Two strange things I saw this morning

1. A large man, in pajamas and a bath robe, taking the metro from Gallery Place to Tenleytown. In other words, this guy wasn't making a quick stop to the nearest grocery store... he went across the city in a bath robe. I have not come up with a satisfying explanation and I did not have the balls to ask him.

2. A plate in the kitchen of the econ department with "Made in the People's Republic of China" on the back - not "Made in China". I've never seen it written like that. It was an IKEA plate. Do they write "People's Republic of China" out in Europe or something?

I know it's bad form to do this on his 93rd birthday...

...but this line from Buchanan quoted by Don Boudreaux is just wacky. I like Buchanan's work on constitutional economics and public choice a lot. But whenever he writes about Keynes or Keynesianism it always seems to degenerate - not just into something I might disagree with - but complete nonsense.

It's like Hayek on "scientism" for me. It reads like a completely different (nonsensical) Hayek.

Here's the quote:

"The whole Keynesian edifice [the Council of Economic Advisors] was constructed on the preposterous supposition that economic advice is offered to a genuinely benevolent despot, an entity devoid of its own interests, and presumably willing and able to implement, without resistance, the advice offered to it. The early monetarist challenge was directed to the Keynesian analysis and, in itself, did not question the implicit political supposition... Effective authority lodged with an hereditary monarch might represent the closest historical parallel to the implicitly presumed Keynesian model of politics."

American political leadership has sought advice on economic policy from the beginning of the republic. Exactly what about the CEA supposes a benevolent despot? And given that we all recognize this world is not governed by benevolent despots, isn't a council of economists advising the President exactly what you would want? I mean, if we were governed by an idealized benevolent despot, what would be the point? The whole value of the CEA lies precisely in the fact that men are not angels and are not ruled by angels either.

This is not the only time Buchanan distorts the record to promote public choice theory (which really doesn't need the distortions to be promoted - it's a good set of ideas), of course. He's also mangled Pigou in that effort. Last year I was reading through Pigou's Economics of Welfare in the library. This is supposed to be the classic "first, assume a benevolent despot" sort of treatment - largely because Buchanan characterized it as such.

Read it.

It's entirely different from how it's usually characterized. Pigou regularly discusses the problems of implementation that we now call "public choice theory". All the important points that Buchanan has raised were already in Pigou.

Which is fine. We revamp old theories all the time. Part of the fun of reading old economics books is the realization that they're not as dated as you might expect.

What's not OK is painting Keynesians and Pigovians and Keynes and Pigou as being ignoramuses.

Here is a recent article by Backhouse and Medema on the fallacies of Demsetz, Buchanan, and Coase in their treatment of Cambridge welfare theorists, and Pigou in particular.

I am curious what David Henderson (and anyone else who has worked at the CEA) thinks of this assertion. Were you ever under the impression that you were meant to be advising a benevolent despot?

Question

Is there a canonical article/treatment of internal devaluation?

Wikipedia is always a good place to start, but Wikipedia says that nobody really worked on it until 2012 which seems highly implausible to me. Modern treatment, I mean. I know Keynes wrote about it in 1923.

Disciplining your theory

Daniel Klein has three suggestions on what you should ask yourself (HT - Tyler Cowen):

1. Theory of what?
2. Why should we care?
3. What merit in your explanation?

I think it's a good list.

As Klein does in lots of cases, he tests whether other economists conform to what he thinks is good theorizing (like similar tests of whether economists are good classical liberals). And he comes up with a number: out of 66 articles in the Journal of Economic Theory, only 12% pass his theory test.

This sort of exercise, I think, is very problematic (I haven't read the linked paper in detail, but the Journal of Economic Theory analysis is taken from an earlier EJW paper I have read).

Ultimately, what ends up happening is the answers to these questions are somewhat different depending on the audience - particularly the second and third one. These are subjective. I don't care about everything you care about. To a certain extent, even meritorious scholarship is subjective.

Just like Daniel Klein's previous finding that non-libertarians aren't economically enlightened, the finding that 12% of the publications in the Journal of Economic Theory aren't theories should have sent up a bunch of red flags.

So I'm not sure that's the right direction to take this. But I do think that if you can't convince yourself about the answers to these three questions, you're going to have no chance of convincing anyone else.

Kids and Scientists

Regarding what I said in this post, I still think Dewey was relatively right and Rorty was relatively wrong about scientific method. And Kuhn's view (which I know more thoroughly than Dewey's or Rorty's) seems closer to my understanding of Dewey's than Rorty's.

This article on how kid's behavior resembles scientific behavior confirms my appreciation of the scientific method and my view that contra Rorty, a method is not the same as a metaphysics (that is my own pithy way of putting Rorty's critique).

Three things I don't understand

1. This post from Bryan Caplan (HT - Bob Murphy). It's posts like these that really convince me (a.) most libertarians don't understand the people they are arguing with, and (b.) most libertarians do not consider the robustness of their own ideal society, or at least are not aware of or curious about whether other positions on the robustness of their own ideal society. The thrust of the post is a little different - it's about when different people just say "tough luck", and that's a reasonable point. What really bad is his grasp of what much of the other side thinks.

2.  The second one is from a facebook conversation excorciating state tax breaks as just "moving jobs around" rather than being "job creators". The post concluded with the claim that real job creators are immigrants. This guy is a thoughtful libertarian, not some kind of reactionary. And he's not alone in that assessment. It's a very mainstream/neoliberal view of things. What I don't get is how a guy like that can hold such a zero-sum view of the economy when talking about state tax breaks but abandon it in the next sentence when he's talking about immigration. Another example of this is the way some people (I've heard Russ Roberts and David Henderson do this in an Econtalk, for example) get the general equilibrium demand lead growth argument when talking about immigrants, but compeltely miss the exact same point when talking about the minimum wage. The supply curve slopes up and the demand curve slopes down in both cases. Demand lead growth arguments make a lot of people comfortable with the impact of immigration on native workers. Why the disconnect with the exact same argument when it comes to the minimum wage? A final example gets back to my facebook friend's point about state tax incentives. These are often denounced as "beggar they neighbor" policies. Why is it that the same people who call this "beggar they neighbor" don't similarly dismiss corporate tax cuts as "beggar thy neighbor"? Both states and the federal government are cutting taxes on businesses. Why is it mercantilism when the states do it but A-OK when the country does it?

3. Some writing on Cafe Hayek about Keynes recently has been so stupid that it's not worth talking about here. But this morning Don had a post that is a common enough sentiment that it's worth talking about. I still don't understand it at all, though. He is sharing a quote and references the fact that the writer is "speaking chiefly of economics circa the mid-1960s - the heyday of Keynesianism and of the related heady belief in the policy prowess of the best and the brightest". I genuinely don't understand this view. I understand what the common response to me would be, but I don't understand how people can bring themselves to consider that sort of response a convincing one. If Keynes and subsequent Keynesians (Krugman and DeLong are perfect examples of this today) have been trying to communicate anything, it's how supremely dumb policymakers can be and how tempting it is to do exactly the wrong thing. The thing that radiates from everything Keynes writes, from Economic Consequences of the Peace to Treatise on Probability, to all his writings in the 20s about the gold standard, to the General Theory is the failure of policymakers and the damage that people can do when they claim that hubristic high ground we call "certainty". All the well known Keynesian public intellectuals have trumpeted this point in one way or another too. Ex-Keynesians that grew into monetarists regularly make this point as well. I genuinely don't understand how Don comes to this view, except that he is doing what Bryan did. Don assumes that because Hayek thought X Keynes and Keynesians must think not-X. It seems to me that we should note that this is a great overlap between Keynesians and Hayekians (some people do recognize this). Now, we still have macroeconomics to argue about when that's done. And I'll still marvel over the fact that Don can hold his libertarian blueprint for social engineering even after reading Hayek, and I'll propose instead we use what we've learned tacitly - from trial and error - and move cautiously in another direction. But I'll at least recognize that he thinks of himself as not having a blueprint for social engineering (I'll keep insisting he does, but I recognize he doesn't think he does). I get the impression he doesn't even realize that we Keynesians are cognizant of this point, though - and that's really what I don't understand.

Murphy on Carbon Taxes

Bob Murphy has a new article (HT - David Henderson) summarizing work on tax interactions associated with carbon taxes, which - the argument goes - make the optimal carbon tax lower than the social cost of carbon (and potentially zero).

The logic is straightforward enough when Bob explains it, but easy to overlook when thinking about these issues. Carbon taxes raise factor costs and if distortionary taxes exist on factors (which they do), this can reduce welfare.

I am fine with the logic, but a little unsure with what direction to take this in (and one first step is to move beyond Bob's excellent article and read the AER article he is discussing).

My first thought is to push back a little on one potential interpretation of the finding (I don't say "Bob's interpetation" because for all I know he'd find this point reasonable). Does this really suggest that carbon taxes should be lower, or does it suggest that the factor taxes are more damaging if all social cost and benefits are accounted for? It seems really weird to think about this as a problem with the carbon tax, since that's not assumed to be distortionary at all - it's the factor taxes that are influenced by the price of carbon that are distortionary.

This leads me to my second thought. Since it's the interaction with factor taxes that's the problem, is this just another good reason to shift to consumption taxes? So carbon taxes shouldn't just come with a reduction in factor taxes, they should also come with an increase in consumption taxes?

I need to think about this a little more to answer another question that comes to mind: does this tell us that under a textbook carbon tax, the price of carbon will be set too high (so that carbon is utilized below its optimal level of utilization), or does it just tell us that total welfare is lost? Because if we're thinking about climate change specifically, those are two quite different things.

More questions than answers - I know. But there are plenty of very interesting answers to other questions in Bob's post. So go read it!

Song of the day

Working on Sloan analysis from home today until class tonight, nursing Kate back from a cold.

This is a good nursing back to health song, apparently (particularly notable since she [brace yourself for this heresy] normally doesn't like Willie):

He gets it for bacon, why not for high-skill labor?

Matt Yglesias understands that recent price increases do not indicate a "bacon shortage". Quite the opposite - it's the sort of market signal that ensures we keep the bacon coming.

So why can't he forthrightly say the same thing about high skill labor? It's true, I'm stretching this a little. The linked article does not come out and declare a high skill labor shortage. But it validates the idea that "we should hand out more work permits to high-skilled foreigners, particularly people with STEM degrees" and calls that one of the "nice things" that we can't have because we have a dysfunctional Congress.

I don't understand why insights people have about goods and services are often so hard for them to apply to labor. Yglesias is better than many on this issue. He is willing to say in some cases that low skill labor is as important as high skill labor. But then he does a 180 in posts like this and says that we should be "particularly" loosening up for high-skill STEM workers. So he gets the message right some of the time. But wouldn't it be nice to have an emphatic "there are no persistent STEM shortages" post just like his recent bacon post?

New Acquisitions

This time it is mostly of the bottled variety: 2010 Tre Sorrele, Cab Franc, 2011 Paco Rojo, and 2011 Something White. All are from Fabbioli Cellars, one of our favorite wineries. It was a great weekend to head just north of Leesburg. Only about a third of the leaves have turned, so there's a lot of different colors and with a fire going outside the winery the day was perfect.

We're having the Tre Sorrele in a "vertical tasting" party in a couple weeks. We have every bottling of this wine back to 2005 (the first year they had it, when the winery was only a year old. In a vertical tasting you taste only subsequent years of the same wine. Something White will come with us to the mountains in western Maryland with friends in a couple weeks. And the rest won't last long.

Usually "New Acquisitions" refers to books, and I've got one of them too: Richard Rorty's Philosophy and Social Hope. I'm a couple chapters in and like it very much so far. I already knew I was on the same page as him on a lot of issues. He's been described as a non-Marxist leftist before but I haven't familiarized myself with too much of that critique of his. That comes out quite strongly: he critcizes the Marxists on much the same lines that he criticizes the Platonists, which is the right approach I think.

The one disappointing thing has been Rorty's criticism of Dewey for his positive disposition towards the scientific method. There hasn't been a lot of detailed discussion of that yet, but so far I consider him mistaken on that. He ties it awfully closely to positivism and suggests Kuhn rejected it. I think the obvious response is that a method is not a metaphysics and the whole point is that the scientific method (which deliberatley avoids an a prioristic attitude) provides useful insights into the world without relying on a particular metaphysics. I would think Rorty would appreciate that. It may turn out that he is just calling positivism in science "the scientific method" and will subsequently approve of the sort of iterative hypothesizing and induction that I think of as "the scientific method".