reason to claim knowledge of any revealed religion. We are not justified by any standard of knowledge to make those sorts of claims. If we eliminate all standards of knowledge that claim of mine still stands, doesn't it? Indeed, it stands even more firmly!

It seems to me this is all very similar to (although not quite the same as) a skeptic's "brain in a vat" argument... or for the kiddies, one might say that we're "plugged into the Matrix". We can't trust our reason and our observation - they could both be fooling us. So where does this leave us? Well, as I said before it still leaves us with no firm knowledge of revealed religion, but I at least have a pretty good basis for knowledge of the Matrix, right (at least a pragmatically viable basis)? If this is all just a dream world at least it is a dream world I can make claims about. Where does it leave a believer? Still without knowledge of revealed religion, still authorizing himself to believe what he believes, but now with an accusation that all I really know is the Matrix... ok, but at least I know something that I work and operate in on a daily basis. The initial question - the question of our knowledge of God - is still exactly where we left it.

I'm a big fan of Christopher Hitchens. Some of the work of his I'm least attracted to, though, is his work on atheism. It's not very sophisticated, it can be unnecessarily aggressive, and it's largely dependent on metaphors and analogies (sometimes I feel like I'm going to puke if I hear him use the phrase "celestial North Korea" again). But there are a few things about his approach to religion that I like, one of which is his persistent refrain that "even if we grant X, then all your work is still ahead of you". He often raises this with things like the cosmological argument that we brought up earlier in the comments. He explains why he thinks it's unconvincing, but then says that even if he were to be convinced "all your work is still ahead of you" in making that knowledge useful from the perspective of revealed religion. Who is this shell of a God you've just demonstrated with this medieval logical display? How can we fill him out? What is his character? Is he even still here or did he pass from reality long ago? What does he think of us? What is his name? Even the answers to these questions (which I have no idea how one might answer) won't get you much farther than a vague Abrahamic tradition, if that. If we allow absolutely everything that Evan, Mike D, and Christopher Lake have insisted on - every sui generis epistemological get out of jail free card - we still get to a modest deism at best. That's not revealed religion! "All your work is still ahead of you," guys! And again - this is my fundamental point. We cannot know revealed religion. We authorize ourselves to believe it. And I can't stress enough that this is not some outrageous statement that I'm making. It's what (in my mind) the best positioned and most firmly founded revealed religion on the menu (Protestantism) claims for itself clearly and emphatically. Sola fide might be epistemologically inadequate, but at least it's honest and consistent.

This speaks to Evan's point too about valid and non-valid religious axioms. Perhaps assuming the authority of the Old and New Testament specifically is a bit of a stretch, he says, but we can axiomatically identify "scripture" as "a text that is spiritually authored and inerrant" (or whatever else you want to attach to the definition). The same can be said of God - perhaps we can't axiomatically claim anything specific about God, but we can definitionally identify God. This is no different from "all bachelor's are unmarried". Every man on Earth could be married and that would still be a valid axiom. So I'm perfectly willing to axiomatically define God and scripture in this way, and accept those axioms. But again, "all your work is still ahead of you". We still don't know if such things exist even though we've defined them. And even if we knew they existed "all your work is still ahead of you" because once again you only have a modest deism. Where is the knowledge of revealed religion? We still don't have it. We're still authorizing ourselves to believe these various and sundry claims that are mixed and matched by various people across the face of the Earth.

I think people are so busy poking holes in what I've said about epistemology (which is completely valid - I'm no philosopher), that they haven't realized that their case is still left unmade. And that was really my point from the beginning - that there is no case to make. The authority for these beliefs comes from one place - from ourselves. Just be honest about it.

A Firm Foundation? Knowledge of Revealed Religion

The other day Evan and I got into a discussion about proof of religion, and I wanted to bring it over to the blog. The spark for the discussion was this post about a blogger who decided to convert from the Presbyterian Church of America (a more conservative brand of American Presbyterianism) to Roman Catholicism. Evan actually has a very good comment on the blog critiquing the fault that the convert found with the Presbyterian Church. My bigger concern was this statement (again, from the convert):

“Should I just continue to form opinions and interpretations
with lots of prayer and reflection? Should I just do my best to be part of the
group I feel conforms most closely with Scripture? No, I can't because any
options within this paradigm of Sola Scriptura lead to the same fateful
conclusion that I am my own authority.”

My concern with this approach – and the implicit claim that Catholicism would remove this autonomy – is the fundamental problem that it doesn't recognize that all revealed religion is self-referential and its “own authority”. If we take revealed religion at its word, then the self-referencing authority is a being of some sort. If it’s an all-powerful being, then perhaps that’s reason enough to submit. But the point is, what we’re trying to get at the truth of is precisely the reality of this being. If we’re unwilling to take revealed religion at its word (which presumably we aren’t if we’re asking the question “what is true?” in the first place), then what is self-referencing is the revelation itself. Having lost the author of that revelation we come back to this convert’s initial conundrum: any conclusion based on revelation is going to be a conclusion derived from our own authority, our own interpretation – from ourselves. This is the heart of what it means to have "faith" - it is to trust in your own authority and assessment of something that you have no other evidence for. If you have faith in something someone else told you, then you are authorizing them to provide you with truth, but you are still the source of any authority that you actively or passively ascribe elsewhere (to a text, to a cleric, etc.).


Standard Epistemological Foundation 1: Rationality

Traditionally, standards of what is considered "knowledge" have had to be based on more external foundations. We derive knowledge logically that is indeed contingent knowledge, but it is still independent contingent knowledge. Given a set of axioms and given a set of rules, we say that a deduction is true. This knowledge is contingent on these givens, but it is independent insofar as (1.) the axioms are not argued from authority, but from consensus and mutual agreement, and (2.) there is consensus and mutual agreement on the rules of logic. Nobody can assert axioms or rules on his own authority or on the authority of some magisterium. Moreover, the useful knowledge that we derive in this way is derived. We don't consider the axiom itself to be useful knowledge so much as tautological or definitional knowledge. In Real Analysis, you start with the "field axioms" - all the various real number properties, the existence of the additive identity, the existence of the additive inverse, etc.. Likewise, we axiomatically claim things like "all bachelors are unmarried". The claims of revealed religion (authority of scripture, apostolic succession, reality of God) are treated as axiomatic in this sense (and we can think of theology as the body of knowledge derived from these axioms), but there is a problem with this. Axiomatic claims are supposed to be simple, basic, tautological or definitional if possible, and a starting point of broad agreement and concurrence. Or, if not broadly agreed upon at least useful assumptions (neoclassical economics, for example, is built up from some dubious axioms that we explicitly assume - but then the conclusions we derive are tested for veracity).

With revealed religion or theology, the axiomatic presupposition is in fact exactly what we want to prove! God is assumed. The authority of scripture is assumed. And details are derived from there. This, of course, is backwards. It's a way of churning out volumes of doctrine, but it's not a way to find assurance of the most important questions: is there a God? and has He interacted with us? These important questions are just asserted and the less important questions are the ones that are derived or proven (if we choose to think of the tenets of a faith as axiomatic).


Standard Epistemological Foundation 2: Empiricism

Another epistemologically valid option is inference from empirical observation. This doesn't necessarily have to be rigorous if we're willing to attach an element of doubt. In other words, we can make valuable, useful inferences about the nature of water fowl without strict falsification if we keep in mind the possibility of a black swan. "Almost all swans seem to be white, but I guess there could always be a black one" is a piece of knowledge that we can work with and use in every day life, that is based on empirical evidence, even if it is weaker than the definitive "all swans are white". Revealed religion isn't based on this form of knowledge either. To the extent that people cite empirical evidence, it is exceedingly vague. It is a feeling or an intuition. For a moment we can put aside everything we know about brain chemistry and moments of euphoria, and simply observe that even if this intuition or feeling is genuine, it can't be conclusively attributed. Did it come from the Holy Spirit? Or did it come from Allah? Even assuming that it is a genuine external force acting on us, how do we have any confidence in attribution? Often, the confidence for believers comes from corroboration. An intuition is consistent with Scripture, for example ("test the spirits"). But what value is it to be consistent with Scripture? Again, the authority of Scripture is ascribed (either by oneself or by an institution to whom one attributes authority), not inherent. What revealed religion does is take a prefabricated understanding of the universe and overlays that on top of feelings and intuitions that on their own could not be ascribed to any source. There is something that objectively exists - a feeling, an intuition. That's not the problem and the observation of that feeling or intuition is not the problem. The problem comes from what sort of knowledge is derived from it. To put it in swan terms, revealed religion says "I see many, many white swans and I conclude that the white swans are black swans that have painted themselves white". The problem here isn't the observation per se (the observed white swans are analagous to the spiritual feelings or intuitions that I'm not trying to deny happen) - it is the fact that every important element of the knowledge that we try to derive from these feelings and intuitions is brought to the experience or speculated, and not inherent in the experience itself. Approaching our knowledge of revealed religion as an empirical endeavor is problematic for much the same reason that approaching it as a rational endeavor is: every informational contribution that meets epistemological standards (either rational or empirical) is vague and unattributable to any god, much less a specific god; every informational contribution that provides clarity, specificity, and significance is information that is assumed or self-referential.

This is all obviously extremely problematic. We like to think that the strength of an argument for the truth of a claim should be proportional to the significance of the claim we are making. "I am the Son of the one true God and I have come to Earth to be sacrificed, an act which will absolve your sins" presumably requires considerably more evidence than "the sky is blue". A casual, unscientific empiricism suffices for the latter. And yet the former many of us treat as axiomatic! Why? How? Scripture? That just regresses the problem back one step - what is the authority of Scripture? That too is axiomatic. The convert from Presbyterianism to Catholicism cited earlier is concerned with the shakiness of this step back to Scripture. His solution? The magisterium! But from whence does the magisterium derive its authority? God. And how do we know the magisterium derived its authority from God? Two ways: Scripture and that the magisterium told us so! It's all axiomatic! And unlike definitional axioms like the associative property or “all bachelors are unmarried”, these axioms are complex, specific, and ultimately precisely the points that we wanted to verify!

Conclusion

This may sound harsh to revealed religion, but it shouldn’t be understood that way. What I’m being harsh with are the claims of individuals who make inappropriate claims for revealed religion. Ultimately where all this leads us to is the self. Belief in revealed religion is belief in something that you authorize yourself to consider “true,” not belief in something that any established epistemological standard (either rational or empirical) allows you to claim is true. In terms of the truth-claims of revealed religion all authority is vested in the believer. Now, if those claims are indeed true, then perhaps other types of authority reside elsewhere – perhaps with God. But the claim itself by the believer is made on the authority of the believer. And that believer may delegate authority to a text or to a cleric or to a magisterium. This is what faith is – it is the self-authorization to believe something that you have no justification for believing aside from your own self-authorization to believe it (of course we can mix faith and evidence. I can say “I have faith that my wife won’t cheat on me”, which is based on observational evidence of her past behavior as well as a hope that I authorize myself to maintain for sentimental reasons, or just to keep myself sane).

Being serious and honest about the epistemological problems with revealed religion actually reinforces a lot of what (at least Christianity – particularly Protestant Christianity) has to say about itself. Whether faith is a wise choice is another question entirely, and I’m not even sure how one would answer that question.

I’d conclude with another hesitation – the point that what we are trying to understand here (the existence and nature of God) by definition eludes epistemologically sound verification. We are talking about an invisible or spiritual being that wants to let humans have a substantial degree of free will and free reign. It is a singular being supposedly – we don’t have lots of them to compare and look at, as we do with the classic case of the swans. It is a being that withholds judgment for quite a while. It is a being that said his piece two millennia ago and let a Spirit take the initiative from there. This is a being which, if we were trying to pursue empirically, we would not expect to get very far with. The noise swamps the signal. The appropriate response to this situation isn’t to declare its non-existence, but to say that we “fail to reject the null hypothesis”. We can’t make a claim one way or another, but we do declare that we are unable to embrace the affirmative.

Thoughts on Schumpeter

Richard Swedberg and Thorbjorn Knudsen use Schumpeter's ideas about combination and resistance to entrepreneurship as the basis of a new theory of entrepreneurship. Their ideas are presented in more detail in an earlier article here, in the journal Capitalism and Society. They suggest in the post that this theory of entrepreneurship can be developed into a business cycle theory, but they don't give much detail on how. I assume it's tied to the creative destruction associated with market innovation. For a policy-oriented Schumpterian perspective, see the Information Technology and Innovation Foundation, headed up by Rob Atkinson. I've been to a few of their events - it's a neat group. The group has one of those internet quizzes to figure out what kind of economist you are. The options are "supply-side economics, liberal neo-classical economics, Keynesian economics or innovation economics". I was "innovation economics" - the one they associate with Schumpeter. I imagine I fell out that way because what they call "Keynesian" was basically a mix of welfare-state liberalism and vulgar Keynesianism.

Book reviews...

I've actually found time to read recently, for the first time in a long time - so I am swiftly nearing the end of my book on the 1848 revolutions. Next is Roger Garrison's Time and Money - I suppose you might call it a non-technical formalization of Hayek's Prices and Production. That should go fairly quick too, because I have a long flight to Paris in a week and a half. I've been paying attention to some book reviews to see what I want to read next.

Colossus, by Michael Hiltzik, looks like a very interesting study of the Hoover Dam.

Ed Glaeser provides a really great review of Joel Mokyr's new book on the Industrial Revolution in England, called The Enlightened Economy. Mokyr cites the Enlightenment as the primary source of the Industrial revolution, although Glaeser is skeptical of leaning too hard on that conclusion.

Recently I've been doing a little more independent research on the work that my great grandfather did presiding over the Maryland Constitutional Convention in 1967 (this is sort of an ongoing, open-ended research project of mine). The new state constitution failed in 1968, in no small part because of the disruption caused by the assassination of Dr. Martin Luther King, and the subsequent riots in Baltimore, which were vigorously quelled by then governor Spiro Agnew (his response to the riots would put him on the presidential ticket with Nixon). The nebulous plans in my head are to one day write something about the failed constitution (perhaps for the 50th anniversary in eight years?), and I'm realizing that King's death is going to be essential for framing it. To that end, this review of a book on James Earl Ray, King's killer, looked interesting. Hellhound on His Trail, by Hampton Sides, traces a wandering Ray across the United States after he escapes from prison in 1967. He makes a few stops to (believe it or not) actually campaign for George Wallace as he tracks King across the country.

Here, Peter Osnos shares the news that the famous Politics and Prose bookstore in Washington is being sold. Its owners are getting very old and need to pass the torch. I haven't been yet, but I really need to stop by - it's supposed to be great.

I have a few other books I'm likely to read after Garrison. I've read a lot of economics this spring, so I think I'm going to turn back to history. Carl Becker's 1909 classic, The History of Political Parties in the Province of New York: 1760-1776 is at the top of the list. Becker provides an important appraisal of the clash of economic and social interests that eventually culminated in the decision to push for independence in New York. Becker's work set off a considerable amount of subsequent interpretation and debate by Charles Beard, Forrest McDonald, Bernard Bailyn, and more recently guys like Woody Holton. I've had a deep interest in the revolutionary period and the early republic for a long time, and I feel like I have to read this literature at some point - Becker seems like the best place to start.

Also on the short list are Friedman and Schwartz's Monetary History of the United States, although that is so long I probably won't take that up next. I've been meaning to read Rhy Isaac's The Transformation of Virginia: 1740-1790. Perhaps the first volume of Joseph Dorfman's The Economic Mind in American Civilization. Also looking at Jacob Cooke's Tench Coxe and the Early Republic.