Thursday, May 31, 2012

Scott Sumner's image-maintenance when it comes to Krugman is not helping build a consensus on good policy

Arggh - I've said this many times before, but Scott Sumner is really frustrating me in the way he talks about Krugman and monetary policy. Scott seems to feel the need to be the voice in the wilderness for monetary policy in this depression, and this has lead him to act as if Keynesians don't support accomodating monetary policy, practically by definition.

When Brad DeLong and others came out strongly in support of NGDP-targeting as the policy goal recently he took this as proof that before that point they didn't think monetary policy could do anything. That's not true at all of course - they just didn't really get on the NGDP bandwagon until then. There's a difference between wanting looser monetary policy and thinking that the best way to frame that is through NGDP level targeting.

Now back to Sumner on Krugman:

"Here’s Krugman in November 2008:
Nearly every forecast now says that, in the absence of strong policy action, real GDP will fall far below potential output in the near future. In normal times, that would be a reason to cut interest rates. But interest rates can’t be cut in any meaningful sense. Fiscal policy is the only game in town.
Those were the posts that had me pulling my hair out in 2008.  Why wasn’t Krugman calling for monetary stimulus?"

Ummm... he was, Scott. He just recognizes that you can't idealize central bankers or make people react how you want them to react to central bankers. To bastardize a little James Madison, "If men were angels no monetary policy would be necessary. If angels were to govern monetary policy, no fiscal policy would be necessary.  In framing a monetary policy which is to be administered by men over men, in a liquidity trap, the great difficulty lies in this: you must get the monetary authority to make a credible commitment. And if that's not in the cards you need to start talking about fiscal policy too."

Scott should refrain from pulling his hair out.

There are at least two mechanisms for monetary policy: through interest rates and through expectations about future spending and inflation. The former is a dud right now. The latter may not be, and the latter can influence demand directly and it can influence real interest rates through inflation expectations.

For four years now Krugman has been noting that the first mechanism is not an option and that the second mechanism is a reason for loose monetary policy. He has been haranguing the Fed for not embracing this view. An example from back in 2009 is here. He supports monetary stimulus every bit as much as Sumner does and is probably more realistic than Sumner about how hard a credible committment is (which is why he also supports fiscal stimulus - which Sumner doesn't).

And yet Scott Sumner still insists on only paying attention to the first point about the liquidity trap. Why? He has to know that Krugman has supported monetary stimulus for years now. The only reasonable conclusion is that he really likes to feel like he's a voice crying in the wilderness. That's not what we need right now. What we need is a consensus, and a consensus is Scott standing up and saying "yes, Lars Christenson, David Glasner, Paul Krugman, Mark Thoma, Brad DeLong, and I have been saying from the beginning that we need more monetary stimulus".

If you don't think that the liquidity trap is the only consideration in thinking about monetary policy, congratulations - you agree with Krugman, who said that a decade and a half ago.

Brad DeLong shares a nice modern example of proto-Keynesian crank ideas

Here. And I don't mean that in a bad way. There are usually lots of bugs to work out, but proto-Keynesian cranks often have good stuff to say.

Today's featured crank is Major Douglas.

Sentence of the day

(Well - actually sentence of two days ago but I'm going without internet at the house until Friday and am just now checking things on campus)

"I don’t believe skepticism of evolution is driven by “skepticism,” scientific or otherwise" - from Jonathan Adler

Lots of good news on publications

- My reply to Vedder and Gallaway is up at the QJAE. It's a reply to a rejoinder to a comment on an article... perhaps a little excessive... but the Vedder and Gallaway piece was so poorly argued and imputed so much to me that I never said, that I thought it was worth sending in a reply.

- My co-authored article on apprenticeships in the long-term care industry has been resubmitted to the Journal of Women, Politics, and Policy.

- I just found out that my co-author Marla McDaniel and I got a revise and resubmit from the Review of Black Political Economy for our article on racial disparities in the returns to a high school diploma.

My comp is next Tuesday and then I'll have much more writing work: (1.) finishing my draft chapter on the basic income guarantee, (2.) pushing forward a project with Gene, (3.) finishing off and sending in my article on Keynes and Newton, and (4.) turning around this revise and resubmit.

Steve Horwitz on Jewish opponents of the NRA

Steve has an interesting article in The Freeman here.

He's sort of shooting fish in a barrel by recounting the opposition of Jewish butchers (the Schechter brothers) to the NRA. The club of people who think the NRA was a bad idea is very, very long, after all. Steve wonders why Jews don't celebrate the Schechter brothers as heros today, speculating that it might be out of love for FDR. I think it's simpler than that: the NRA is generally regarded as a bad idea and a failure, so it was more of a forgone conclusion. While Steve does raise interesting points about the prosecutor playing on public anti-Semitism, it's not like the NRA was implemented to hurt Jews or anything like that. This is not exactly Esther vs. Haman, in other words. I'm guessing that's why you don't hear about them as much.

I do have big concerns about this passage: "At the same time, criticisms of the NRA grew, not the least from the African-American community, which correctly saw attempts to raise wages as a means of shutting black labor out of the market. Writers at the Chicago Defender, the local black paper, referred to the NRA as the “Negro Run Around” and the “Negro Removal Act.” The NRA’s harm of black workers fits into a longer story how of labor market regulation was used for racist purposes."

It is true that in the early New Deal period Roosevelt didn't do much to challenge discrimination, but the claim here by Steve is a little odd. After all, black support for Roosevelt was enormous in 1936, which is quite impressive given the legacy of animosity between the Democratic party and blacks.

It is true that in the face of NRA wage increases many employers chose not to hire blacks. Roosevelt had a solution for this in the 1940s in war-related industries: he made it illegal to discriminate on the basis of race, with phenomenal results. He could do that in the 1940s when the nation was on a war-footing. He couldn't do that in the 1930s with the NRA. Perhaps Steve agrees with me that it would be nice to have had anti-discrimination legislation even earlier, but it seems very misleading to paint the New Deal as bad for blacks just because many employers were racist at the time.

It's also worth mentioning that amidst discriminatory employers, the New Deal provided millions of jobs to blacks through the CCC, WPA, and NYA. These programs not only didn't discriminate - they actually had quotas to guarantee economic opportunity to blacks.

So let's not get the wrong view of the New Deal here. The NRA was dumb, but it wasn't inherently anti-Semitic or anything like that. The NRA probably hurt blacks too but because a lot of employers were discriminatory in their hiring anyway, and Roosevelt couldn't do anything about it the way he eventually did in the 1940s. And Roosevelt did inaugurate many programs to directly address black poverty and Southern poverty - an issue his administration was acutely concerned about. The reason why people like FDR is because (although he made mistakes) he took important steps to end or at least alleviate the depression. And the reason why FDR was able to swing blacks so fervently toward the Democratic Party is that he ranks up there with Lincoln and Johnson for his achievements on civil rights and racial equality. From the vantage point of 2012, it's not all rosy, but a lot of progress was made.

One more note - if Steve is looking for Jewish role models during the Depression, one place to look might be Leon Keyserling.

Tuesday, May 29, 2012

David Henderson's Memorial Day Thoughts

David Henderson links to my last post and provides some great thoughts of his own on Memorial Day here. He quotes extensively from Richard Timberlake. I agree strongly with the last two passages he cites, and I have some minor quibbles with the first two passages. Let's start with the first two.

Timberlake writes:

"All of my fellow airmen and I knew that Hitler and his henchmen were atrocious and loathsome examples of the human race. Yet, any U.S. soldier or airman who thought even briefly about his job of trying to kill and destroy 'the enemy,' knew that he was not within range of damaging Hitler and other Nazi leaders. We could not reach their personal environments or influence their decisions; our activities were many magnitudes removed from hurting them. We could only chip away at the peripheries of their domain and hope that they would realize the futility and fallacy of their ways. To do so, we had to try and kill our enemy counterparts with whom we had no personal quarrel at all. We aimed our bombs at their strategic war-making industries and infrastructure, but in the process we knew that we could not avoid hitting churches, schools, and innocent people. Many of us thought that a better way must exist. Fifty-six years later, I still think so."

This reminds me of the opening passage of George Orwell's The Lion and the Unicorn (1941): "As I write, highly civilized human beings are flying overhead, trying to kill me. They do not feel any enmity against me as an individual, nor I against them. They are ‘only doing their duty’, as the saying goes. Most of them, I have no doubt, are kind-hearted law-abiding men who would never dream of committing murder in private life."

These are important realizations, but my concern is that Timberlake is defining down the "job" of soldiers in WWII. So long as German soldiers were destroying and violating peoples we felt a duty to protect, it seems to me it's not appropriate at all to say that the "job" was just to kill Hitler and the Nazi leaders. The "job" was to stop German soldiers from destroying Europe and bringing it under Hitler's control. The soldiers may have been pawns. I met two German soldiers (they were on the Eastern front) when I visited Hamburg and they seemed like good people to me. They probably were pawns. But the point is this nice old man I talked to in Hamburg invaded Poland and Russia before he was in turn driven back by the Russians. It's all well and good to recognize that a lot of these men are "good men", but so long as these "good men" are invading Poland it seems to me the job is considerably broader than assassinating Hitler, right? The same goes with the Orwell quote. Orwell is exactly right. Many of the German bombers were probably good men. But those good men are dropping bombs at your head that makes them men that you have reasonable cause for aiming a gun at. In fact for Londoners that job arguably takes priority over assassinating Hitler, at least for the duration of the raid.

It's for this reason that I have quibbles with the second Timberlake quote too: "War is the mutual destruction of capital, both human and non-human." Again, I think this reduces war to so little that it risks skewing sound analysis. This makes it sound completely irrational and reckless. But that's not usually how wars work. Wars don't come about when two leaders say "hey, you want to have our young men get together and beat the shit out of each other today?". They happen because belligerents act first and others respond with force - NOT in order to destroy capital - but precisely to prevent the destruction of capital. This is what frustrates me about pacificists who cite the costs of war as a reason for their pacificism. They need to consider the counterfactual. Is it right or moral to take a policy of indifference towards marauding and mass killing? No, that doesn't seem right at all to me. So we are in this tough place where there are high costs on both sides of the choice. It's an terrible choice, but the point is it's not an easy choice the way pacifists always try to make it.

Of course, both Timberlake and Orwell are still basically right, which is precisely why war is so awful. Henderson is not a pacifist and I'm not either so we both recognize that given the realities of human nature its appropriate to maintain and use a military, and honor those who serve in it. In WWII, defining the belligerents was easy - and I think as a result defining the German soldier as an "enemy" (not just the Nazi leaders) should have been fairly easy too. Other historical cases (and contemporary cases!) are not so clean cut.

This frames the last two quotes which I agree with 100%:

"Finally, in their external affairs governments must resist any temptation to intervene in the affairs of other peoples. It takes a government to wage a war. So governments must take the same oath of nonintervention - live-and-let-live - with other governments as each individual observes with other individuals. The model for this point-of-view is the political system the Founding Fathers put together when they wrote the Constitution of the United States."


"Surely, if societies owe anything to the veterans of former wars and the innocent soldiers and people destroyed in these catastrophes, it is a responsibility to avoid further warfare by every practicable means. So far as I can see from my vantage point, societies and governments are not following my simple prescription - or any other effective strategy - for preventing wars of all varieties. In not doing so, they are betraying the trust that my wartime colleagues, especially those who made the ultimate sacrifice, and I reposed in them."

Monday, May 28, 2012

Veteran Appreciation Open Thread

Please share thoughts of appreciation for veterans in the comment thread.

I wanted to mention my granddad, who was a lawyer in the Army in Vietnam and served in a veteran's court after the war. I think the military can often get maligned either because the lack of wisdom and foresight of the leaders that sent them to war or because of the bad apples in their ranks. One of the things I've appreciated about my granddad is hearing about the things the military does to police itself and keep soldiers to the high standards expected of them.

A Decent Denominator

In this post I discussed a how a few measures people use for talking about stimulus and austerity. While I think there are definite risks for some of the things I pointed out, to a large degree it is my own preferences around clear exposition more than something that is actually "wrong".

One thing I didn't like was expressing things as a percent of GDP. That's fine for talking about a lot of things, but doesn't work as well when we're talking about the business cycle because both the denominator and the numerator are changing (and even worse - it's precisely the relationship between the two that we're usually interested in!). You can get some perverse results from that.

One thing I've never seen before - but should work pretty well - is measuring things like governmenet spending as a percent of potential GDP. That should no give you any perverse results and should be more easily interpreted.

Krugman has an example here.

Sunday, May 27, 2012

Moving today!

That is all.

Saturday, May 26, 2012

Salzman on STEM Shortages and Immigration

Hal Salzman has a new article at U.S. News and World Report arguing that fears about shortages of scientists and engineers should not drive you to support "stapling a green card" to STEM diplomas.

If you want an open and inviting immigration policy, I for one am in your corner. If you want to use immigration policy to distort the labor market, I have a lot more reservations about it. I don't think it makes much sense to let people into this country conditional on their educational or occupational background. That doesn't seem right to me and it doesn't seem like good economics either. And some of the arguments that lean in that direction certainly aren't consistent with the evidence.

Peter Klein on Public Funding of Science

I had an exchange with Peter Klein the other day on public funding of science. He had a post up criticizing an APSA email for allegedly ignoring social science findings and methods. It's true they have a weak experimental design (it's a mass email - there's no experimental design!) so I guess I have to agree with him on the methods point. But their plea was very much in line with social science findings. The post raises good points, of course, just not entirely valid criticisms of the APSA. And of course if you don't agree with Klein you haven't read Bastiat (I think this cliche - can I call it a cliche at this point? - is strategic... it would be silly to say "you haven't read Friedman" or "you haven't read Hayek" because most social scientists actually have. By saying "you haven't read Bastiat" you're more likely to get a "who is Bastiat?" response and feel vindicated because he's more obscure. It's kind of silly, though. You can get these points about opportunity costs and unintended consequences from Samuelson for God's sake. But an Austrian saying "you clearly haven't read Samuelson" doesn't have quite the same effect!).

I comment on a specific point he made about some oft-cited research by Austan Goolsbee:

"You have quite high expectations of research design in mass emails!

Part of the issue with Goolsbee is that he’s looking at relatively short term impacts. Economists studying this labor market since at least the 50s have noted that one of its most important features is a high short-run inelasticity of supply. So yes, in the short run you have much higher wage effects than quantity effects.

This doesn’t hold true in the long run. It’s a good study of Goolsbee’s, consistent with the rest of the literature, but I think it’s often poorly (and for that reason over-) cited."

He responds, again with the Samuelson... errr... Bastiat point:

"Right, but I’m talking about the within-scientist effect. Take the supply of scientists as fixed in the short run. The issue is whether a grant induces the researcher to work on a project he otherwise wouldn’t have worked on, or simply increases his compensation for working on the projects he was already doing or planning to do (salary supplement, equipment and travel funding that benefits his other activities, etc.). APSA seems to assume that the former effect dominates the latter (or that the latter effect is zero). I have plenty of first-hand evidence that the latter effect is common."

And I clarify:

"But that’s precisely why we use markets for scientific labor that do respond in the long run. Certainly people will shift what they’re working on. That’s largely the point of bidding up wages, right!

If there is something they would have worked on in the absence of the grant that has a lower value than the stuff they would work on on the grant we don’t want them working on it. We want to bid them away. The trouble is, we’d like a sure method of valuing science that has social payoffs.

Unfortunately political allocation can’t give us that. Unfortunately, the market can’t either.

So we’ve gotta do our best. But I don’t see why it’s a bad thing to bid people off other projects.

And again – insofar as their is bidding off other work, it’s a short-term phenomenon. In the long-run, so long as we do our best to approximate the social value of this research, the bidding away that goes on is bidding away that we’d like to see happen.

I think the issue ultimately should be attaching the right social value to publicly funded research, not being concerned about short-run inelasticities that Goolsbee’s work picks up. If we get the valuation right none of the bidding away should bother us.

And I think good social science tells us two things: positive externalities are underfunded by the market and corner solutions are rarely optimal except in some unusual circumstances. So I think good social science is on the APSA’s side here. Of course there’s a lot more legwork to do to determine the right amount of funding."

Friday, May 25, 2012

New Acquisitions

Gave a lot of books to the library so of course I had to drop by the used book sale there. It did not disappoint. I got a handsome hardback copy of Vannevar Bush's Science: The Endless Frontier (1945). It was one of those important books that I never picked up a copy of because a pdf was readily available. This was a 1980 re-release that also includes the associated committee reports as appendices.

So the book itself is beautiful, has a lot of good content, and is just a good one to have. But another great part about it is where it came from. Based on the imprints in the book and along the spine, it was donated given away to the library by DARPA's technical library (DARPA is just a block away from the Arlington Public Library). So DARPA's old copy of Bush's report - pretty cool!

btw - one of the things I appreciate about the book is that its chapter on workforce issues did not obsess over shortages and labor supply issues and out-doing the Soviets in the same way that a lot of people associated with science policy did in the 40s and 50s (and even today for that matter). Bush takes a fairly measured approach. He does dedicate a good deal of space to a very specific supply problem: the fact that the draft and the war generated a deficit in new scientists and engineers that would have otherwise gone through college during the war years. That, of course, is a fairly legitimate supply concern and it's not grounded in nonsense about chronic shortages.

Is Irving Fisher really "the greatest economist America has produced"?

Tyler Cowen shares an article from Yale's alumni magazine on Irving Fisher's views on eugenics.

Aside from the obvious thing I find objectionable in the article (the eugenics), I was also a little surprised by this line "Fisher is widely regarded as the greatest economist America has produced". The author then goes on to cite a 1947 statement by the Harvard economics department to that effect (right after Fisher's death).

But is that really enough? In 1947 Paul Samuelson, Milton Friedman, Kenneth Arrow, and Robert Solow were just getting their start. Would the Harvard economics department make that judgement today? Even before the giants of the mid- to late-twentieth century, you have J.B. Clark who made an awfully big impact.

That having been said, Irving Fisher obviously looms large in the history of American economic thought. I think Clark, Samuelson, and Friedman could challenge him because of their role in a revolution in thought (in the Kuhnian or near-Kuhnian sense). Samuelson and Arrow could challenge him simply because of the sheer breadth of their contribution.

What do you all think? Who is the greatest economist America has produced?

Frum on Political Dysfunction

I'm no political scientist of course, but a lot of the points he raises here seem to make good sense. One thing it made me think of is the issue of centralization and decentralization of power in institutions of governance. We generally think decentralization is good. But what, exactly, is to be decentralized? It probably makes more sense to decentralize jurisdictions and to decentralize tasks, but to more heavily centralize the execution of those tasks.

So I've advocated on here a lot that more of the heavy lifting of health reform needs to be done at the state level (just like welfare reform), and not at the federal level. That's a decentralization of the task itself, and I think that's a good idea for all the traditional reasons we think decentralizing power is a good idea. But given the distribution of tasks, I think Frum has a point that you want to be careful with how much you decentralize the decision making within a governance institution. Of course you want an ultimate decentralization of authority through democratic and constitutional measures (i.e. - voting decision makers in and out, and checking and balancing their authority), but you can still have that in a system where decision making is centralized and there aren't a million different individuals that have the authority to hold things up.

Arguably this is what was wrong with the Articles of Confederation. The Articles actually empowered the central government to do a lot of the things that it was empowered to do under the Constitution. There was some change to the centralization of tasks in the Constitution, but there was much more change to the centralization of power within the institution performing the tasks.

So next time someone talks about supporting "decentralization of power", probe a little on exactly what they mean by that.


Thursday, May 24, 2012

A Krugman Kontradiction

This is very misleading (bolded, below):
"Tomorrow is Lalaland, doing Bill Maher. Also on, Art Laffer.
This might be an occasion to revisit some of the predictions various parties made a few years back. Here’s Laffer three years ago, Get Ready for Inflation and Higher Interest Rates:
But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.
OK, it’s only three years, so I guess there’s still time for the hyperinflation — but it had better get a move on. I think my take is doing a bit better:
Let me add, for the 1.6 trillionth time, we are in a liquidity trap. And in such circumstances a rise in the monetary base does not lead to inflation."
He DID NOT say that 1.6 trillion times. That is blatantly false. Geez, I wish this hack would just quit it already.

[If this post confuses you (1.) don't worry about it, and (2.) why the hell aren't you reading Bob Murphy? He's got some of the best blogging on the internets!]

To quote Bill Maher: "I kid Bob Murphy".

I do think this will be a particularly good thing to talk about. The European comparisons are so wishy-washy to me because of the damn counterfactuals. But what Krugman is pointing at here is a solid qualitative difference in prediction. Not dueling, dubious marginal effects. I don't think economists have crystal balls for complex systems - I'm suspicious of forecasting. But this sort of qualitative forecasting oughta mean something and oughta be possible. And if I recall even Bob Murphy has backtracked on some of the stronger claims of the sort that Laffer is quoted on above.

btw - here's a great performance of another wonderful economist on Bill Maher. Krugman is long overdue:

This is why I could care less about problems with interpersonal utility comparisons

Here. (HT Gene)

To put it bluntly, "screw Felix". I find it very odd that welfare even made it so big in economic science. Marginal subjective value informs personal decisions. That's the role it plays. Anything more than that is a little odd as a scientific matter.

Now as a practical matter we can probably say a little more, because it's a nice short cut to some conclusions. But there's no reason why we have to accept maximum total utility as the metric we're interested in. It's perfectly reasonable to say "let's just assume a more consistent utility function for everyone, (because screw Felix) and figure out what maximizes that". That's a defensible practical approach. And I suspect that's how welfare analysis sneaked its way into economic science. But it's highly dubious as a scientific matter.

Because as a scientific matter, there may be Felixes out there. But as a practical matter, we're well within our rights to not care, and most of us don't.

Quote of the day, from Leon Keyserling

This is from a 1965 New York Review of Books comment agreeing with Daniel Bell's dismissal of the problem of "automation" for employment. He discusses that in the first paragraph, but I found this next passage particularly interesting:

"I agree also with Dr. Bell that an adequate rate of economic growth, which means growth in total demand, would result, with relatively unimportant exceptions, in corresponding modifications in the structure of the labor force, which means that the problem of “structural unemployment” has been grossly exággerated. But Dr. Bell perhaps does not stress sufficiently that vast changes are needed in what I call the structure of demand, or the internal composition of aggregate demand, in that the extent to which a given expansion in demand and production will increase employment depends greatly upon the rates of productivity advance in the particular areas of production against which the demand is exerted. These rates of advance in productivity vary greatly in various sectors of the economy, and also there are wide variations as to the amount by which demand for various products may be expanded in terms of the needs and desires of the people, even assuming that they have plenty of money to spend. This observation supports the very important conclusion, reached by Dr. Bell on value judgments which I devoutly share, that the changes in the structure of demand required to restore and maintain maximum employment require very much more emphasis upon expanded public spending, and a halt to the veritable orgy of tax reduction in which we have thus far engaged. We cannot, with a continuation of this horrible over-reliance on tax reduction as the main weapon of policy, clear our slums, rebuild our cities, meet our grossly under-serviced educational and health needs, replenish and expand our natural resource base, bring our levels of Social Security and welfare payments up to the standards justified by our productive capabilities, nor mount anything approximating a full-scale war against poverty."

This is an externality problem applied to macroeconomic policy. Guaranteeing full employment is one thing, but guaranteeing an optimal full employment, from a welfare (or as he calls it here - a "value" perspective) is something else entirely. This is one major advantage that fiscal policy has over monetary policy, aside from all the "zero fiscal multiplier if that's what the Fed wants" stuff.

Wednesday, May 23, 2012

(In case you didn't figure it out from the beard)

I was searching for pictures of Keynes to include on a post and came across this one:

...somebody out there either isn't too sharp or doesn't think you're very sharp.

Pop quiz: what man is depicted here?

Mainline economists sweep economics association favorites

The Mainline (I'll get to the "favorites"... allow me my digression)

Pete Boettke is a proponent of distinguishing between "mainline" vs. "mainstream" economics. Mainline economics is economics built on the solid foundation of scientific practice and the insights derived from economic science - unalloyed by ideology, fad, etc. Mainstream economics is a principally sociological designation - it is whatever is fashionable at a particular point in time, and it may or may not coincide with the "mainline".

I think Pete's parsing of what counts as "mainline" is pretty hard to defend - but I like the concepts themselves.

It seems to me the two indisputable anchors of the mainline of economics are Adam Smith and John Maynard Keynes. Smith's analysis of the market order and the gains from exchange speaks for itself, I think. For most people Keynes speaks for himself too - but since he doesn't speak for himself for a lot of my somewhat idiosyncratic group of readers I'll clarify. After Smith a lot of people took the conclusions about the order of the market and made some inappropriate extrapolations about both the stability of the market and more importantly the optimality of that market order. There was also some more specific vague thinking about savings and investment, as well as the role of expectations in the market order (the market is, after all, a place where people's planning for the future is an important motivation). Keynes cleared up a lot of this, bringing in a lot of very solid, old concepts from people like Malthus and the mercantilists (whose respective metaphorical babies had been thrown out with the bathwater), as well as new ideas, and integrating a lot of the advances of early twentieth century thinkers like Wicksell, Marshall, Hawtrey, Fisher, Kahn, etc. And, of course, aside from being an excellent synthesizer, he made his own contributions (particularly around clearing up the confusion surrounding savings, investment, and interest). It was good economics and it set the course for much of twentieth century economic science.

So - who is the modern anchor of "mainline economics"? Without diminishing the many great economists out there today, it seems to me one obvious answer is Paul Krugman. Krugman's ties to Smith are obvious. Krugman essentially won the Nobel Prize for bringing Smithian economics back to trade theory after a long, long, long Ricardian hiatus. Oh, and he applied similar ideas to lots of other modern problems too. His ties to Keynes are obvious as well. I think Krugman's channelling of Keynes really came on the scene with Japan in the late 1990s. Of course many people at Princeton at the time participated in this revival of thinking about Keynesian themes of expectations, fiscal policy, and liquidity traps (Bernanke, Woodford, Svensson, etc.), but Krugman clearly became this group's public and intellectual face.

So there is our mainline: Adam Smith, John Maynard Keynes, and Paul Krugman. It's not a faddish looking list. You may disagree with some of them, but these are guys that had good, clear answers to the premier scientific questions of their time, and most importantly - time has demonstrated that the answers hold up.

Krugman is a hot potato because he's our contemporary and he has political views that he expresses. Fine. Maybe you don't like everything that Smith and Keynes each thought (and I know I have readers that question both), that's fine too. But if you think that either of them is somehow a subverter of economic science or that they haven't made monumentally important scientific contributions, I think you need to reevaluate your objectivity on these questions.

And they are the clear favorites

I think economic crises offer an opportunity for serious critical reflection. In a sense, they raise the stakes of the science, which gets people to pay a lot closer attention. So given this focused stance, who are economists' favorite economists? According to a new paper by Klein, Davis, Figgens, and Hendengren (2012), Smith, Keynes, and Krugman dominate the list. There are four categories: pre-20th century, deceased 20th century, over 60, and under 60. Adam Smith wins the first category, Keynes the second, and Krugman the fourth. Granted, the academic societies surveyed have specific leanings, but even among the AEA and the regional associations, these three dominate. This is very good to see. Friedman and Mankiw also do well, which I am also happy to see.

The over 60 category is interesting just because it's so diverse. The overall winner is Gary Becker, but there was a lot of diversity across associations. Arrow and Stiglitz both did well too.

More forfeiting???

In the last post I noted that it seemed like Pete Boettke was excusing himself from the discussion - "never mind them... they're illusionists, distorters, not in the mainline of Adam Smith, ideologues, etc."

I guess Don Boudreaux is throwing in the towel too. He writes: "Keynesianism isn’t economics; it’s a rejection of economics"

Well I guess that settles it!

Don goes on to lecture us Keynesians on the fact that... well... that the economy produces lots of different things. Oh - and microeconomic forces are important.

Gee, thanks Don. There's only one way to describe the claim that this was lost on Paul Samuelson: breathtakingly ignorant. And it's getting really, really old.

Assault of Thoughts - 5/23/2012

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

-  Happy Birthday Bob Murphy!

- And speaking of Bob, he's got three more posts on Krugman, measuring austerity, etc. The first one is a pretty traditional "Krugman Kontradiction" of his which - as usual - I think is pretty weak. He tries to catch Krugman inconsistently discussing bailouts, automatic stabilizers, and stimulus. The case is pretty simple though - bailouts were a critical recovery policy but can in no way be considered fiscal stimulus (and were never called fiscal stimulus by Krugman), and automatic stabilizers and stimulus packages both are fiscal stimulus but it's reasonable to talk about each separately. The only contradiction Bob establishes is that over the course of four years Krugman has used the phrase "big government" to refer to different things at different times... meh. The second post I agree with: deficits have long been used as a measure of the fiscal stance by Keynesians. I'd argue it shouldn't be the only measure, but it's obviously an important one because it says something about government participation in the loanable funds market. Finally, he has a post up on on the subject.

- Ryan Murphy has a good post on Hayek, but I'm not sure he thinks I should think it's a good post on Hayek. A few good points I think most reasonable people should accept: (1.) Hayek can be hard to parse; (2.) Road to Serfdom shouldn't form your whole conception of Hayek; (3.) if your march to socialism doesn't get you to socialism obviously Hayek is going to think you've heeded him by stopping the march to socialism. That's a plausible thing for Hayek to argue. It's plausible for others to argue that they were never marching to socialism in the first place. Nothing jumped out at me as something I disagree with in terms of the interpretation of Hayek in this post. I disagree, of course, that "the logic" (to use Ryan's words) that got you to a social democracy ever represented a rejection of individualism or The Great Society in the first place. One last point - Ryan notes of Hayek's discussion of Communism and Fascism that "in many circles today it is almost banal". I'd add that in many circles in 1942 Hayek's observation was banal. Calvin Hoover, an economist at Duke who would eventually associate with Keynesianism, made this point in a number of widely read books many years before Hayek. Keynes of course also tied the totalitarians (fascists and communists) together and specifically cited their mutual rejection of individualism before Road to Serfdom. Needless to say, Keynes was not a minor intellectual figure in Britain in 1942.

- Mark Thoma shares Herb Gintis's excellent defense of the way that market exchange makes people more moral (or, perhaps a better way to put it, is that moral progress and liberal social institutions go hand in hand).

- A disappointing post from Peter Boettke. Maybe it's just me, but when I read Pete accusing the other side of pushing the "economics of illusion" and being driven by ideological imperatives to "distort" the truth, it sounds like he's excusing himself from the discussion. This isn't a general "there are people out there who do this" claim. There are people out there who do this, so that's fine. This gets pretty specific. This is exactly the sort of post that made me completely give up on Russ Roberts, so I hope it's just a fluke or a moment of passion for Pete.

- Jonathan Catalan has good thoughts on free banking here.

Tuesday, May 22, 2012

Krugman and European Stimulus Comparisons

A lot of people have been discussing Krugman's comparison of the American stimulus to European countries, and I have a few scattered reactions I wanted to share on it.

I should preface all that, though, by saying that I don't really like these posts much from Krugman anyway. It's not that there's anything necessarily wrong with the approach, it's just so hard for me to know what to make of them. One of the posts that's been discussed compares the U.S. to Sweden, for example. What does this tell us exactly? To know what it tells us you have to know what would have happened in both Sweden and the U.S. without the government spending that went on. I feel like I have a rough sense of what I'd expect in the U.S., but no idea when it comes to Sweden. You have to know something about the monetary policy stance (I don't know that for Sweden), and you have to know what was going on in the financial sector (I don't know that for Sweden), and aside from those two elephants in the room you have to know exactly what was going on in the economy. I don't, so I really don't get much from these sorts of posts. My RSS feed is pretty long, so often (knowing I'm not going to feel like I get much out of it), I even skip over these posts.

But I do think there are a few things to say about some of this ongoing conversation.

I. What data to look at?

That can be a tough call, but generally I think:

1. You can't just look at deficits. You have to look at expenditures, but probably deficits and expenditures together. J.R. Vernon does a great job - in reviewing some empirical work by Christina Romer - highlighting why this is critical. Tax multipliers and spending multipliers are different because of differences in public and private MPCs. Looking at deficits therefore understates the fiscal stance.

2. You can look at any level of government spending, because what we're concerned with is marginal effects. Another dollar of spending by the Department of the Interior is going to increase output for Keynesian reasons, after all. But do you want to look at just any old measure of government spending? I don't think so. If we're talking about government policy it seems to me that we should look at total government spending (i.e. - federal, state, and local), but of course that's a judgement call. We think of state and local government as "government" in almost every other discussion. Much of the federal stimulus went to state and local governments. And most critically state and local expenditures are determined politically and not by the market. Ultimately I think you just need to be clear about what your claim is.

3. I am suspicious of looking at things as a percent of GDP (although I'm sure I do it a lot). We're looking at cases where output is shrinking. Think of what government spending as a percent of GDP would look like if government did nothing and the economy shrank. If you're looking at a percentage of GDP you would say the government was stimulating the economy. That makes no sense at all. Nobody is claiming that having the government take up a larger share of the economy is inherently a good thing. The claim is that increased demand is a good thing.

4. Getting a sense of the trend is always important. Growth below trend seems like austerity to me.

II. Krugman's Ireland Post

Krugman had a post recently looking at Irish austerity. I liked it better than most because it basically said "hey - the Irish are doing austerity", rather than trying to make any kind of multiplier point which, as I said above, I'm uncomfortable with. Bob Murphy didn't like it. Russ Roberts didn't like it either. It's true I've pretty much given up on Russ, but I thought this post was especially bad. Krugman seemed to be saying two correct things: (1.) that the increase in spending in Ireland earlier in the crisis was the bank bailouts which may or may not be a good financial rescue package, but certainly isn't what we typically think of as Keynesian stimulus, and (2.) welfare program growth has not been due to any alterations of the welfare state. Russ seemed to think he said that welfare program growth does not count as stimulus. I still can't find where he said that. I emailed Bob about it and I think it's a difference in interpretation (and of course, I think what I think is clearly right).

The takeaway of this post is that once you take out the transfers to the banks, Irish spending has been flat through the crisis (even taking into account the increase in welfare spending, since other spending declined). Essentially standing still (i.e. - below trend) as your economy collapses is austere.

III. Swedish Stimulus

There's also been a lot of acrimony over Krugman's Sweden post. To repeat my point from above, I'm a little hesitant to get too excited either way over this since I have no idea what's going on with Swedish money or Swedish banking. But Krugman seems basically right that Sweden doesn't seem to have been all that austere. I took a look at OECD data, and Swedish public spending growth seems about on par with the U.S. from 2005 to 2010 (they haven't posted data after that, but that's the heart of the crisis). It seems to be growing somewhat slower than U.S. federal spending (Bob posts federal spending too) and faster than U.S. state and local spending. It works out to low single digit annual growth rates.

I would caution one thing about this data - like the Irish data, it includes capital transfers. That's a decent share of U.S. federal growth (6.051% of U.S. federal spending in 2009), but not a big part of the Swedish growth (0.508% of Swedish public spending in 2009). So if we're talking about spending that we normally think of as stimulus (spent on output, not stocks of assets) maybe Sweden was even less austere than the U.S. I don't have time to do all the comparisons now.

But the difference in capital transfers also gets at one of the elephants in the room I mentioned earlier: I don't think Sweden had a banking crisis. That matters tremendously if we are talking about post-recession growth trends. It probably makes all this talk of public spending levels superfluous.

To wrap up Sweden, LK has a good post on it this morning, and he makes an important point: a good initial response lets you get back to standard fiscal policy sooner.

I know people are going to say what they've said many times before: that I am letting Krugman off the hook because... I'm not sure why. I'm not sure what they think I gain by being easy on Krugman. That's not what's going on here. I honestly don't see the big problem with Krugman's posts. I probably wouldn't have posted so much about it, for the reasons I stated above. But I don't see any great malfeasance.

I would say this: Sweden certainly doesn't provide any evidence that shakes my faith in Keynesianism. Granted, a couple Swedish data points don't provide a super clear picture either.

Monday, May 21, 2012

Lies your teacher told you

1. That Solow, Samuelson, and all those other crude, naive Old Keynesians thought the Phillip's Curve was a structural relation. Not true guys (HT Robert Waldmann). Lucas drove the point home in a very valuable way, but like many great critiques, he had to trump up the charges to really make his point (Keynes did this too, of course).

2. And speaking of Keynes, the other thing you often get from people is the impression that nobody cared about rational expectations and forward looking behavior before the 70s and 80s. There is a grain of truth to this. The old models abstracted from that, but that doesn't mean the economists that came before the models ignored the point. Jonathan shares a great passage from Keynes which, when I read it, sounded like it could have been the introduction to a seminal article on rational expectations fifty years later:
"The psychological time-preferences of an individual require two distinct sets of decisions to carry them out completely.  The first is concerned with that aspect of time-preference which I have called the propensity to consume, which, operating under the influence of the various motives set forth in Book III, determines for each individual how much he will reserve in some form of command over future consumption. 
But this decision having been made, there is a further decision which awaits him, namely, in what form he will hold the command over future consumption which he has reserved, whether out of his current income or from previous savings." (the General Theory, page 166).

Thorstein Veblen had some good ideas

Bryan Caplan marvels over the organic food industry:

"Right-leaning people typically believe that (a) markets work, and (b) organic food is a scam.  I definitely fit the profile.  As a result, my every trip to the grocery store inspires cognitive dissonance.  Organic food isn't merely on the shelves; it's growing by leaps and bounds.  The organic industry itself claims that sales grew from $1B in 1990 to $27B in 2010, with 7.7% sales growth in 2010.  What on earth is going on?  How can my cognitive dissonance be resolved?

The ideologically easiest escape route is to drop (b).  Maybe the health benefits of organic food really do justify a 30-50% price premium.  But nothing
high on Google Scholar inspires confidence in this position.  Major literature reviews in 2009, 2003, and 2002 report that (a) there's little solid evidence about the health benefits of organics, and (b) existing evidence reveals little health benefit of organics. 

This is hardly surprising given the emotional, credulous cognitive style of organic consumers.  Can you imagine the typical "all-natural" fan changing his mind in response to peer-reviewed nutritional research?  That's just not how they roll.

The second-easiest escape from cognitive dissonance is to water down the meaning of (a).  Couldn't you just say "Markets work"="Markets give consumers what they want," then add "Lots of consumers want organic food"?  Sure, but this escape route overlooks a key distinction.  Perhaps there are some consumers who simply want organic food, come hell or high water.*  But many consumers of organic food want not organic food per se, but healthier food.  As far as scientists can tell, the latter consumers aren't getting the extra health they're paying for.

At this point, you could water down the meaning of (a) even further: "Markets work="Markets give consumers what they want given their beliefs."  This story seems OK as far as it goes.  But doesn't it damn markets with faint praise?  In a world of fools, markets produce a great deal of folly.  Sounds a lot like
my critique of democracy, no?

Nevertheless, one big difference between markets and democracy remains.  In democracy, if the median voter is a fool, everyone has to live under foolish policies.  The great redeeming feature of markets is that anyone who figures out that, say, organic food is a waste of money can immediately stop wasting his money.  This is far from a perfect system.  But democracy, unlike markets, adds injury to insult.  In the market, the rationalist suffers fools.  In democracy, the rationalist doesn't just suffer fools.  He obeys them.  Or else

Let me just say I think almost all of what Bryan says here is part of the answer - nothing is wrong with any of this. But my first reaction is to go to Veblen. There is on scientific study saying fur coats keep you warmer than faux fur coats either. So? This is largely a status thing.

I also think it's an altruism thing. It's not necessarily themselves that people want to keep healthy - it's the environment. Whether organic foods do the trick there or not is not something I'm qualified to answer, but I don't get the impression that organic food consumers are just engaging in healthy eating.

Saturday, May 19, 2012

And our gargoyles are guarding the kitchen

Deck (through the window) and kitchen shots

Some of today's work

A restructured library

One thing I've always found satisfying is a complete restructuring of my library. The move to the new house afforded me the opportunity to do that. Groups of books that started with only a handful that in the meantime grew to a shelf can be collected together, etc. How your books are organized is both influenced by and influences how your thoughts are organized.

My go-to bookshelf, to the left of my desk, has some important categories that used to be scattered across several shelves:

My history of economic thought shelf has now been divide between two shelves: a shelf shared by Cambridge (Marhsall, Pigou, Keynes, Robinson) and Austrian thought, and a shelf entirely dedicated to the history of American economic thought. My American economic thought was previously scattered but I think it's good to have it together. Also on this bookshelf is a shelf dedicated to my economics of science and engineering books. Above that is a shelf dedicated to labor economics. Above that is a shelf entirely dedicate to the interwar economy, with books on the Versailles conference on one side, running through 1920-21, the twenties, and the depression on the other side. Above that is the non-labor, non-historical economics.

The other bookshelf in the room is entirely dedicated to American history. The most important shelf on that bookshelf is dedicated to local (i.e. - Maryland and Virginia) history in the mid-twentieth century. About half of that is taken up with books on the Maryland Constitutional Convention of 1967-68, and the other half has a mix of Virginia and Maryland material and some Civil Rights movement material. Jefferson and Washington share a shelf. Colonial and revolutionary history have another shelf. American economic history has another shelf. There is about half a shelf dedicated to Marxism and socialist thought at the bottom.

The third bookshelf in my study has a shelf of philosophy at the top, a shelf of random social science (some political science here) under that, and the other four shelves on that bookshelf are taken up with twentieth century history up through current events (mostly international, with lots on energy). These four shelves do something I've been wanting to do for a long time: integrate my library with Kate's library, which has been separate for awhile. That means there's a ton of twentieth century Russian history. But the point is, it's ours now - not mine and hers. That's good I think.

She used to have a lot of Russian literature mixed in with her Russian history. That's purged. All fiction is in the bedroom. Almost no fiction is in the study (I make exceptions for Lovecraft, Melville, Fitzgerald, and a few others that seem to fit well with the American history shelves).

Travel books, cookbooks, and (temporarily) my half dozen accordion folders with printed articles are in the second bedroom.

And now, I'm going to make bacon and pancakes to fuel us for a day of painting.

Would we expect dualism in market judgements

Following links on Unlearningecon's blog, I came across the blog "anti-mankiw", which (despite my generally pro-Mankiw stance) has some good material on it. This post, which criticized the "markets in everything" mentality, was particularly interesting:

"A few years ago, in a conversation one of us had with a fellow graduate student, the issue came to surface of how to approach certain issues that have become a mainstay of the mainstream curriculum over time. We were specifically discussing the issue of how easy it is to fall into the so-called "markets in everything" trap -- whereby you start thinking about how markets for everything from organs to healthcare could solve most of the problems of social inefficiency. But the issue is much more general than that, and exposing that generality is the topic of this post.

So when one of us was discussing how to approach the "markets in everything" issue, which is really quite widespread among the blogosphere... our friend made the point that, why not start from the other direction, and work your way back? Instead of beginning with the idea that everything should be marketized, begin from the idea and theory that nothing should be marketized, and then ask what would qualify something to be marketized. That is to say, we should expose students' inherent repugnant feelings about a market for body parts or healthcare from the start, and then work backward from there, adding in markets as a qualification of the general argument that commodification should not exist. (In fact, if you think historically, this is actually the way in which the debate occurred -- we didn't start out with a fully marketized society and we only got there from peeling off various layers of social-institutional control!)

I think there's probably something worthwhile in this approach. My question is, would we expect dualism in this answer? Would we expect to come up with the same answer from the other direction (and, as the post later suggests, simply have a better appreciation of problems like exploitation), or would we come up with a fundamentally different answer? If we come up with a fundamentally different answer I'd personally like to understand why.

It also just makes you think about what normally qualifies a good to be traded in a market for mainstream economists. Usually people talk about rivalry and excludability (which together give you four different institutional arrangements). I usually don't think this is very helpful. I find you have to also talk about externalities. We got into this with the students in the intermediate micro class this year when we discussed health care and education in particular. Both are rivalrous and excludable (education probably isn't completely rivalrous... but it can get that way quickly with classroom crowding. Certainly on important margins its rivalrous). Both are "private goods" in that sense and are certainly treated like private goods in a lot of societies. But the public sector plays a big role in each. Why? You need to bring in externalities and concerns about equity too.

Equity - as I've stated many times on here before - really is an externality issue at its heart anyway. The poor kid in the inner city had unequal chances than the middle class kid in the suburb because they are third parties being influenced (coerced?) by the decisions of others. This was Jefferson and Paine's point when they argued for egalitarian liberalism.

Are these the issues that would come up if we solved the puzzle from the other direction? I'm not sure. The discussion on the anti-mankw blog is a little vague about how this would proceed. If we just go through and look for rivalrous, excludable goods with internalized costs and benefits we ought to get the same result, but I'm not sure that's what he has in mind.

Friday, May 18, 2012

So here's a question...

...why do critics of "mainstream" or "orthodox" economics always have such a distinct ideological background? They're always either well to the left or well to the right. In contrast, defenders of mainstream economics run the gamut from left to right.

Does this tell us anything about the nature or value of the dissenting position? Is there a reason for this? Is there a good reason for this? Or is my premise wrong: do the dissenters actually have the same ideological distribution as the mainstream (note: thinking up one centrist dissenter does not refute the premise)?

Unlearningecon really ought to be better than this

He publishes a list of "'Free Market' Double Standards" that leaves a lot to be desired.

First I still don't understand his obsession with marginal product or why the marginalist condition for profit and utility maximization is so repugnant to him. Humans don't do calculus when the optimize, I'll grant (and I have granted recently), but they do (roughly) optimize, which implies an equation of marginal costs and benefits (at least in a competitive market). And, btw, while people don't use calculus "do X until it costs about as much to do one more time as it benefits me to do one more time" is a pretty easy heuristic to follow, for those of you who like to emphasize the heuristics point. That takes up the first couple lines of his critique. Moving on...

On #3: Alex Tabarrok and Justin Wolfers are different people. This is not a "double standard".

On #4: Milton Friedman and Robert Lucas are different people. This is not a "double standard". This one is particularly aggravating because while Friedman and Phelps did foreshadow some of Lucas's (excellent) critique, they still contributed to the literature on a reduced form Phillip's Curve that was Lucas's target in the first place!

On #5: Scott Sumner is one person. Good job. [I couldn't decide if that one was snarky or positive reinforcement... eh, who cares]

On #7: This seems like an empirical question. Anyway, I don't think any free market economists have denied that profits and income motivate those who earn obscene amounts of profit and income (and I use "obscene" in the nicest way possible).

On #8: This badly misrepresents Arrow-Debreu. There is no one consumer with one set of preferences. There are, in fact, i consumers each with their own idiosyncratic, perverted, quaint, or boring set of preferences (Arrow-Debreu, 1954, pg. 269). i can be more than one if Unlearningecon wants it to be. i can be 10,000,000,000, thus exceeding the number of consumers currently living on the planet, if Unlearningecon wants it to be. The only constraints on the preferences are that they be complete, transitive, and continuous. That doesn't seem like too much to ask to me. "Complete" is the really suspect one, but I think "locally complete" should be enough to appreciate the point of the model. Even given that particular nit that you may be interested in picking, it hardly seems like a "double standard" to me. It strikes me as being more along the lines of Nobel Prize material (and I am not alone in this assessment. The Nobel Prize committee, for one, seems to agree with me. The last line is pretty dumb too... how are you "robotically responding" if you follow your preferences??? Isn't that the opposite of responding robotically? Don't we usually reserve the word "robotic" to describe people who respond to some predetermined protocol regardless of their preferences? Don't we reserve the word "robotic" for people who don't even appear to have preferences of their own? Isn't Arrow-Debreu exactly the opposite of this?

 On #9, #10, #12, Kudos.

I think the #11 community is probably pretty narrow, and they're probably people we all ignored anyway.

On #13, counterfactuals work both ways. I'm not quite sure this is fair. I do think the point is right (assuming we put in some language in there about cyclicality... cuts probably do crowd in during booms).

On #16: I don't understand how this problem doesn't solve itself.

#17 Just seems wrong, but I have to think about it more. Anyway, in terms of monopolies we often draw flat marginal cost curves for monopolies for precisely this reason. I don't se why upward sloping supply curves depends on diminishing returns - it seems to only require heterogeneous technology.

On #18 I think this describes very few people.

On #20: I think almost everyone thinks 2008 is related to the last several decades... they just have different perspectives on the relevant contributing features of the last several decades.

On #21: This is more of a technicality, but Caplan is talking about relative prices in the first post and general prices in the second post. Those are two quite different things. The observation that these are two quite different things is an observation that spans all sorts of ideological backgrounds.

On #22: Dr. Pirie is not a Congressional Republican. this is not a double standard.

And #23 isn't even a double standard at all!!! This is one of the greatest virtues of capitalism!!! That Unlearningecon is identifying this as a contradiction is not a good sign at all.

Glasner on Sraffa and Hayek

I don't have time to read this now, but this old post by Glasner comes highly recommended by JP Koning. Murphy defends Sraffa in the comments. In anticipation of a fall project I've been thinking a lot the last couple weeks about whose business cycle ideas have done a better job applying Wicksell: Keynes or Hayek? When you bring Sraffa in, though, you're forced to ask yourself the question "what's the value of applying Wicksell anyway?". I do think there's value in Wicksell, but I think Sraffa's point about multiple rates of interest needs to be considered. I think you consider that point, though, by calling those multiple rates of interest "marginal efficiencies of different types of capital" and reserving the concept of "interest" for money (even then, of course, you've got lots of different time horizons and default risks to worry about). We can still talk about Hayek with all these adjustments (and I'm going to try to). I'm not one for throwing the baby out with the bathwater. But there were a lot of rough edges to work off with Hayek, and whereas Keynesians seemed to work off their rough edges over time Hayek just seemed to drop out of the conversation.  I will confess, though, that I don't know Sraffa's critique nearly as well as I know Hayek or Keynes (and even with Hayek I'm not familiar with much of the PTC stuff - which is something I ought to remedy).

Sometimes I wonder if my wife actually listens to me...

...for example, when I ramble on about how Tesla was awesome and Edison was a jerk.

Then yesterday she shared this with me. She does listen! I guess I should be careful about what I ramble about. Edison gets clobbered in it of course. Interestingly enough they reference J.P. Morgan but they don't mention him by name.

Thursday, May 17, 2012

Catalan on Pigou on Keynes on Hayek on Keynes


I must confess, I've never quite understood why Keynes bringing Prices and Production into his reply to Hayek was a dirty tactic. Atypical, sure. But what is wrong with it exactly? I have no idea.

Hayek said he wasn't quite sure what to make of certain parts of the Treatise on Money. Keynes pointed out he couldn't make heads or tails of the Treatise because Hayek was making assumptions about the interest rate specifically in his review that he had used in Prices in Production. Keynes detailed what he thought was wrong with these assumptions (and what was different from his own assumptions), which of course was tantamount to describing what he thought was wrong with Prices and Production. He could have danced around the issue, but that was the clearest way of differentiating how Hayek was trying to read the Treatise from how Keynes was trying to write the Treatise.

So someone tell me - what's wrong with that? Clearly the editors didn't see a problem with it. And this wasn't published in Keynes's journal, after all - it was published in an LSE journal.

Wednesday, May 16, 2012

Recommended Reading

I was packing up my files yesterday and came across Keynes's "The Pure Theory of Money: A Reply to Dr. Hayek" (1931) - his reply to Hayek's critique of the Treatise on Money. So, of course, I stopped packing and reread it.

It's a very good piece. First, I think a lot of Austrians have this image of it as a cheap shot against Hayek but Keynes really makes the case that Hayek was the one that started with the cheap shots. Since Austrians are generally more interested in history of thought than Keynesians, that side of the story usually doesn't get told. The other thing that really impressed me was that the reason Keynes brought Prices and Production into the discussion was to make the point that Hayek was criticizing the Treatise under the assumption that Keyes agreed with him on several fundamental points, which of course he didn't (rendering a lot of Hayek's points moot). Keynes brought Prices and Production into it to highlight the very different approaches of the two men. And finally, what I liked was that even at that early point, Keynes was talking in terms of a liquidity preference theory of interest. He wasn't saying it quite as clearly as he would in 1936, but he was definitely going a lot farther than the leakage of money from the system due to hoarding, which is how a lot of people think about his position at this point.

Hayek had a lot of the General Theory thinking in front of him in 1931, if he had any interest in engaging it.

Some history of my new neighborhood

We're slowly moving things into the new house, and while we were there with boxes last night we met one of our new neighbors from across the street. She was a very nice woman, and she also told me something about the history of the neighborhood. Some of the families had been there for awhile and our neighbor to the left was actually related in some way to the old residents of Tinner Hill in Falls Church.

I checked that out when I got home, and it's an interesting bit of history. Tinner Hill used to be a pink granite quarry. It got its name when Joseph Tinner bought the property in the late 19th century, but before then it was mined by slaves at the Dulaney Plantation. Tinner was deeply involved in early efforts for civil rights. In 1915 he and E.B. Henderson spear-headed a lawsuit to fight residential segregation in Falls Church (which they won). They also applied to the NAACP to open a Falls Church branch, which was the first rural NAACP branch in the country (the area isn't quite so rural anymore). The first meeting of the Falls Church NAACP was in Tinner's house.

E.B. Henderson is famous for fighting for the integration of sports in the D.C. area. He attended Howard University (in DC) and then Harvard, and was the first African American male to teach physical education, apparently. Henderson was also an avid writer of letters to the editor and had 3,000 published in the Washington Post (the Post claims he is the most published letter writer in their history).

Some residents of Falls Church have set up the Tinner Hill Heritage Foundation to raise awareness about the work of Tinner and Henderson. Once we move in I plan on checking this out. They also have an annual blues festival which will happen right when we're settling in - so I'm looking forward to that.

There are many things I disagree with in the comment section of my optimization post... I thought it was worth collecting them.

PrometheeFeu writes: "I think part of the problem is that this may not be emphasized enough in economics college courses. My international relations courses made a big deal of the fact that our models were just tools to understand the world from the very first day of IA101. My economics courses felt like they were making a big deal that people are rational agents."

I have a couple thoughts. The first is agents are rational in the colloquial sense of the term. Some people try to change this into meaning that they're emotionless or that they don't have diverse goals, but I think that's a misleading use of the word. Plus economists are usually not using it in the colloquial sense and have something specific in mind, and that's worth keeping in mind too. As for the point generally I of course can only fight anecdote with anecdote - but I've racked up quite a few anecdotes over the years and my experience is completely the opposite. Economists in my experience are very good at emphasizing that their models are just useful abstractions to illustrate a particular mechanism.

S/he continues: "Maybe it's just anecdotal, but then there is the fact that in many studies, econ students do behave much more rationally than their peers, happily violating social norms in the name of optimization."

Selection effects are very important here. Certain types of people choose to take economics. I'd also wager the anecdote is an overstatement. And finally, a lot of the empirical evidence on this comes from experimental economics games. To me, that just says that economics students know the theory behind the games and they know how powerful some anonymous, unrepeated defection can be. Insofar as that's the evidence, I'd be wary of generalizing that to behavior in the real world (which, I understand, kind of shoots a hole into the whole point of experimental economics).

Elliott had the most bizarre comment of all: "Policy setters attempting to "de-complicate" the system based on recommendations stemmed from mainstream economic models -- I imagine this is what pisses everyone off -- the reality of "uncertainty" and "entrepreneurship" by themselves should shine a light upon delusional recommendations stemmed from the notion of state enforced common good"
My experience is that it's usually precisely we economists who are the only ones telling policymakers that they are not capable of achieving this. Come on guys - it's the old Hayek line about how the task of economists is "is to demonstrate to men how little they really know about what they imagine they can design"

Charles Rice says: "I agree right up to the part where you said "to develop testable predictions""
This gets to my long-standing point about explanation versus forecasting (and "prediction" is admittedly an ambiguous word). Forecasting a complex system is very hard, whether it's the weather or the economy. We can do OK at forecasting using a process that Charles describes: throwing a bunch of lags and polynomials of a bunch of variables into a model and seeing what gets spit out. That's often what forecasting amounts to. If you're a trader that has its place, but its not economic science because you're not really learning anything about the processes of the economy. I would not be as caught up with forecasting as Charles's comment is. I'm more concerned with testable predictions about the behavior of data. He goes on to say we should bet on our conclusions... I've never understood the fascination with prediction markets. A few interesting bets here and there always makes things interesting, but I don't see what's necessary about that.

Unlearningecon says: "I think the difference is that there is only one variable that the algae adjust to here, whereas when humans make decisions there are a lot of different influences."

I disagree with the first part of the sentence and agree with the second part. Then he goes on to essentially blame the financial crisis on mainstream economics, which is nuts because mainstream economics is giving us the best explanation now of what all happened.

 Min provides another head-scratcher: "First, evolution is a satisficer, not an optimizer. It's survival of the fit, not the fittest. Herbert Spencer did not get it right. In fact, some of the best evidence for evolution is the lack of optimality."

Right. But Min, you seem to have an odd view of the objective function of a maximization problem. It doesn't have to be "maximize my strength subject to these constraints" - that would be the (false) optimizer view of evolution (as you put it). If the objective function is simply to pass on genes subject to constraints - and particularly if those constraints involve a degree of path dependence - you have a satisficer version of evolution. This is what bugs me about critics of mainstream economics who hate the idea that everyone is motivated by profits, for example. Fine! Put something else in the objective function! Mainstream economics is a framework for approaching a problem. I've never heard anyone say "if you don't think people are solely interested in maximizing profits you can't be a mainstream economist". Dierdre McCloskey, great as she is, makes this mistake a lot.

Min goes on: "When the environment changes at the same rate as the organism, the result can be chaotic. Human systems in which agents are adapting to each other can be chaotic, as well."

Well, right Min! Min is a lot like Charles Rice above... I think half the reason why s/he disagrees with me is because s/he thinks I'm saying something that I'm not.

What takes the cake is that Min shares this link about how Russ Roberts butchers a discussion of biology and economics:

Clearly Min is unaware that I harangued Russ over EXACTLY this post and I made most of the points that Mike makes here. Mike argues that economists should be careful when they talk about biologists. The same is true in reverse (although physicists are the absolute worst when it comes to thinking they know something about social science). Clearly Min is assuming I'm saying things that I'm not saying.

Tuesday, May 15, 2012

Glasner on the Fisher effect and inflation expectations

He writes: "when expected yield on holding cash is greater or even close to the expected yield on real capital, there is insufficient incentive for business to invest in real capital and for households to purchase consumer durables. Real interest rates have been consistently negative since early 2008, except in periods of acute financial distress (e.g., October 2008 to March 2009) when real interest rates, reflecting not the yield on capital, but a dearth of liquidity, were abnormally high. Thus, unless expected inflation is high enough to discourage hoarding, holding money becomes more attractive than investing in real capital. That is why ever since 2008, movements in stock prices have been positively correlated with expected inflation, a correlation neither implied by conventional models of stock-market valuation nor evident in the data under normal conditions.

As the euro crisis has worsened, the dollar has been appreciating relative to the euro, dampening expectations for US inflation, which have anyway been receding after last year’s temporary supply-driven uptick, and after the ambiguous signals about monetary policy emanating from Chairman Bernanke and the FOMC."

As I pointed out a while back when David was talking about the Fisher effect and inflationary expectations, this is the exact same point as the liquidity trap argument. It is a little surprising to see all the schadenfreude over Europe. Trouble there does not bode well for us.

Monday, May 14, 2012

Economists talk about utility maximization and profit maximization in the same way that these biologists talk about algae reducing drag coefficients...

Martone, Kost, and Boller (2011) write:

"Intertidal macroalgae must resist extreme hydrodynamic forces imposed by crashing waves. How does frond flexibility mitigate drag, and how does flexibility affect predictions of drag and dislodgement in the field?...  Bladed algae were generally “shape changers”, limiting drag by reducing drag coefficients, whereas the branched alga Calliarthron was an “area reducer”, limiting drag by reducing projected area in flow."

These guys don't actually think that bladed algae reduced drag coefficients. There are lots of equations in the article determining optimal drag coefficients, derived from the laws of fluid dynamics. Nobody is agruing that the algae get together, sketch out the optimal shapes they shift into at a given point on the blackboard given those equations, and then with perfect knowledge, foresight, and technique put it into practice.

But we do think there are good reasons to think the organisms optimize on critical margins. The systems in which they are optimizing may be complicated, but to the extent that we understand the systems they are in we can usually apply a little calculus and pretty quickly come up with this thing called "the optimal point" or "the optimal path" or "the optimal set". We always need to test those calculated optimals against what organisms actually do, of course, but since we've got a good reason (evolution by natural selection) to think organisms grope pretty consistently toward optimality, it's reasonable to calculate the optimality of the system and use it to talk about the behavior of an optimizing organism.

For some reason, people go nuts when mainstream economists do the exact same thing.

Of course human beings don't pull out pen and paper and figure out an optimal choice every time they make a decision. Nobody said they did. But we economists know a lot about the laws governing the social system that human beings operate in. We can bring a little calculus to those laws and quickly get a sense of the sort of behavior that a human being might engage in. We always take that to the data and test and change things where it needs changing. But generally speaking mainstream economics has held up pretty well (that's more or less how you survive as "the mainstream").

Figuring out how human beings approximate optimization - through heuristics, for example - is very important work, just like biologists' attempt to understand the approximation of optimization for animals generally is important work. We award Nobel Prizes for that stuff. We all support that stuff.

But despite the views of some, that is not a reason to dismiss the equally important work of understanding the often very complicated optimization issues involved in human social behavior, in order to develop testable predictions.

Think about the algae and their choice of drag coefficients next time you recycle some tired old criticism of "mainstream economics" and their boorish, naive mathematical models (and maybe try talking to a mainstream economist to see if they actually think the things you are accusing them of thinking, or if instead they're just trying to come up with a workable model of a very complicated system).

Daniel Sanchez announces that "all 10 volumes" of The Review of Austrian Economics are converted to e-book...

(Sanchez's announcement here)... it is the "full collection", boasts the Mises Institute page.

That's funny, I could have sworn The Review of Austrian Economics had 25 issues, not 10! After all, I just announced Volume 25, number 2 on here the other day, and my own article was published in Volume 24.

What's going on?


Sunday, May 13, 2012

An important sentence in Krugman's Eurodämmerung post

"4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:

4b. End of the euro."

I am sick and tired of hearing people say things like "Keynesians don't care about microeconomic factors" or "Keynesians don't think about relative price adjustments". It's wrong - it's simply wrong. If you hear it from somebody they're either ignorant or they have an ideological axe to grind. And the latter case usually has a hefty dose of the former anway.

The whole problem with depressions and liquidity traps in particular is that relative price adjustments can't be made. Right now every relative price adjustment just twists the knife that the financial crisis plunged into effective dmand.

Harberler on Keynes and aggregation

Jonathan shares this quote:

"Let us not forget that The General Theory runs in broad, aggregative terms and is therefore precluded from dealing, and is not designed to deal, with sectional unemployment, which is the result of faulty allocation of resources or of shifts in demand. It is meant to deal only with general, mass unemployment resulting from a deficiency in aggregate effective demand (deflation). Its author clearly assumed that the smaller problems would take care of themselves, if only aggregate effective demand was kept on an even keel or raised when necessary, for example when the wage and price level is pushed up."

I think this is the sense in which one can talk about Keynes dealing with aggregates and not disaggregated issues. Not the sort of stuff that Boudreaux has been posting lately or that he has been citing from Horwitz and White. The market process generally balances competing uses of resources well. Keynes was explicit on this point. The market process does not always guarantee a full employment of all resources.

We can of course talk about interesting specific cases, but this is generally my view of things too.