Gene Callahan and Jonathan Catalan have weighed in. Gene agrees with me that the real difference is in the way they thought about interest rates, and he suggests that which was right is an empirical question and may vary from time to time. Jonathan thinks that a potentially more important difference is between the Ricardo effect and the multiplier (I'm not sure why these are being contrasted with one another, personally).
But most of Jonathan's post is about interest rates again. If I'm reading him right, I think he's suggesting that the interest rate theories are not a "crucial difference" because they ultimately provide you the same conclusion. He writes:
"If the classical loanable funds theory is correct, the aggregate
demand for factors of production equals exactly the amount of money
saved. If Keynes’ liquidity preference theory is correct, there runs the
chance that the rate of interest won’t accurately reflect society’s
time preference. In both cases, the prices of the factors of production
should reflect the nature of the rate of interest.
In other words, even if the rate of interest is higher than what it
should be given society’s time preference, the prices of the factors of
production will reflect total aggregate demand for them. That is, the
prices of the means of production would be lower than they would be if
the rate of interest were lower. We can roughly conceive of this as an
equilibrium ratio between the prices of producers’ goods, the rate of
interest, and expectations of future income."
I think this is right. You could talk about both theories with an AD-AS graph (just ask Roger Garrison!). This is a good point to make because it speaks to my initial reaction to Gene's post. Gene wrote:
"And they were both partially correct: the interest rate is influenced by
both of these factors. So here is where we must get empirical: To the extent that the interest rate is determined by liquidity preference, to that extent Keynes was correct. To the extent the interest rate is determined by the supply and demand for loanable funds, Hayek was correct."*
But what is the empirical test??? We don't have data on liquitiy preference schedules (although presumably we could come up with something). For me, the real testable difference comes back to Wicksell. Both Hayek and Keynes are heavily influenced by Knut Wicksell, specifically the idea that there is a "cumulative process" (and Keynes and Hayek both have thoughts on what that cumulative process is... and perhaps this is what Jonathan was thinking about when discussing the multiplier and the Ricardo effect together) that are set off when the interest rate departs from some "natural rate".
But this works differently for Keynes and Hayek. Keynes suggests that the departure from the natural rate comes during the crash, either because of changes in the interest rate or MEC or both. Before the crash (aside from perhaps some asset bubbles that might induce the panic), the economy is operating normally. For Hayek the interest rate goes below the natural rate before the crash. That sets of an unsustainable cumulative process that ultimately has to end because of the irreversibility of capital investments, the distortions set off by the Ricardo and Cantillon effects, and revisions in entrepreneurs understanding of what's going on.
So here's the heart of all that: what is the empirical test we could do that Gene suggests we do?
If we had a good estimate of the natural rate, we could compare it to the interest rate over the business cycle and assess the strong and weak points of each description of reality.
So why do I think interest rate theory is so important? Because Keynes's liquidity preference theory and the whole constellation of observations about financial markets in the General Theory provides us with a reason to think that the interest rate is higher than the natural rate during the downturn. It motivates the whole description of what we observe.
I am thinking about all these things right now, and Gene and Jonathan should both be prepared to be pestered for thoughts on a draft in a couple months.
* I actually don't hold a pure liquidity preference theory myself (and I wonder if Keynes really would have if he thought about it). So in that sense I'm in between Gene's two poles to begin with. When a person saves rather than consumes, that is obviously informed by their time preference. So even if the marginal decision between keeping money liquid and putting it at interest is primarily a liquidity preference decision, the size of the pool of liquid assets influences the ultimate decision and the size of that pool is clearly determined by time preference! In addition, financial institutions that pay interest are going to be informed by the demand for loanable funds, which is going to be determined by firms' internal rate of return. So yes - interest is definitely the price for parting with liquidity. But the amount of liquid funds available and the demand for the liquid funds put at interest are both determined by time preference. A pure liquidity theory seems far less important to me than the simple fact that liquidity preference is in there at all, introducing a "loose joint".
Saturday, August 18, 2012
Friday, August 17, 2012
Ummm... how about speaking for yourself, Judge?
""Those of us who really yearn for a return to first principles,
the natural law, the Constitution, a government that only has
powers that we have consented it may have... are frustrated by the
choice between Barack Obama and Mitt Romney," says Judge Andrew
Napolitano" (HT - Zach Weissmueller and Matt Welch).
Not me. If he had said "mildly unenthused in my greedier moments" instead of "frustrated" perhaps he'd describe me. Then again, in the pundit's eyes we are always on the brink.
Although I'm not too keen on the whole "natural law" thing. Perhaps that accounts for the difference. Something tells me that's not it.
Not me. If he had said "mildly unenthused in my greedier moments" instead of "frustrated" perhaps he'd describe me. Then again, in the pundit's eyes we are always on the brink.
Although I'm not too keen on the whole "natural law" thing. Perhaps that accounts for the difference. Something tells me that's not it.
Tesla Museum
People are raising money to buy the land for it at Tesla's old laboratory.
Much of my funds have recently been tied up to purchase another piece of property, but I thought I'd pass it on. Aside from Tesla just being a fascinating guy, I like the whole Tesla saga because it has some neat lessons for the economics of science.
Much of my funds have recently been tied up to purchase another piece of property, but I thought I'd pass it on. Aside from Tesla just being a fascinating guy, I like the whole Tesla saga because it has some neat lessons for the economics of science.
Article submitted!
To Notes and Records of the Royal Society, a history of science journal published by the Royal Society, with a strong focus on the Royal Society.
Our resubmission to the Review of Black Political Economy should go in soon too... it's in Marla's hands right now.
Our resubmission to the Review of Black Political Economy should go in soon too... it's in Marla's hands right now.
Brennan on Bastiat and Keynes
Jason Brennan makes an interesting - although I think ultimately wrong - argument about Bastiat and Keynes. He writes:
"Bastiat demolishes populist arguments. To counter Bastiat, you need something like Keynesianism. You need to argue for such things as “animal spirits” and “multipliers”, plus you need to prove, empirically, that the multiplier is large enough to counter Bastiat’s objection."
So Bastiat's naive libertarianism answers a naive populism, and that opens the door for Keynesian arguments.
Sort of, but I have a hard time thinking about Bastiat like this considering it was Bastiat who wrote:
"As a temporary measure in a time of crisis, during a severe winter, this intervention on the part of the taxpayer could have good effects. It acts in the same way as insurance. It adds nothing to the number of jobs nor to total wages, but it takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times."
He is not exactly an enemy of counter-cyclical fiscal policy. It's true he doesn't go the full-Keynes, but I don't think it's entirely correct to say that Keynesian arguments are used to "counter" Bastiat. That doesn't give Bastiat enough credit.
But it is worth thinking about Keynes as presenting the argument that responds to the conditions that Bastiat provides. Bastiat talks about the uses of resources that stimulus is taken from. As he nicely puts it - money doesn't come down "miraculously on moonbeams" when the legislature passes a spending bill.
And this is where Keynes agrees with Bastiat (he doesn't counter him) and steps in. Keynes notes a couple important things. First, that investment is the critical activity, not consumption (see this point in his criticism of underconsumptionist theories), second, that investment is dictated by expectations of future profits, and third that those expectations of future profits are compared to an interest rate that is determined by liquidity preference and not the supply and demand of loanable funds. Since the interest rate limits investment but is determined by liquidity preference, negative demand shocks that increase demand for liquidity can leave idle resources and lower investment levels - which provides a perfect opportunity for the sort of crisis stimulus that Bastiat agrees with, and which does not draw resources away from other activities.
"Bastiat demolishes populist arguments. To counter Bastiat, you need something like Keynesianism. You need to argue for such things as “animal spirits” and “multipliers”, plus you need to prove, empirically, that the multiplier is large enough to counter Bastiat’s objection."
So Bastiat's naive libertarianism answers a naive populism, and that opens the door for Keynesian arguments.
Sort of, but I have a hard time thinking about Bastiat like this considering it was Bastiat who wrote:
"As a temporary measure in a time of crisis, during a severe winter, this intervention on the part of the taxpayer could have good effects. It acts in the same way as insurance. It adds nothing to the number of jobs nor to total wages, but it takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times."
He is not exactly an enemy of counter-cyclical fiscal policy. It's true he doesn't go the full-Keynes, but I don't think it's entirely correct to say that Keynesian arguments are used to "counter" Bastiat. That doesn't give Bastiat enough credit.
But it is worth thinking about Keynes as presenting the argument that responds to the conditions that Bastiat provides. Bastiat talks about the uses of resources that stimulus is taken from. As he nicely puts it - money doesn't come down "miraculously on moonbeams" when the legislature passes a spending bill.
And this is where Keynes agrees with Bastiat (he doesn't counter him) and steps in. Keynes notes a couple important things. First, that investment is the critical activity, not consumption (see this point in his criticism of underconsumptionist theories), second, that investment is dictated by expectations of future profits, and third that those expectations of future profits are compared to an interest rate that is determined by liquidity preference and not the supply and demand of loanable funds. Since the interest rate limits investment but is determined by liquidity preference, negative demand shocks that increase demand for liquidity can leave idle resources and lower investment levels - which provides a perfect opportunity for the sort of crisis stimulus that Bastiat agrees with, and which does not draw resources away from other activities.
My reading has been sluggish, but I just finished a good one
Founding Choices, an NBER volume on economic policymaking in the 1790s. I especially appreciated the chapters on monetary policy and on state constitutions. I'm going to try to write a review of this for an American history journal.
One of the thoughts that came to mind when reading this was that the simple distinction between the "constitutional stage" and the "political stage" that people presenting the Buchanan argument often make is really misleading in practice. The "constitutional stage" is really just a higher level political stage, and it's influenced by prior political stages. There's still value for distinguishing rule-making or institution-building stages from the normal business of political decision making, and these things do change more slowly than everyday policy making. But they change as well and they are every bit as political. Buchanan - as I've always read him - recognizes this. But a lot of people approach the "rules of the game" discussion as different from the political discussion, when it's really not so distinct.
One research area that this book has got me interested in is the role of money in development, which is all quite different from discussions of the role of money in macroeconomics. Needless to say, monetary neutrality - even long-run neutrality - went out the window in the money chapter, with a lot of very convincing arguments.
I'm continuing to plow through Moby Dick, which has slowed down while reading this. I'm a slow reader anyway, and it seems like every free minute this summer has been spent writing rather than reading, or working on some project on the house.
I'm also starting to turn seriously towards my dissertation reserach. I started reading through the articles in the Economics of Training volumes of the "Critical Writings in Economics" series. Reading Gary Becker right and Walter Oi right now. It's drier than Founding Choices, but still interesting stuff. I've also had the opportunity to catch up on some Critical Review articles I've been meaning to read.
I had a good conversation with Bob Lerman yesterday too about my dissertation. He's not my advisor yet, but I think he may end up being my advisor. I'm going to read up some of Dixit and Pindyk on real options and investment under uncertainty, and look into applying that to human capital investments (specifically S&E education).
One of the thoughts that came to mind when reading this was that the simple distinction between the "constitutional stage" and the "political stage" that people presenting the Buchanan argument often make is really misleading in practice. The "constitutional stage" is really just a higher level political stage, and it's influenced by prior political stages. There's still value for distinguishing rule-making or institution-building stages from the normal business of political decision making, and these things do change more slowly than everyday policy making. But they change as well and they are every bit as political. Buchanan - as I've always read him - recognizes this. But a lot of people approach the "rules of the game" discussion as different from the political discussion, when it's really not so distinct.
One research area that this book has got me interested in is the role of money in development, which is all quite different from discussions of the role of money in macroeconomics. Needless to say, monetary neutrality - even long-run neutrality - went out the window in the money chapter, with a lot of very convincing arguments.
I'm continuing to plow through Moby Dick, which has slowed down while reading this. I'm a slow reader anyway, and it seems like every free minute this summer has been spent writing rather than reading, or working on some project on the house.
I'm also starting to turn seriously towards my dissertation reserach. I started reading through the articles in the Economics of Training volumes of the "Critical Writings in Economics" series. Reading Gary Becker right and Walter Oi right now. It's drier than Founding Choices, but still interesting stuff. I've also had the opportunity to catch up on some Critical Review articles I've been meaning to read.
I had a good conversation with Bob Lerman yesterday too about my dissertation. He's not my advisor yet, but I think he may end up being my advisor. I'm going to read up some of Dixit and Pindyk on real options and investment under uncertainty, and look into applying that to human capital investments (specifically S&E education).
Catalan on Inequality
I missed that Jonathan had already talked about the Hagopian and Ohanian inequality article I discussed yesterday in my Cochrane post.
These are his original thoughts, and this is his post from yesterday.
The Hagopian and Ohanian article focuses on the old equality of opportunity vs. equality of outcome distinction. That's a little strange because that's really my concern with inequality: an inequality of opportunity. The problem is inequality of outcomes are often the result of inequalities of opportunities, and they intergenerationally transmit unequal opportunities. I've noted this entanglement of outcomes and opportunities in the past.
So my concern is that while Hagopian and Ohanian profess a concern for equality of opportunities they're really not addressing it seriously, and not offering any new information that would lead us to doubt the problem of inequality.
These are his original thoughts, and this is his post from yesterday.
The Hagopian and Ohanian article focuses on the old equality of opportunity vs. equality of outcome distinction. That's a little strange because that's really my concern with inequality: an inequality of opportunity. The problem is inequality of outcomes are often the result of inequalities of opportunities, and they intergenerationally transmit unequal opportunities. I've noted this entanglement of outcomes and opportunities in the past.
So my concern is that while Hagopian and Ohanian profess a concern for equality of opportunities they're really not addressing it seriously, and not offering any new information that would lead us to doubt the problem of inequality.
Thursday, August 16, 2012
Why is Cochrane so excited about this inequality study?
Here.
It's called "The Mismeasure of Inequality", but it doesn't live up to it's name, nor does it live up to John Cochrane's hype.
It seems to just recycle a few points about inequality that we already know and that do not invalidate the way that others measure it. Namely:
1. The distribution of consumption is more equal than the distribution of income
2. Income gains are different from welfare gains
3. Higher income people get better benefits so if you choose to exclude that portion of compensation the income distribution looks more equal, and
4. Europe generally has more progressive benefits and less progressive taxes so if you look just at the tax burden the U.S. looks like it is very progressive
The other day we were talking about the general public's understanding of the minimum wage, but let's get back to the economists' bubble on this.
Didn't we already know all of this?
Why is John Cochrane so excited about this study?
Let me know when Emmanuel Saez actually teaches us something new about inequality, like what the most recent data says. It seems to me we know all of this already.
It's called "The Mismeasure of Inequality", but it doesn't live up to it's name, nor does it live up to John Cochrane's hype.
It seems to just recycle a few points about inequality that we already know and that do not invalidate the way that others measure it. Namely:
1. The distribution of consumption is more equal than the distribution of income
2. Income gains are different from welfare gains
3. Higher income people get better benefits so if you choose to exclude that portion of compensation the income distribution looks more equal, and
4. Europe generally has more progressive benefits and less progressive taxes so if you look just at the tax burden the U.S. looks like it is very progressive
The other day we were talking about the general public's understanding of the minimum wage, but let's get back to the economists' bubble on this.
Didn't we already know all of this?
Why is John Cochrane so excited about this study?
Let me know when Emmanuel Saez actually teaches us something new about inequality, like what the most recent data says. It seems to me we know all of this already.
Quote of the day: Mario Rizzo
On signing the list of economists for Romney's economic plan:
"I interpreted signing as restricted to economic policy issues. The statement itself speaks only to economic issues. However, at the time, I didn't realize the degree to which people would interpret this as an endorsement of Romney overall. (Yes, the headline is "Economists for Romney" but somehow I thought it was clear that it was only economics.) I do not endorse his views on foreign policy, civil liberties and social policy. Endorsement of his economic policy proposals is to be viewed only in comparison to Obama's policies (and also his lack of proposals to restrain spending). This does not represent my deepest ideals or a comprehensive economic philosophy. I believe it is akin to choosing the less scratchy toilet paper. I am distressed that some people would interpret my action as selling out to the GOP establishment or such. I am not looking for a job with a Romney administration. (They would never offer, anyway. I can't keep my mouth shut.)"
I like that - "the less scratchy toilet paper". This is basically the way I see Obama's economic policy - not great but better than the Republican and Libertarian alternatives. It's true, though, that I probably warm more to Obama's other policies than Rizzo does to Romney.
This was a response to my surrpise that Rizzo - as a libertarian - would be on the list. So the ultimate justification from Rizzo is not unanticipated and I think makes a lot of sense. I've never been a fan of protest votes. I think it makes much more sense to shape the system itself the best we can. That's the system we'll be living under, after all.
I am also glad to see Rizzo express distress at suggestions that policy positions will be taken by profesional economists in pursuit of political power (certainly it happens, but the suggestion that this is notable or applicable distresses Rizzo). I hope this means that when it is suggested in the comment thread or elsewhere that Keynesianism is popular for this reason, Rizzo will be on my side of that argument
UPDATE: Brad DeLong ain't happy with Mario Rizzo, linking my post here. I'd share Brad's displeasure that any economist anywhere would endorse the relatively vague and unsatisfactory Romney plan - especially relative to the also imperfect Obama alternative - but I want to stress that I reposted Mario's quote here because I at least like his reasoning. I'm not a fan of his ultimate choice, but I am a fan of his more pragmatic willingness to engage the political reality that we actually have, rather than endorsing some third party candidate without a chance (if a third party candidate ever makes more headway, of course you may have more justification for backing him or her). Plus I just liked the "less scratchy toilet paper" line.
"I interpreted signing as restricted to economic policy issues. The statement itself speaks only to economic issues. However, at the time, I didn't realize the degree to which people would interpret this as an endorsement of Romney overall. (Yes, the headline is "Economists for Romney" but somehow I thought it was clear that it was only economics.) I do not endorse his views on foreign policy, civil liberties and social policy. Endorsement of his economic policy proposals is to be viewed only in comparison to Obama's policies (and also his lack of proposals to restrain spending). This does not represent my deepest ideals or a comprehensive economic philosophy. I believe it is akin to choosing the less scratchy toilet paper. I am distressed that some people would interpret my action as selling out to the GOP establishment or such. I am not looking for a job with a Romney administration. (They would never offer, anyway. I can't keep my mouth shut.)"
I like that - "the less scratchy toilet paper". This is basically the way I see Obama's economic policy - not great but better than the Republican and Libertarian alternatives. It's true, though, that I probably warm more to Obama's other policies than Rizzo does to Romney.
This was a response to my surrpise that Rizzo - as a libertarian - would be on the list. So the ultimate justification from Rizzo is not unanticipated and I think makes a lot of sense. I've never been a fan of protest votes. I think it makes much more sense to shape the system itself the best we can. That's the system we'll be living under, after all.
I am also glad to see Rizzo express distress at suggestions that policy positions will be taken by profesional economists in pursuit of political power (certainly it happens, but the suggestion that this is notable or applicable distresses Rizzo). I hope this means that when it is suggested in the comment thread or elsewhere that Keynesianism is popular for this reason, Rizzo will be on my side of that argument
UPDATE: Brad DeLong ain't happy with Mario Rizzo, linking my post here. I'd share Brad's displeasure that any economist anywhere would endorse the relatively vague and unsatisfactory Romney plan - especially relative to the also imperfect Obama alternative - but I want to stress that I reposted Mario's quote here because I at least like his reasoning. I'm not a fan of his ultimate choice, but I am a fan of his more pragmatic willingness to engage the political reality that we actually have, rather than endorsing some third party candidate without a chance (if a third party candidate ever makes more headway, of course you may have more justification for backing him or her). Plus I just liked the "less scratchy toilet paper" line.
Wednesday, August 15, 2012
Always dig around in your data
I am much more excited about this restricted Dept. of Education data than I was when we first applied for it. I had no idea it had monthly longitudinal employment records for these people. I figured I'd be stuck with a couple employment variables every couple of years (for each wave of the survey).
Nope - monthly history.
The thing is this is the Dept. of Education, so they don't care about that. They used all that great data to create a couple summary variables and then stuck it all in a source file and buried it way down in a sub-folder. But I sniffed it out! If this were a Bureau of Labor Statistics dataset that would have been front and center (in fact it is front and center in things like the NLSY).
So the lesson is: always dig around in your data and get to know it. When you get started with some data treat it like a long-term relationship: a woman you're trying to woo, rather than a one night stand to satisfy your more immediate needs. I got that sort of relationship with the NLSY and have since repeatedly turned back to it because I knew the data like the back of my hand. Trying to develop that sort of relationship right now with the SIPP and the B&B.
Microdata is complicated and when people make investments in big surveys like this there's usually a lot of moving parts involved. There is always more to it than there first appears to be. Get to know it!
Nope - monthly history.
The thing is this is the Dept. of Education, so they don't care about that. They used all that great data to create a couple summary variables and then stuck it all in a source file and buried it way down in a sub-folder. But I sniffed it out! If this were a Bureau of Labor Statistics dataset that would have been front and center (in fact it is front and center in things like the NLSY).
So the lesson is: always dig around in your data and get to know it. When you get started with some data treat it like a long-term relationship: a woman you're trying to woo, rather than a one night stand to satisfy your more immediate needs. I got that sort of relationship with the NLSY and have since repeatedly turned back to it because I knew the data like the back of my hand. Trying to develop that sort of relationship right now with the SIPP and the B&B.
Microdata is complicated and when people make investments in big surveys like this there's usually a lot of moving parts involved. There is always more to it than there first appears to be. Get to know it!
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