Thursday, September 30, 2010
It all starts with two really great posts from Krugman essentially saying:
1. "war is not moral, and when I say it had X, Y, and Z effect on the economy I want to make clear I am not saying that makes it moral", and
2. "war destroys wealth and destroying wealth hurts the economy".
Two very clear points. Today, Steve Horwitz writes a post that links to the first post of Krugman's I mention and essentially says "Krugman thinks war is morally acceptable because he thinks it did X, Y, and Z to the economy"
I have no idea what Steve was thinking when he wrote this. Disagree with his macroeconomics - fine. Take issue with the aggregates - fine. Reason through all that and talk all that out. But how could you possibly ascribe that ethical perspective to Paul Krugman while linking to a post where he says exactly the opposite, and failing to cite a post where he makes Bastiat's point?
This Krugmania (which I mentioned a couple days ago too) is nothing short of bizarre and it's substantially lowering the quality and productivity of the discourse in the economics blogosphere. It's not good. I leave a comment with some pointed questions for Steve on Coordination Problem where he shares the post.
UPDATE: To throw a monkey wrench into the collection of about half a dozen monkey wrenches that Steve has already thrown into this relatively straightforward point, I also want to note that it was probably a good thing we entered WWII, wasn't it? This is just one war and there are lots of unjust wars - and even with this one war we would obviously all be wealthier if fascism didn't threaten three continents to begin with - but given that fascism did threatent three continents... well... there are some things worth killing and dying for, aren't there? I think so. Anyway - this is a little besides the point. Krugman's point is that regardless of the moral content of the war, the war had certain economic impacts that we can talk about scientifiically. That doesn't "make war moral" - but I also want to stress that it doesn't make entering WWII a bad idea. Unless my readers are all with Pat Buchanan on this, I thought this point should be clarified. So for the record, Daniel Kuehn firmly believes that fighting fascists who aggressively conquer multiple democratic republics is a good thing.
Don't believe everything you read on blogs that have an interest in getting the facts wrong to support their position...
Here, David Beckworth points out how weak we've been on monetary stimulus.
But again, you wouldn't even know it reading some people.
1.You find it hard to be enthusiastic for something until you know that others oppose it.
2.You have little interest in getting clear on what exactly is the position being argued.
3.Realizing that a topic is important and neglected doesn’t make you much interested.
4.You have little interest in digging to bigger topics behind commonly argued topics.
5.You are less interested in a topic when you don’t foresee being able to talk about it.
6.You are uncomfortable taking a position near the middle of the opinion distribution.
7.You are uncomfortable taking a position of high uncertainty about who is right.
8.You care far more about current nearby events than similar distant or past/future events.
9.You find it easy to conclude that those who disagree with you are insincere or stupid.
10.You are reluctant to change your publicly stated positions in response to new info.
11.You are reluctant to agree a rival’s claim, even if you had no prior opinion on the topic.
12.You are reluctant to take a position that raises the status of rivals.
13.You care more about consistency between your beliefs than about belief accuracy.
14.You go easy on sloppy arguments by folks on “your side.”
15.You have little interest in practical concrete implications of commonly argued topics.
16.Your opinion doesn’t much change after talking with smart folks who know more. [maybe, but this is tough to assess because there's usually ample "smart folks who know more" that agree with me and "smart folks who know more" that disagree with me - so attributing this accurately is a little hard]
17.You are especially eager to drop names when explaining positions and arguments.
18.You find it hard to list weak points and counter-arguments on your positions.
19.You feel passionately about a topic, but haven’t sought out much evidence.
20.You are reluctant to not have an opinion on commonly discussed topics.
It bothers me most when people fail on #11 and #18, and these are two things that I consciously try to succeed at. You only shoot yourself in the foot if you don't familiarize yourself with the weaknesses of your own argument. You open yourself up to having other people raise the point - it's always better to raise the point yourself and acknowledge not everything is worked out yet. Number eleven is pointless too. Some people have a need to disagree with those from a "different school of thought". I think that's extremely dangerous because (1.) it could create superficial differences where there really aren't any, and (2.) it's not really clear whether you've thought through someone's claim or just opposed it because they support it.
- Mark Thoma on the fact that "depression economics" should be a part of regular economics. One of the oddest misconceptions is that traditional Keynesian economics "dominates" economic education. It really doesn't. I got some of it in undergrad, but I didn't get any of it in grad school that I remember (Tom, if you're reading correct me if I'm wrong - Joutz certainly didn't cover any of those chapters in the Romer text). Anyway, needless to say I agree with Thoma.
- Arnold Kling has some critiques of Murray Rothbard and Austrians in general. He starts with an interesting prediction of Rothbard's coming out of the 80s that went horribly wrong. A counter-part for the Austrians is 1921 and 1946, which they regularly use as "disproofs" of Keynesianism. The thing is - no Keynesian that I'm aware of is really all that surprised by either episode (except Samuelson at the time, of course). We have a pretty obvious explanation. What is the explanation for why Rothbard's prediction went so wrong? Is there one, or no? Further down in the post, I think Kling uses "prophetic" a little too liberally.
- Evan has a good new post on his blog about Stephen Hawking and God.
- Does anyone know of a good online resource for sample GRE math questions? I've got a second test scheduled for October 25th. I had a 750 on the last one, but I got a 780 out of undergrad (scores are expired now, though) so I think I can do better, and I've heard 750 described as "on the edge" of what's considered by schools. Anyway - I got a new book that's more recent and more focused on harder problems than my old one, but I don't think all the practice problems in the new book are going to last me until the 25th! Going for gold on this one.
"Assault of thoughts" joke: "Two peanuts walk down a dark alley... one was a salted"
I don't know much about the dissipation rates of signals we send out, but if this "Goldilocks planet" (not too hot, not too cold - good for liquid water) is twenty light years away, we need to be bombarding it with signals. If there is intelligent life there to receive it and send something back, we could hear back before I die.
... oh and just to keep this all economics-relevant... bombarding planets with signals that will take no less than 40 years to hear back from is not something that market forces can optimally provide. Markets are tools - and you use the right tool for the right job. You don't use a hammer to bang in a screw and then yap about how dedicated you are to hammers - that makes you look dumb.
Wednesday, September 29, 2010
I've written on the importance of time for political philosophy and economics many times before. Two recent posts brought it to mind again.
1. Don Boudreaux shares this excellent article by Bart Hinkle on voluntary and involuntary obligations. This is the comment I left about it on Don's blog (my argument should be familiar to people who follow my thoughts on this sort of thing on this blog):
"Really excellent - I think Nozick's approach to these questions that Hinkle applies is very important, my only concern is that I think people underemphasize the fact that any voluntary contract is going to be constrained by a rights structure that is imposed on us institutionally/externally. You can't contract without an understanding of rights, so the question becomes "do I get a say in what my rights are?". You clearly don't - that institutional framework is exogenous, although clearly always changing and evolving.
This is why I like the contractarian approach of a lot of libertarians (as opposed to the approach of guys like Rawls) and I identify with it, but I don't think it has pushed the institutional understanding of what a "voluntary contract" would really mean far enough (at least in what I've read and seen people argue - I'm not claiming to be an expert).
I think one of the more important pieces that should be brought along with Nozick is a short essay that Dewey wrote in 1935 about property rights - I forget what it was called exactly. It was essentially making the same point that I did above - that what you can "voluntarily contract for" is dependent on a structure of rights, and the framework of rights that you operate in is externally determined (forced on you, as it were) as well. So if these are "voluntary contracts", they're only "voluntary" in a superficial sense. In addition to the rights structures we inherit, there are also presumably endowments (monetary, genetic, etc.) that constrain our "voluntary" contracting.
The solution, I think, is a Buchanan type approach - constitutionalism. That doesn't solve all problems, of course (you can still ask "was the constitution passed in a just way?", "are future generations constrained by the constitution?", "is the constitution ethical?") - but it at least addresses the problem of the structure of rights under which we voluntarily contract head-on. And ultimately I think that's all we can ask for."
2. Peter Boettke shares this interesting looking paper by Nathan Nunn. It's a survey of the literature on the long-term impact of historical events for economies (ethically the Earth may belong to the living, but in actuality it often does not). I haven't read it, but this is the abstract:
"This article provides a survey of a growing body of empirical evidence that points toward the important long-term effects that historic events can have on economic development. The most recent studies, using microlevel data and more sophisticated identification techniques, have moved beyond testing whether history matters and attempt to identify exactly why history matters. The most commonly examined channels include institutions, culture, knowledge and technology, and movements between multiple equilibria. The article concludes with a discussion of the questions that remain and the direction of current research in the literature."
2. The UN apparently appointed an official ambassador to alien visitors. The only problem is, the appointed ambassador appeared to be out of the loop on the decision, and SETI has some bruised egos over it.
All of this is great stuff because right now I'm reading Lovecraft's The Whisperer in the Darkness (1931) - which is a part of his transition from supernatural horror stories to science fiction and explicit extraterrestrial stories. In The Whisperer in the Darkness, we're faced with the fungi from Yuggoth (also the subject of an earlier poem by Lovecraft). Yuggoth is intended to be Pluto (identified in the book as the undiscovered planet beyond Neptune) which was discovered in February 1930, the very month Lovecraft began writing the story. I'm really enjoying it - it's shaping up to be one of my favorite stories from him yet - better even than The Shadow Out of Time, which I enjoyed a lot.
I'll start with a man that has an entire blog dedicated to willful misreadings of Paul Krugman -
And a crowning example is one I think almost all readers of this blog have heard at one point or another before: that Krugman supports war to end depressions. Krugman himself - who I'm sure never even reads through some of the critical blogs I read through - is shocked anyone even took the point that way, and spends two posts outlining why that's wrong, and why it's wrong to say that we prospered after WWII because everybody else's economy was in shambles. I've regularly argued on here that some of Bastiat's loudest supporters have no idea what Bastiat actually said - Krugman provides a nice illustration here, describing a real application of Bastiat, rather than the mangled, ham-fisted attempts to apply it to fiscal stimulus.
I guess what inspired this was not just
Why? What is your deal people? The only people I complain about as much people complain about Krugman are the hosts at Cafe Hayek. But I'm pretty clear that I complain about them because they're libertarians and because they make poor arguments against Keynesianism - not because I invent things not to like about them (like that they think we live in a zero-sum world or that they don't like Adam Smith or that they want war).
This Krugman thing is a gigantic mystery to me. I get why you don't agree with him - that's perfectly fine. Why do you harbor such resentment towards him and willfully misread him? Maybe it seems normal to you, but it comes across as pathological to everyone else.
Tuesday, September 28, 2010
- Jonathan Catalan blogs on Callahan and Murphy's arguments about overproductionism. He is not convinced. Recently I've found overproductionist arguments quite interesting. Unlike underconsumptionist versions of the "general glut" they're usually more riddled with fallacies (although underconsumptionist point have certainly been made badly too). But they were extremely popular at one point in time. I have two general thoughts on overproductionism: (1.) I think it's hard to talk about overproductionism without introducing money and prices, and even then it's hard, and (2.) when we say "overproduction" what we often really mean is an overproduction of everything relative to the utilization of labor (and sometimes money as well). The classic response to the Malthusian point is that an overproduction of one thing means an underproduction of something else. I'm not sure if that's strictly true or not, but if what is "underproduced" is labor, that doesn't exactly mean that everything is fine. That's the whole problem! The question is - will the market right itself, and how quickly? A lot of the people talking about overproductionism in the early twentieth century focused on what is done with the labor that wasn't being used. The answers ranged from unwanted unemployment to productive and cultured leisure, to further application in the labor market (raising living standards). The final option of course was only available to people who did not think there was a shortage of effective demand (which is of course where Jonathan and I probably differ on some occasions).
- Menzie Chinn writes about crowding out (or the lack thereof). A while back Steve Horwitz wrote a blog post about how stimulus proponents forget about the problem of crowding out (how else would they advocate a stimulus?). It always amazes me that looking at the situation and concluding that crowding out is not happening is tantamount to "forgetting about crowding out" to some people. It's the same with Krugman and DeLong - if you follow them, they talk about crowding out quite regularly. This is certainly on people's radar screens.
- Frances Woolley talks about how it's getting harder to publish in economics. Well that's not encouraging! Hopefully this provides an incentive to publish journals more often, expand them, expand online content, etc.
- Evan shares an interesting looking arts promotion project in Hyde Park, his new home.
- If anyone knows any good sources on Bertrand Russell's views on economics or his interaction with the Cambridge economics department, I would be very interested in hearing about it.
Monday, September 27, 2010
So what the hell - I'll probably try again in October. I just choked early on the test, but then rushed through and had ten minutes left for the last two questions! Keeping my composure could have probably gotten me the same score I got back in undergrad. The material wasn't particularly bad - like I said I just choked.
I've promptly forgotten what my verbal score even was - and I only finished two and a half hours ago. It really doesn't count for much in this business. It was fine, I just forget what it was.
By the way - any advice on applying to grad schools for the next couple months would be greatly appreciated. I'm applying to U. Maryland (College Park), Johns Hopkins, Georgetown University, and American University. That offers a good range of acceptance challenges, I think. I took a lot of the graduate econ sequence at George Washington Univeristy while I was getting my master's in public policy, so it seems silly to apply there and retake that. Kate and I are pretty wedded to the Northern Virginia area (and she just started a new job here), which explains the narrow range of schools I'm applying to. Needless to say, George Mason University is doing a lot of interesting work, but I don't think it would be a good fit for an investment as substantial as a doctoral program. I'll show up to events, exchange with them on blogs, and interact where I can, but I don't think it would be a good idea to attend.
So where are all you guys on this one? It's hard to see but it says "It is proposed that this article be deleted because of the following concern: Pure OR, no sources. Page has existed for nearly a month with no attempts to improve or expand." The entire post consists of "Regime uncertainty is when business is tepid due to unknown governmental influences. Business tends to invest and grow in stable economies. A government making big changes in the economy produces uncertainty and tend to increase business trepidation, which freezes job growth and overall business growth." What's the matter guys? You can only spend time defending semi-plausible arguments but not muster any energy to defend over-emphasized ones? You usually see the excessive Wikipediaing on controversial topics - is it that nobody talks about this so it's not worth talking about? I don't get it:
That seems absurd. Violence is an extreme recourse, even for a state, isn't it? What about private citizens that own guns? Ultimately, when the cards are down, they'll put someone at gunpoint to get something they want. It's an extreme reaction and it's a reaction that they rarely engage in, but ultimately the use of violence is the ultimate defense and enforcer for a private citizen, is it not? That's why we have the Second Amendment - so the government can't weaken that absolutely essential method of recourse. But you don't say "if a private family isn't willing to get something at gunpoint they have no business doing it". Kevin Williamson is suggesting that the law of the jungle is all there is and that we should judge institutions by the absolute most extreme action they might take. What a poorly reasoned argument!
Why don't we talk that way about private citizens? Why don't we say that private citizens should only be doing what they're willing to defend at gunpoint? Because we live in a society governed by contract, institutions, and norms of behavior. That's what allows us to transcend the law of the jungle. The thing is, the government exists in that society as well. Indeed, with the police force and the courts the government is part of the vast web of emergent institutions that make things like contracts possible.
Kevin Williamson's intellectual sloppiness reveals one of the biggest problems with modern libertarianism: it's obsession with "the state". Nobody talks about government more than libertarians. Why? Because they see it as some sort of alien institution rather than an emergent institution. They think about the state categorically, that blunts their arguments, and they sound ridiculous in the process and don't even realize it; instead, they think stuff like this is deep and insightful.
This is the problem with "road to serfdom" type thinking as well. As soon as you let this piece of categorical confusion in "the road to serfdom" follows easily - it's not exactly a tough argument to piece together. And you get people like Kevin Williamson sputtering about social democracies and Economist letter writers: "Well, bully for northern Europe and journalists with anecdotes! It’s not as though gunpoint politics has no history in Europe: Wait for the next all-European war and let me know how the Dutch and the Danes do."
Now he's just sounding like a garden variety conservative. I'll acknowledge good libertarian arguments when I hear one. There's a lot about the state that cannot be defended and I don't try. This isn't one of those good arguments and I'm baffled that so many people are linking it favorably.
Sunday, September 26, 2010
I was skimming through Lawrence Goodwyn's The Populist Moment for a small project I'm involved with on populism (I'll provide more detail later this week), and it quoted a Jefferson line that would have driven Bob Higgs crazy:
"I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength, and bid defiance to the laws of our country"
Granted, that's 1816 and Jefferson was long out of office, but there are comparable cases when he was in office. We seemed to have muddled through that Jeffersonian regime uncertainty without a major depression.
I thought readers of this blog would be interested in a brief reference to Hayek and Robbins:
"But the real joke of course is, that all this isn't a matter of choice anyhow! Capitalism is dying from internal as well as external causes, and its own leaders and beneficiaries are less and less able to kid themselves. I'm no economist, but from recent reading I've been able to form a rough picture of the dilemma - the need to restrict consumers' goods and to pile up a needless plethora of producing equipment in order to maintain the irrational surplus called profit - which has caused orthodox economists like Hayek and Robbins to admit that only starvation wages and artificial scarcity could stabilize the profit system in future and avert increasing cyclical depressions of utterly destructive scope. Laissez-faire capitalism is dead - make no mistake about that. The only avenue of survival for plutocracy is a military and emotional fascism whereby millions of persons will be withdrawn from the industrial arena and placed on a dole or in concentration camps with high sounding patriotic names. That or socialism - take your choice. In the long run it won't be the New Deal but the mere facts of existence which will be recognized as the real and inevitable slayer of Hooverism. Nobody is going to "destroy the system" - for it has been destroying itself ever since it evolved out of the old agrarian-handicraft economy a century and a half ago." [letter to Catherine L. Moore, Feb. 7, 1937]
As he says - certainly a "rough picture" - but I was somewhat impressed that he identified the LSE position with respect to consumption and investment. Consider this passage from a 1932 letter to the editor by Hayek and Robbins recently posted by Mario Rizzo:
"On the question whether to spend or whether to invest our position is different from the signatories of the letter which appeared in your column on Monday [by Pigou, Keynes, and various other Cambridge economists]. They appear to hold that it is a matter of indifference as regards the prospects of revival whether money is spent on consumption or on real investment. We, on the contrary, believe that one of the main difficulties of the world today is a deficiency of investment - a depression of the industries make for capital extensions etc, rather than of the industries making directly for consumption. Hence we regard a revival of investment as particularly desirable."
I extended the selection from the Lovecraft letter beyond the mention of Hayek to highlight Lovecraft's position on fascism. It's been very encouraging to read his later letters where he has unequivocally turned against fascism and the Nazis (and for that matter, he doesn't talk about racial inferiority as much either - although I'm guessing he still maintained those views). In the early thirties he treated the Nazis as fascinating curiosity. He never liked them per se. He always talked about how crude and ultimately dangerous Hitler was. But he would regularly allude to the fact that they were on to something because society could not undergo a Communist revolution but it had to be more forcefully commanded. By '35, '36, and '37 that seems to have faded away completely. In the early thirties he would use "Marxist" and "Communist" as an epithet for leftists who he thought dangerous. Now, in '36 and '37 he uses "fascist" and "Nazi" as an epithet for right-wingers. He makes references to "Wall Street Nazis", for example. The early romance with fascism has faded, and I have to say I'm relieved. Lovecraft has grown on me. I know he died eighty years ago, so even if he had a soft spot for Hitler until the end it's not like that should really affect me, and it's not like that would change how fascinating and brilliant he was. But it is nice to know the brief infatuation did seem to come to an end.
Friday, September 24, 2010
The conclusion? 1.80, until late 1941 when it hit capacity constraints and was reduced to 0.88.
I'm going to try my best to skim this this weekend and maybe comment further, but what I want to stress is how unsurprising everything we know about multipliers is. When you look in demand constrained times it's high, when you look at it in normal or supply constrained times (Barro) it's low. It would shock me not to see that. The estimate is counter-cyclical (there was a VoxEU article recently on this - I'll try to track it down). It would shock me not to see that. It is high before capacity in manufacturing is hit, and then drops once you hit that capacity constraint (you can only build so many tanks with the existing facilities before hitting supply constraints and crowding out kicks in).
Is this a good paper? I don't know - seems like a surprisingly short time frame to estimate a multiplier. I'm interested to see how they do it.
But I haven't really been surprised by much of anything I see like this. Rapid recovery in 1921 and 1946? Entirely understandable and explainable. It would be surprising not to see that.
This doesn't mean unbalanced capital structure or investors scared of political rhetoric don't matter for anything. It's plausible they do. But until I see better empirical tracking of those concepts and until one of my priors gets upset, I'm going to continue to be a Keynesian that thinks Hayek had some great insights and not a Hayekian that thinks Keynes had some great insights. It is the single best framework we have. Period.
When Charlie Chaplin met Mahatma Ghandi in London, he told him that he did not understand the reason for using such a crude device as Mr. Ghandi's hand spinning wheel when modern machinery seemed better for the purpose. Mr. Ghandi explained that it was necessary to provide occupation for India's millions and that modern machinery would leave them with too much leisure. "We might install modern looms like they have in Lancashire," he said, "but then we would produce more than we need and enforce idleness upon some other part of the world as a result of our overproduction."
Not much to disagree with at all in the first several sentences. That's to be expected - lot's of good upbeat talk about what America is and stands for, etc. That's followed of course by obnoxious partisanship - more of the regular confusion that because they don't like what's been going on "the American people" don't like it. I hate this sort of talk, but whatever.
And that's of course followed by a lot of promises. Some are relatively innocuous and vacuous - of the "cut pork" variety. Some are insane - of the "balance the budget" variety. It's the predictable hodge-podge. A nice melting pot of bad ideas, forgettable ideas, fear-mongering about Democrats, and laudable shout-outs to individualism and federalism. Normal politics, essentially.
This, though, is an excellent idea:
"Adhere To The Constitution: For too long, Congress has ignored the proper limits imposed by the Constitution on the federal government. Further, it has too often drafted unclear and muddled laws, leaving to an unelected judiciary the power to interpret what the law means and by what authority the law stands. This lack of respect for the clear Constitutional limits and authorities has allowed Congress to create ineffective and costly programs that add to the massive deficit year after year. We will require each bill moving through Congress to include a clause citing the specific constitutional authority upon which the bill is justified."
We are a constitutionally illiterate culture and that is not a good thing. There have been republics before, constitutions before, federations before, and democracies before. On their own all of these have major liabilities. Perhaps there have been constitutional, federal, democratic republics before the United States, but there are much fewer examples. That's what we offer, and that's one of the factors that has made us so successful. I think you see a lot of constitutional ignorance. The Tea Party and Tim Geithner stuttering during his Congressional testimony are only the two most prominent examples. I don't expect we'll always agree on what constitutes "constitutionality", but constitutionally justifying it in legislative language will help us deliberate over it and think about it and talk about it in a way that we often don't.
For the most part, modern economists know Gesell because of Keynes. I'll quote Keynes on Gesell in its entirety because it's a neat little section of a neat little chapter in The General Theory. He has some interesting things to say about economists that fly under the radar, "crackpot" ideas, and Marxists here too:
It is convenient to mention at this point the strange, unduly neglected prophet Silvio Gesell (1862-1930), whose work contains flashes of deep insight and who only just failed to reach down to the essence of the matter. In the post-war years his devotees bombarded me with copies of his works; yet, owing to certain palpable defects in the argument, I entirely failed to discover their merit. As is often the case with imperfectly analysed intuitions, their significance only became apparent after I had reached my own conclusions in my own way. Meanwhile, like other academic economists, I treated his profoundly original strivings as being no better than those of a crank. Since few of the readers of this book are likely to be well acquainted with the significance of Gesell, I will give to him what would be otherwise a disproportionate space.
Gesell was a successful German merchant in Buenos Aires who was led to the study of monetary problems by the crisis of the late ’eighties, which was especially violent in the Argentine, his first work, Die Reformation im Münzwesen als Brücke zum socialen Staat, being published in Buenos Aires in 1891. His fundamental ideas on money were published in Buenos Aires in the same year under the title Nervus rerum, and many books and pamphlets followed until he retired to Switzerland in 1906 as a man of some means, able to devote the last decades of his life to the two most delightful occupations open to those who do not have to earn their living, authorship and experimental farming.
The first section of his standard work was published in 1906 at Les Hauts Geneveys, Switzerland, under the title Die Verwirklichung des Rechtes auf dem vollen Arbeitsertrag, and the second section in 1911 at Berlin under the title Die neue Lehre vom Zins. The two together were published in Berlin and in Switzerland during the war (1916) and reached a sixth edition during his lifetime under the title Die natürliche Wirtschaftsordnung durch Freiland und Freigeld, the English version (translated by Mr. Philip Pye) being called The Natural Economic Order. In April 1919 Gesell joined the short-lived Soviet cabinet of Bavaria as their Minister of Finance, being subsequently tried by court-martial. The last decade of his life was spent in Berlin and Switzerland and devoted to propaganda. Gesell, drawing to himself the semi-religious fervour which had formerly centred round Henry George, became the revered prophet of a cult with many thousand disciples throughout the world. The first international convention of the Swiss and German Freiland-Freigeld Bund and similar organisations from many countries was held in Basle in 1923. Since his death in 1930 much of the peculiar type of fervour which doctrines such as his are capable of exciting has been diverted to other (in my opinion less eminent) prophets. Dr. Büchi is the leader of the movement in England, but its literature seems to be distributed from San Antonio, Texas, its main strength lying to-day in the United States, where Professor Irving Fisher, alone amongst academic economists, has recognised its significance.
In spite of the prophetic trappings with which his devotees have decorated him, Gesell’s main book is written in cool, scientific language; though it is suffused throughout by a more passionate, a more emotional devotion to social justice than some think decent in a scientist. The part which derives from Henry George, though doubtless an important source of the movement’s strength, is of altogether secondary interest. The purpose of the book as a whole may be described as the establishment of an anti-Marxian socialism, a reaction against laissez-faire built on theoretical foundations totally unlike those of Marx in being based on a repudiation instead of on an acceptance of the classical hypotheses, and on an unfettering of competition instead of its abolition. I believe that the future will learn more from the spirit of Gesell than from that of Marx. The preface to The Natural Economic Order will indicate to the reader, if he will refer to it, the moral quality of Gesell. The answer to Marxism is, I think, to be found along the lines of this preface.
Gesell’s specific contribution to the theory of money and interest is as follows. In the first place, he distinguishes clearly between the rate of interest and the marginal efficiency of capital, and he argues that it is the rate of interest which sets a limit to the rate of growth of real capital. Next, he points out that the rate of interest is a purely monetary phenomenon and that the peculiarity of money, from which flows the significance of the money rate of interest, lies in the fact that its ownership as a means of storing wealth involves the holder in negligible carrying charges, and that forms of wealth, such as stocks of commodities which do involve carrying charges, in fact yield a return because of the standard set by money. He cites the comparative stability of the rate of interest throughout the ages as evidence that it cannot depend on purely physical characters, inasmuch as the variation of the latter from one epoch to another must have been incalculably greater than the observed changes in the rate of interest; i.e. (in my terminology) the rate of interest, which depends on constant psychological characters, has remained stable, whilst the widely fluctuating characters, which primarily determine the schedule of the marginal efficiency of capital, have determined not the rate of interest but the rate at which the (more or less) given rate of interest allows the stock of real capital to grow.
But there is a great defect in Gesell’s theory. He shows how it is only the existence of a rate of money interest which allows a yield to be obtained from lending out stocks of commodities. His dialogue between Robinson Crusoe and a stranger is a most excellent economic parable — as good as anything of the kind that has been written — to demonstrate this point. But, having given the reason why the money-rate of interest unlike most commodity rates of interest cannot be negative, he altogether overlooks the need of an explanation why the money-rate of interest is positive, and he fails to explain why the money-rate of interest is not governed (as the classical school maintains) by the standard set by the yield on productive capital. This is because the notion of liquidity-preference had escaped him. He has constructed only half a theory of the rate of interest.
The incompleteness of his theory is doubtless the explanation of his work having suffered neglect at the hands of the academic world. Nevertheless he had carried his theory far enough to lead him to a practical recommendation, which may carry with it the essence of what is needed, though it is not feasible in the form in which he proposed it. He argues that the growth of real capital is held back by the money-rate of interest, and that if this brake were removed the growth of real capital would be, in the modern world, so rapid that a zero money-rate of interest would probably be justified, not indeed forthwith, but within a comparatively short period of time. Thus the prime necessity is to reduce the money-rate of interest, and this, he pointed out, can be effected by causing money to incur carrying-costs just like other stocks of barren goods. This led him to the famous prescription of “stamped” money, with which his name is chiefly associated and which has received the blessing of Professor Irving Fisher. According to this proposal currency notes (though it would clearly need to apply as well to some forms at least of bank-money) would only retain their value by being stamped each month, like an insurance card, with stamps purchased at a post office. The cost of the stamps could, of course, be fixed at any appropriate figure. According to my theory it should be roughly equal to the excess of the money-rate of interest (apart from the stamps) over the marginal efficiency of capital corresponding to a rate of new investment compatible with full employment. The actual charge suggested by Gesell was 1 per mil. per month, equivalent to 5.4 per cent. per annum. This would be too high in existing conditions, but the correct figure, which would have to be changed from time to time, could only be reached by trial and error.
The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale. But there are many difficulties which Gesell did not face. In particular, he was unaware that money was not unique in having a liquidity-premium attached to it, but differed only in degree from many other articles, deriving its importance from having a greater liquidity-premium than any other article. Thus if currency notes were to be deprived of their liquidity-premium by the stamping system, a long series of substitutes would step into their shoes — bank-money, debts at call, foreign money, jewellery and the precious metals generally, and so forth. As I have mentioned above, there have been times when it was probably the craving for the ownership of land, independently of its yield, which served to keep up the rate of interest; — though under Gesell’s system this possibility would have been eliminated by land nationalisation.
- Matt Yglesias on Malthus's population theory and its use in literature.
- Richard Posner on Keynes and the paradox of thrift.
- ThinkMarkets has a good quiz up with a quote about the market process that the hosts ask you to attribute. The answer is given in the comment section so don't scroll down until you're ready!
- I just finished reading a great article by William Grampp called "The Liberal Elements in English Mercantilism", from the Quarterly Journal of Economics (1952). It's very good stuff - here's a piece from the introduction that gives you a sense of what angle he's coming from:
"By reasoning from the actual practices of mercantilist states, economists and historians usually have supposed that the doctrines of the period of mercantilism were a justification of its institutions. It is common in studies of mercantilism for the author to explain, say, the restriction of imports by referring both to the tariff duties of the age and to the concurrent doctrine of a favorable balance of trade, or for him to move freely among expressions of public officials, laws, economic tracts and discourses, and to suppose that because particular controls were exercised, like price fixing, they must have been justified in the economic writing of the time. No one, of course, would write of recent economic policy this way. It would be unthinkable to describe the New Deal by an indiscriminate reference to the works of Keynes and Hansen and to the public papers of Franklin D. Roosevelt and the private memoranda of Harry Hopkins and always to suppose that whatever the state did or wanted to do found its rationalization in economic doctrines. When studies of mercantilism use a method of this kind, they leave an impression with the reader that in many ways is distressingly wrong. He must be led to think that because the mercantilist states did not believe in the market as the mechanism for discharging the economic functions of society, the economists of the age held the same belief and were in favor of the intricate kind of regulation which was practiced."
Thursday, September 23, 2010
"Streissler has suggested that Menger anticipated Keynes in emphasising the uniqueness of money among commodities. Would you agree? Would you also not agree that one can comprehend Chapter 17 of the General Theory more easily if one read, as a companion piece, Menger's classic 1892 Economic Journal paper on money?
Menger was concerned with the origins of money and with how money facilitates exchange. Forty-four years later, Keynes was concerned with the perversities of money and with how hoarding money can frustrate exchange. The "story of money" had a happy ending for one and a tragic ending for the other. It is true that both believed money to be unique and that Menger's saleability and Keynes's liquidity can be thought of as synonymous. I think that reading the two stories as companion pieces helps identify just where and how the Keynesian plot turns sour. For Keynes, the alternative to holding money is holding bonds—a view reflecting his belief that the decision about how much to save and the decision about what form the saving will take are made seriatim. The speculative demand for money, then, hinged specifically on speculation about movements in the interest rate. And the interest rate, according to Keynes, is not well anchored in economic reality. This construction led Keynes to psychological explanations of liquidity preference. For Menger, the alternative to holding money is any commodity for which money can be exchanged. Speculative demand—Menger didn't use the term—would have to reflect speculation on the part of the money holder that opportunities for making exchanges might present themselves. Menger, never mentioning the rate of interest even once in the entire article, had no reason to resort to psychological arguments and certainly never suggested anything in the way of a saleability fetish."
I've mentioned before how Garrison mangles Keynes, but not because he misunderstands him - it's pretty clear he does - but because he tries to twist him in the oddest, worst possible light. The initial bolded sentences, for example, are patently absurd (well, the ones about Keynes are). Keynes's whole point was that money facilitated exchange, just like Menger. Keynes didn't think money was perverse as Garrison says - it was precisely because of its facilitation of exchange that liquidity preference or "hoarding" were so problematic! The demand for money increases with economic activity. Keynes's whole concern was that unproductive demands for money (liquidity preference), especially shocks of unproductive demands for money (some liquidity is important, after all) would hamper exchange for precisely this reason.
As I've said before, Garrison is wonderful but don't read Garrison to understand Keynes unless you've already read Keynes. This is a very unfortunate reading of Keynes and the only justification I can think of for it is partisan. I'm not, and I don't think anyone is, saying that Menger is some sort of proto-Keynesian. But he acknowledged a piece of Keynes that had been underemphasized for many decades, and its worth noting. There's no reason to smear anyone over it. I thank Sebastian for the link, but Garrison here strikes me as being as wrong as Sebastian was initially.
In The General Theory Keynes wrote this:
"From the time of Say and Ricardo the classical economists have taught that supply creates its own demand; meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product... It is true that it would not be easy to quote comparable passages from Marshall’s later work or from Edgeworth or Professor Pigou. The doctrine is never stated today in this crude form. Nevertheless it still underlies the whole classical theory, which would collapse without it. Contemporary economists, who might hesitate to agree with Mill, do not hesitate to accept conclusions which require Mill’s doctrine as their premise."
He clearly didn't foresee all the hand-wringing this would cause. In retrospect, he probably should have written this:
"From the time of Say and Ricardo the classical economists have taught
Then we could focus on the real point: effective demand. What we have with the classics and anyone that could be described as new classics is a failure to grasp this point. I don't care about fiscal policy. Forget about it. I'm talking about understanding the way the economy works. The thing is, even Say and Mill recognized this at certain times. But theorizing the economy is a monumental task and people aren't always consistent when they do it. People slip into pretending that "the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product".
There's been a lot of talk about how scientific economics is and that if it were scientific it wouldn't bounce around so much and there wouldn't be much disagreement. One of the things that encourages me is realizing that a lot of people have recognized this principle of effective demand for centuries. As Peter Boettke says, it all boils down to the debate between Malthus and Say. And the debate extended further before that. So it's not like we have new-fangled ideas popping up all the time. The fundamental work-horse of both sides has been out in the open and argued over for a while. People have essentially been leaning one way or another on this fundamental point that Keynes raises.
The second thing that makes me more positive about how scientific economics is is realizing how artificial a lot of the disagreements are. We act as if the different dynamics and phenomenon we theorize about contradict each other when usually they don't. To borrow a point from Daniel Klein (which makes me cringe a little, I admit) - we have a tendency to think of models as theories when they aren't*. Presumably there are many ways to model a single theory. You can also model lots of important processes without having a full-blown theory attached to it, and these models don't have to conflict on the theoretical level. We often make the mistake of confusing "different models" with "contradictory theories". They're not the same thing.
*In this article, Klein and Romero claim that The Journal of Economic Theory doesn't do economic theory - just economic modeling. Strictly speaking I think they're right, but it's an awfully belabored point when all they're really trying to say is "models aren't the same as theories". If the journal were called The Journal of Theoretical Economics or if one were to say "the economists who publish their models in this journal theorize about the economy", I think both those uses of the root word "theory" are fine. Strictly speaking a model is not a theory, but this largely boils down to quibbling over a journal title that none of the current editors came up with.
I had mixed reactions to it. It was such an obvious point that I was immediately suspicious of the posts. It smacked of throwing conservatives a bone, which might give the impression that liberals actually like regulating for the hell of it, and that Yglesias is some wise exception. In a way, the posts frustrated me for the same reason that it frustrates me when libertarians or conservatives bring up the same stuff. The implicit point is this "presumption of ideological orthogonality": because we don't like X, and X exists clearly somebody likes X so it must be the people we disagree with on questions of governance and the economy. Of course that's nonsense. These regulations do exist, but its not because liberals love them and conservatives hate them and liberals have been in power. They exist because laws like this have concentrated benefits and dispersed costs - so industry insiders (successfully) lobby for them and nobody is hurt badly enough by them to bother to challenge it. Nobody likes barber regulations and certifications except practicing barbers. And nobody dislikes them enough to do anything about it. Period, end of story. Waxing poetic about the free market rather than highlighting this rent-seeking dynamic distorts the ideological content of things like barbershop regulations because it allows you to draw spurious connections (like "well that guy questions other things about the free market so his arguments must be related in some way to these occupational regulations we have").
I have warmed up to these Yglesias posts in one respect, though. By posting these things (and a few other points he has a tendancy to post, like demand-based payment for parking) he deconstructs buzz-words that can trip up liberals. In this case, the buzz-word is "regulation". Plain and unelaborated, the word "regulation" to some liberals sounds like taking a stand against problematic special interests. So if someone challenges "regulation" their ears perk up. That's a bad instinct to have. To me the word "regulation" is pretty devoid of substance. When I hear "regulation" I react similarly to how you would when you hear "statute" or "law" or even "constitution". The appropriate reaction is entirely contingent on exactly what the regulation is. Regulations, in and of themselves, are neither good nor bad. I think Yglesias is making people think more about the content and purpose of regulations, which on net is probably a good thing.
He had another great post yesterday doing the same thing with another buzz-word: "outsourcing". He writes (specifically with respect to government outsourcing):
"I got into a little back and forth on twitter yesterday about having written that “It’s often the case that, in principle, contracting-out should be able to save money” as a preface to some remarks about problems with contracting-in-practice that are likely to be made worse by Citizens United.
So to expand on my remarks, it’s worth starting with the observation that many liberals who think they’re against “privatizing” government services or dread contractors in fact have no real problem with the practice. After all, the federal government doesn’t manufacture its own printer toner and your state’s Department of Education doesn’t manufacture desks. The official standard is supposed to be that you don’t outsource “inherently governmental functions” but that’s a bit tautological. Conversely, I often hear it said that we could save money by contracting this or that out without skimping on quality but it’s not possible because the vile public employees unions won’t let us. This, however, is kind of an apples to oranges comparison—the contractors can and will lobby to have programs turned to their private benefit rather than to a public purpose."
Adam Smith told us the division of labor is limited by the extent of the market. If there is a wide market for something, someone is more likely to be able to produce it at scale and it will pay to contract it out. This was further elaborated on and connected to the idea of increasing returns by George Stigler. This should be pretty uncontroversial stuff. Of course a transition from in-sourcing to out-sourcing is going to be painful for a certain group of people and beneficial for another group of people. But that alone doesn't constitute a reason to be suspicious.
There are things to think about: asset specificity, transaction costs, etc. But that's not what people are thinking about when they have a knee-jerk reaction to "outsourcing".
I haven't read it yet, but I'm going to try to go over it. It's quite long and it's got time-series econometrics that I haven't seen or used for five years, but I'll do my best. Skimming it, it looks like it draws heavily from Garrison. If anyone else takes the time to read it and wants to share their reactions I'd be interested in hearing them.
I think my project on empirically testing ABCT is going to start lurching forward, but of course who knows where it will go.
This is the abstract:
"This paper reviews the key elements of Austrian macroeconomics and aims to find out whether the Austrian business cycle theory can explain causes to Norwegian business cycles between 1979 and 2009. The Austrian school suggests that monetary interventions disturb the term structure of interest rates. This causes the capital structure to change which accounts for fluctuations of the business cycle. Credit-induced expansions with unchanged time-preferences create unsustainable growth which inevitably turns the economy into recession. Quarterly time series data of base money supply, interest rates, investment and private consumption expenditure, employment, prices, and aggregate output are analysed in order to find relationships with assumptions of causality. Empirical evidence show that Austrian business cycle theory can help explain fluctuations in aggregate output for Norway."
Wednesday, September 22, 2010
One poster there, Amy Sturgis, seems to work at the intersection of literature and libertarianism (at least here - her own blog seems more specifically dedicated to literature). She had an interesting post up this morning on J.R.R. Tolkien - an old, old favorite of mine - commemorating the anniversary of the publication of The Hobbit. She has this Tolkien quote:
"My political opinions lean more and more to Anarchy (philosophically understood, meaning the abolition of control not whiskered men with bombs) — or to ‘unconstitutional’ Monarchy. I would arrest anybody who uses the word State (in any sense other than the inaminate real of England and its inhabitants, a thing that has neither power, rights nor mind); and after a chance of recantation, execute them if they remained obstinate! If we could go back to personal names, it would do a lot of good. Government is an abstract noun meaning the art and process of governing and it should be an offence to write it with a capital G or so to refer to people.… Anyway the proper study of Man is anything but Man; and the most improper job of any man, even saints (who at any rate were at least unwilling to take it on), is bossing other men. Not one in a million is fit for it, and least of all those who seek the opportunity." (Tolkien, 1943)
So an interesting piece here: anarchy or monarchy; execution for poor word usage; and the fiction of the state. The immediate reaction is of course "Tolkien is a libertarian", and there's previously been statements on Mises.org to that effect. I think he's trying to make a somewhat deeper point than that - the first is sort of a public choice or political economy argument not to anthropomorphize the state. That seems to me the argument that comes out clearest. As for "the most improper job of any man... is bossing other men" is that libertarian or simply liberal or is it simply sentiment? I don't know - I can only study the political and economic philosophy of one literary figure at a time! And I know from studying that one that you have to be careful about assigning too much technical meaning to potentially uninformed sentiment.
Which brings me to a few other things: in addition to an interest in Tolkien, Sturgis also apparently has an interest in Lovecraft! Her own blog is actually called Redecorating Middle Earth in Early Lovecraft (and I thought "Facts and Other Stubborn Things" was clunky!). I'm following it now and will, of course, share interesting updates. Here are a few Lovecraft items to start with from Sturgis:
- First, this is the list of all her posts with a "Lovecraft" tag.
- This is an article she wrote in 2005 called "The New Shoggoth Chic: Why Lovecraft Now?"
- She links to this article in July's Publisher's Weekly on "the enduring popularity of Lovecraft"
I haven't read any of these posts or articles yet personally.
There's a good discussion of the relationship between anchored expectations and the equilibrium process that supports "market process" type thinking on the Austrian side, if you want it to. This point reminds me of Keynes in the Tract on Monetary Reform. One of the few things that he praised the gold standard for was that it was slow to adjust. That cut down on the noise and accomplished that task that Rowe attributes to anchored expectations here.
The post is a tsunami of metaphors and allusions to points that are internal to Keynesian discussions. That may make it confusing to some people, but I still think its very good to read through. Up until now I've been skimming a lot of posts on this blog. There have been a lot of good ones lately, and I'm definitely not going to skim anymore.
The George Evans video I share in this post may help explain what he's talking about too. It's still technical, but less dependant on lingo like "stag hunt", "tinkerbell", or "sunspots".
I noticed this Monday with a string of good NBER posts - Tyler Cowen brings my attention back to it. The authors derive some basic insights from Mises and Hayek on SCD issues, they produce a falsifiable hypothesis, and they test it.
Not many people nowadays argue central planning works... Lange and Lerner, despite whatever else they may be famous for, don't win many adherents. But it's still a great paper.
1. The first volume of Joseph Dorfman's The Economic Mind in American Civilization. The Constitution is in force and the Federalists are in power. This book has impacted my thinking on the history of economic thought, particularly as it related to American history, in much the same way that Drew McCoy's The Elusive Republic did: substantially. I'm a little concerned that when I'm done with this I'm just going to pick up the other two 500-page volumes and not get as much diversity in my intake.
2. Thorstein Veblen's "The Overproduction Fallacy"
3. Adolph Lowe's "Capital Formation and Economic Growth"
4. H.P. Lovecraft's "The Whisperer in Darkness"
5. Robert Higgs's "Regime Uncertainty: Why the Depression Lasted So Long and Why Prosperity Resumed After the War"
Tuesday, September 21, 2010
It strikes me as a good point, but very, very oddly expressed. So he talks about the fifties and says elites distrusted popular movements and regular Americans when they thought that McCarthy threatened a sort of neo-fascism. Sure - fine. There was elitist, academic distrust of conservatives at the time. But mid-century is that really the elite-against-popular-causes thing you'd immediately think to highlight? What about the Civil Rights movement? Isn't that the most obvious instance of elites militating against popular movements? He also points out opposition to the Tea Party. But what about the popular movement behind Obama? Some of these "elitist-vs.-the-people" narratives can be very confused, I think. It's bizarre to see people like Sarah Palin tell me about what "the people want" and tell me that I'm on the side of the elites. From my angle, Palin is quite an elite. Ron Paul lecturing me from the heights of Capitol Hill on elitists? It's almost laughable. Do these people realize they're elites? Do they not understand that it's "the people" who make up most of the opposition to the Tea Party?
The reality is this - there are multiple popular movements. Two major ones are the supporters of Obama's initiatives, which has been nothing if not a popular movement - and the Tea Party. Both of these popular movements have elites on their side. But each is trying to spin the narrative as "elites-vs.-the-people". What's amazing is that these narratives persist. I think it's symptomatic of a depressing lack of dialogue. If you think of the Tea Party as "the people" and the movement behind Obama as "the elites" then you aren't paying attention to what's going on. The same goes for people who dismiss the Tea Party as a corporate front, think the Tea Party represents "the elites" and Obama is for "the people".
Smart people trade in these misrepresentations, though. Arnold Kling talks about "elites" all the time.
I think it's very misleading.
Gordon Wood studies a period of history where there was a group of elites and they were fairly non-chalant about saying "yes, I think the elites should rule the people". His mistake, I think, is bringing that into today - into the 50s and 60s, and then into the 21st century. Often what we have is warring popular movements, each with its own set of allied elites.
"Economists have got lots of P-data and Q-data, and we pay a lot of attention to it. I think we don't have much L-data, except anecdotal, and we don't pay much attention to the hard L-data we do have.
P-data is data on the prices at which goods are traded. Q-data is data on the quantities of goods traded. We've got it, and we use it. And it's good we've got it and we are right to use it. P-data and Q-data are important. But they are not the only data that are important.
What do I mean by L-data? I'm going to come at that slowly.
Think about the "stylised facts" of the business cycle. In a recession, output and employment fall, or rise less quickly than before. That's Q-data. Prices and wages also fall, or rise less quickly than before. That's P-data. Looking at the P-data and Q-data can help us test theories and understand the causes of the business cycle. But there's some other data that isn't P-data or Q-data that has a big impact on why I think about business cycles the way I do. We ought to be able to explain why we believe what we do believe, and I can't fully explain why I believe that business clcyles are largely demand-driven without talking about L-data.
When we go into a recession, many things become easier to buy and harder to sell. And when we go into a boom, those same things become easier to sell and harder to buy. A recession has lots of buyers' markets and a boom has lots of sellers' markets. That's what I mean by L-data. There's something more going on than what is captured in the P-data and Q-data. There's something more going on than the P-data and Q-data that tell us all we need to know about perfectly competitive markets for perfectly liquid goods with perfectly flexible prices. And that something more is crucial to the way I think about the business cycle....
I think that prices and wages are sticky. And I think that sticky prices and wages are important in understanding the business cyle. Those two things go together. The main reason I think that prices and wages are sticky is not just that they look sticky, but because if I assume that prices and wages are sticky i can make sense of the fact that we get buyers' markets for goods and labour in a recession, and sellers' markets for goods and labour in a boom. If aggregate demand falls, either prices and wages fall, or we get buyers' markets for goods and labour, or we get a bit of both. If aggregate demand rises, either prices and wages rise, or we get sellers' markets for goods and labour, or we get a bit of both. And we generally get a bit of both, in both recessions and booms, though the proportions vary from market to market. And because of imperfect competition, with sellers usually having market power to set prices on average above competitive equilibrium, buyers' markets are normally more common, on average over the business cycle, than sellers' markets."
He goes on to ask for examples of liquidity data that are out there. Several financial examples are given, which isn't surprising - bid-ask spreads, etc. I think the components of the Beveridge Curve - some measure of job seekers, matches, and vacancies is going to be important. There are good points in the comment section - it's worth reading through.
"But the fact that different goods cannot be exchanged for each other with equal facility was given only scant attention until now. Yet the obvious differences in the marketability of commodities is a phenomenon of such far-reaching practical importance, the success of the economic activity of producers and merchants depending to a very great extent on a correct understanding of the influences here operative, that science cannot, in the long run, avoid an exact investigation of its nature and causes."
Monday, September 20, 2010
Yesterday I offered what I think is a fertile empirical framework for assessing ABCT. This was motivated by thinking from Mario Rizzo on how to get broader acceptance of the Austrian school. One thing I've pointed out before is that the basic dynamics of ABCT are in the General Theory in chapter 16. Of course you wouldn't want to talk about it as a passage from Keynes in actual practice, but you could discuss ABCT as it was outlined by Hayek and then say "even Keynes used some of this logic as a brief aside in his discussion of capital, but he left its implications somewhat underdeveloped".
And underdeveloped it certainly was, but here it is:
"Given the optimum amount of roundaboutness, we shall, of course, select the most efficient roundabout processes which we can find up to the required aggregate. But the optimum amount itself should be such as to provide at the appropriate dates for that part of consumers’ demand which it is desired to defer. In optimum conditions, that is to say, production should be so organised as to produce in the most efficient manner compatible with delivery at the dates at which consumers’ demand is expected to become effective. It is no use to produce for delivery at a different date from this, even though the physical output could be increased by changing the date of delivery; — except in so far as the prospect of a larger meal, so to speak, induces the consumer to anticipate or postpone the hour of dinner. If, after hearing full particulars of the meals he can get by fixing dinner at different hours, the consumer is expected to decide in favour of 8 o'clock, it is the business of the cook to provide the best dinner he can for service at that hour, irrespective of whether 7.30, 8 o'clock or 8.30 is the hour which would suit him best if time counted for nothing, one way or the other, and his only task was to produce the absolutely best dinner. In some phases of society it may be that we could get physically better dinners by dining later than we do; but it is equally conceivable in other phases that we could get better dinners by dining earlier. Our theory must, as I have said above, be applicable to both contingencies.
If the rate of interest were zero, there would be an optimum interval for any given article between the average date of input and the date of consumption, for which labour cost would be a minimum; — a shorter process of production would be less efficient technically, whilst a longer process would also be less efficient by reason of storage costs and deterioration. If, however, the rate of interest exceeds zero, a new element of cost is introduced which increases with the length of the process, so that the optimum interval will be shortened, and the current input to provide for the eventual delivery of the article will have to be curtailed until the prospective price has increased sufficiently to cover the increased cost — a cost which will be increased both by the interest charges and also by the diminished efficiency of the shorter method of production. Whilst if the rate of interest falls below zero (assuming this to be technically possible), the opposite is the case. Given the prospective consumers’ demand, current input to-day has to compete, so to speak, with the alternative of starting input at a later date; and, consequently, current input will only be worth while when the greater cheapness, by reason of greater technical efficiency or prospective price changes, of producing later on rather than now, is insufficient to offset the smaller return from negative interest. In the case of the great majority of articles it would involve great technical inefficiency to start up their input more than a very modest length of time ahead of their prospective consumption. Thus even if the rate of interest is zero, there is a strict limit to the proportion of prospective consumers’ demand which it is profitable to begin providing for in advance; and, as the rate of interest rises, the proportion of the prospective consumers’ demand for which it pays to produce to-day shrinks pari passu."
Malinvestments aren't in there, but the response of the Hayekian triangle to changes in the interest rate is. That ain't bad. So why does Keynes only spend a couple paragraphs on this? Well, he said that the time it takes to produce something is just one facet of its production, and hardly something to build a theory on. He notes that different production processes also smell bad to varying degrees, but we don't have a "smelliness theory". He didn't think it made much sense to pick out one component of economic activity and exalt it as the driver of the system. Keynes stripped the economy down to its essentials: the supply of and demand for goods, and the money used as the intermediary to make that market work. He looked at each of those components and tried to understand how each impacted output. Obviously, I think Keynes took the most fruitful route and Austrians took the less fruitful route. But I don't think the Austrian route is as unfruitful as Keynes suggested. The trade-off between time and interest driving ABCT is a macroeconomic phenomenon - it affects the entire market simultaneously. That makes it a good candidate to explain broad, economy-wide fluctuations. Regardless, the Austrian dynamics are still in Keynes.
So use that! Note that!
If Austrians keep convincing themselves that they hate Keynes and Keynesianism, they're not likely to use that. If Austrians keep telling Keynesians that the Austrian school is incompatible with Keynesianism, the mainstream is going to start to believe it. A better approach, I think, is to say: "Look we've been thinking about it from this angle that hasn't received much attention by the discipline - so we could probably strengthen our understanding of the economy by focusing more on this angle (which, of course, we are well position to provide for you). And although you might no have heard of this stuff before it's not crazy - Keynes laid out the basic dynamics in the General Theory, although he didn't follow through on it. We're here to follow through on it."
Sunday, September 19, 2010
I got this book, which I've had my eye on for a while but is now out in paperback. Revisiting Keynes is a collection of essays reflecting on Keynes's 1930 essay "Economic Possibilities for our Grandchildren". Keynes makes a variety of predictions on what the world would look like in 100 years (so, 2030). Some of them are right, but many are way off. And where Keynes is right (on economic growth prospects) he actually low-balls it. The accuracy on this point is actually quite commendable - the opening essay details how, in 1930, not many people had very high hopes for secular economic growth. The U.S. was just entering a depression but Britain had been stagnant for years. Keynes was actually making a counter-intuitive case for optimism in continued growth.
His other predictions went awry, though - perhaps most famously his view that demand would be satiated, work hours would be reduced considerably, and we would spend more time on leisure and the arts. I've only read the first essay, but it looks like several contributors are going to address this point. One of the most interesting explanations is that a lot of the capital accumulation that ended up being important in the 2oth century in a way that early writers didn't forsee was the importance of human capital. Physical capital you can put to work while you enjoy a life of leisure, but you can't enjoy the gains from human capital unless you go to work yourself. I think this is probably the most convincing reason for why Keynes was wrong on this point. But there are also discussions of multiple equilibria depending on preferences (Europe has seen a greater reduction in work hours), reward in work itself (this is brought up by Phelps - and this is actually a point that Keynes himself stresses in The General Theory, that it's wrong to simply think of work as a disutility and that work can be enjoyable), that consumption isn't as easily satiated as one might have thought, etc.
To make things even more fascinating, I was also reading more Lovecraft letters last night, and I read a 1931 letter where he also takes it upon himself to make predictions of what the world will look like 100 years in the future. What's amazing is that he cites many of the points that Keynes makes: (1.) mechanization will increase growth substantially and reduce work hours considerably (2.) cultural and moral development will be emphasized once people have all that leisure time - they'll create art and have their own Bloomsbury Group (Keynes's literary circle) or Kalem Club (Lovecraft's literary circle). I've seen Lovecraft make overproductionist arguments before, but here he also makes the underconsumptionist arguments that would become characteristic of Keynesianism. That was a very exciting find for me. In classic Lovecraft form, he calls his synopsis of underconsumptionism "a fine piece of grim cosmic irony".
The Keynes book looks good - I'll update as interesting points come up.
Contributors include William Baumol, Gary Becker, Richard Freeman (which reminds me, I need to work on that NBER chapter he's editing!), Axel Leijonhufvud, Lee Ohanian, Ed Phelps, Robert Solow, and Joe Stiglitz, among others.
By the way - it's another beautiful day today, and for anyone near Arlington, Crystal City is having it's annual wine festival. Please come if that sounds interesting to you.