Assault of Thoughts - 7/11/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

- Alexis Madrigal has a short piece on Bill Gates's contribution to the Aspen Institute's "Ideas Festival", and specifically talks about a "renaissance of technocracy, which had its first peak in America in the years following World War I", as well as Plato's philosopher-kings. Discussions of "technocracy" and especially "philosopher-kings" get well deserved sneers whenever they come up. I'd share in many of these sneers, but I will say one thing on behalf of technocrats: we need to be very careful to distinguish between "calculation problems" (which are a valid basis of critique of technocracy), and "incentive problems" (which may actually be a point in favor of a technocracy). I discuss the distinction between calculation and incentive problems at length in this series of posts. Too often, critiques of technocracy are mush philosophical drivel, rather than well thought out attacks.

- Raghuram Rajan of the University of Chicago (formerly of the IMF) has a post up on the causes of the crisis that cites skill-biased technological change and inequality. It was interesting to see this, since just yesterday I appealed to readers for information on "technological unemployment". Rajan combines two major explanations of the Great Depression cited at the time that never really made it into the economic canon. Only the inequality explanation has really resurfaced to explain the current downturn. Rajan takes the inequality argument in an unusual direction - he suggests that amelioration of concerns about inequality lead to an excessive reliance on debt, which drove the financial crisis. Another explanation that you hear that jives with Keynesianism is that wealthier people have a lower marginal propensity to consume, so as you concentrate more wealth in the hands of the wealthy, demand is depressed. I'm not qualified to assess Rajan's claims about debt and government policy - I just thought it was interesting that he cited both technological change and inequality. I think these may be potentially important - and if they're not, they're at least interesting arguments to read.

- I noticed Steve Horwitz's post at Coordination Problem on "Idle Cash" at around the same time that I got to Garrison's discussion of liquidity preference. I think Horwitz misreads Keynes on liquidity preference. Horwitz's critique amounts to the assertion that the "hoarding" that people worry about isn't really hoarding because the cash isn't necessarily idle. Keynes addresses this quite clearly in his chapter on The General Theory of Interest. In the first footnote of the chapter he highlights the fact that where we draw the line between "cash" and "savings put at interest" or "debt" is unimportant and largely hueristic. For his purposes, he suggests debt contracts of less than three months might be called "cash". So Horwitz (and Cowen's) point that "it's not really idle cash" misses Keynes's point entirely. Keynes is saying there is a continuum, but for the purposes of discussion we can pretend there is a dichotomy. In reality, it's not that some cash is idle and some cash is productive, and in a depression more cash becomes idle. In reality, the point is that all money except for the bills you have in your wallet is "productive" to some degree and "liquid" to some degree - and in a depression that money becomes less "productive" than it otherwise would have been and more "liquid" than it otherwise would have been. Horwitz works off the assumption that there is some sort of sharp dichotomy - Keynes and Keynesians do not.

- And speaking of liquidity, I was listening to NPR on the way to the grocery store yesterday and they had Chris Farrell, a personal finance guy and author of "The New Frugality" on. He was talking about... well... frugality, and discussing prospects for savers. He lamented the fact that interest rates are so low and said "this is good news for borrowers, but it's bad news for savers - you're going to do about as well putting cash under the mattress as you are putting it into a bank account". From his personal finance perspective, that was the only relevant point to be made. I was listening to it and thought "See! Even people that aren't doing macroeconomics can grasp the fundamental point of the liquidity trap! It's not that hard!". And speaking of the liquidity trap, Jonathan Catalan has a new post up on it. I still think the whole issue gets a lot more press than it really needs to, but it's still an interesting little nugget from the General Theory. Unlike some people, the liquidity trap does not frame or define my view of depressions.