"Thinking like an economist" on climate change

Bjorn Lomborg, a famous "climate change skeptic", is publishing a new book where he identifies climate change as one of the biggest problems facing the human race, which should be addressed by a carbon tax and billions invested in addressing the problem (HT - Tyler Cowen). All very shocking stuff, right? This pronouncement by Lomborg is going to electrify the environmentalist community and it will be presented as a major coup.

The problem is, as far as I can tell Lomborg isn't really saying anything new. He's always asserted that climate change is real and a problem, and he has always (like a huge portion of economists) identified a carbon tax as the solution.

I think the public's view of economists is driven by the weird way that economists think and interact (relative to everyone else at least). For example, economists are very good at compartmentalizing different parts of a problem, and they are also good at thinking speculatively. Thus, in Superfreakonomics, you have the authors speculating about the relationship between time preference and the mitigation of climate change. They set aside the question of whether we should do anything about the problem (let's say, for the sake of argument, that we should) and ask "what should we do?". It may be more efficient to wait until climate change is actually a problem and cheaply pump sulfur aerosols into the atmosphere to cool down the Earth, compared to the impoverishing impact of reducing our carbon consumption. Like it or not, this is a serious thing to consider: do we do painful remedies now when we are relatively technologically unadvanced, or do we do cheap remedies later when we'll have greater technical know-how anyway. Normal people don't think in terms of these time preferences and trade-offs... but economists are not normal people.

Lomborg is the same way - he's severely criticized Al Gore and other alarmists for hyping extreme scenarios and misleading the public about the reality of climate change. Normal people assume this means that Lomborg is somehow unconcerned about climate change. After all, Al Gore seems to have good intentions. Anyone criticizing Al Gore must not take climate change seriously. This is not the case at all.

Generally speaking, natural scientists approach natural science objectively and social issues subjectively and emotionally. The general public often approaches both natural and social science issues somewhat subjectively and emotionally. Economists tend to approach social questions quite objectively. You can't assume that because an economist opposes cap-and-trade he is unconcerned about climate change. You can't assume that because an economist opposes the minimum wage he is unconcerned about low-income families. You can't assume that because an economist supports large budget deficits they are unconcerned about fiscal responsibility. They may be unconcerned about those things, but not necessarily. They view these questions objectively, as scientific questions, whereas the general public sees them as moral questions. If you come out against any proposed climate change policy it is assumed that you don't care about climate change. If you come out against any policy purported by elected officials to help the poor or to bring responsibility to Washington, it is assumed that you don't care about those things.

Of course, part of "thinking like an economists" is laughing it off when people assume you're a monster... in retrospect this probably isn't very conducive to straightening things out.

Another important element of "thinking like an economists" is amicable arguing. Criticism among economists is famously vicious, but professional. This catches a lot of non-economists off guard, which is why I think Lomborg has been branded as an opponent of dealing with climate change (and actually - Lomborg is not an economist, although he is a social scientist and he does "think like an economist"). I've run into concern about this "amicable arguing" at Cafe Hayek a lot. People there have accused me of "disrespecting" Don Boudreaux and Russ Roberts. That's because most people argue with people they don't like and try to smooth out disagreements with people they like. Economists aren't like that, as anyone who has been to an academic workshop in economics can tell you. This is what I tried on several occasions to tell people commenting on Cafe Hayek - I'm just raising what I see as concerns with Don and Russ's argument. Patting them on the back for good points seems unnecessary and unproductive. Beyond a shadow of a doubt, Don and Russ both get the same kind of scrutiny in their own workshops at GMU (just take a look at the Youtube debate between Bryan Caplan and Peter Boettke - amicable argument is the norm within economics departments).

Normal people don't generally act like this. Vigorous disagreement and disputation are taken as signs of opposition. Normal people try to cushion criticisms of friends, and let themselves go in criticisms of enemies. I've never seen that tendancy in economists. You don't do your friends any favors by indulging inaccuracy, and as Keynes said "There is no harm in being sometimes wrong- especially if one is promptly found out".

When you add all these things together: an eagerness to speculate, an ability to compartmentalize, objectivity on questions of social import (we can also think of this as a well tuned ability to distinguish between "is" and "ought" or positive and normative points), and an argumentative nature (even with friends), what you get is a group of people who can easily be mistaken as supporting something they actually oppose or opposing something they actually support. But that's not because we're being unclear about it - it's because you normal people are.

Hitchens on the grandiosity of the claim to be "pro-freedom"

Christopher Hitchens speaks with Charlie Rose about a variety of things, but I thought the opening portion of this segment was interesting. Hitchens distinguishes between being pro-freedom and anti-totalitarian, and claims that the former is too grandiose a claim. I would also add that it becomes a very complex claim very quickly. I, for example, don't consider the libertarian movement to be at the forefront of the fight for liberty for reasons I've outlined ad nauseum here. Like Dewey and Foucault, I see society as composed of a dense web of relations and obligations and it can be hard to call any single arrangement of those relations and obligations "free" and another one "unfree". That's not at all to say that freedom is an illusion - but just that its exact definition can be illusory. Many, many, people substitute ideologically convenient definitions of "freedom" for real freedom.



Part 1 of the interview is here, Part 2 here, 3 here, and 4 here.

New from Reinhardt and Reinhardt

When I read Reinhardt and Rogoff's recent book, it was at the time when it was summarized as "financial crises have been more common historically than people think, and financial crises are always harder to recover from than normal recessions". With the initiation of a debate between austerity and stimulus this Spring, Reinhardt and Rogoff have recently been summarized as saying "if your government borrows more than 90% of GDP you will have a sovereign default". The message that irresponsible borrowing can lead to sovereign default obviously comes out in the book, but this was never really the primary thrust of it. Indeed, they highlighted cases of surprisingly high debt tolerance.

The "Carmen Reinhardt is in favor of austerity" approach took another blow with a recent paper by Carmen (U-Maryland) and Vincent (AEI) Reinhardt (HT - Matt Yglesias). I'll quote at length from the conclusion (emphasis, mine):

"The outcome could materialize as a consequence of the failure of policy makers to provide sufficient stimulus after a wrenching event in an economy where rigidities give ample scope to demand management. An important role for credit in supporting spending might imply that an associated collapse in financial intermediation lengthens and deepens the downturn (with the unavailability of credit serving as the propagating mechanism discussed in Bernanke, 1983). In such circumstances, slow growth might be a self-fulfilling prophecy produced by timid authorities who neither supported spending nor dealt with the capital-adequacy problems of key financial institutions. [in other words, "we are way, way, way below full employment and Bernanke wrote this cool paper about how gummed up financial institutions can create a situations that acts like liquidity preference"]

Economic contraction and slow recovery might also feed back on the prospects for aggregate supply. A sustained stretch of below-trend investment and depreciation of human capital prompted by elevated and lengthy spells of unemployment could hit the level and growth rate of potential output. The unemployment rate stays high because it has been high, exhibiting hysteresis as described by Blanchard and Summers (1986). [this is similar to the cyclical unemployment turning into structural unemployment point]

The forcing mechanism for a reduction in aggregate supply might be policy itself. In adverse economic circumstances, political leaders sometimes grasp for quick fixes that impair, not improve, the situation. Included in the list of unfortunate interventions are restrictions on trade (both domestically and internationally), work rules and pay practices, and the flow of credit. The output effects of crises might be persistent because we make them so, in the manner posited for the Great Depression by Cole and Ohanian (2002). [can anyone say "repealing the Bush tax cuts"?]

Or, changed prospects after a crisis might reflect the correction of outsized expectations that fed the prior boom. If, for instance, investors grossly overestimated the possibilities for productivity improvement from a new technology, they might bid up asset prices, borrow against future anticipated income, and invest in myriad capital projects in an unsustainable manner. Chancellor (2000) casts many episodes of financial euphoria and ensuing crash over the centuries in exactly this sequence, from the diving bell, through the steam engine, to the radio, and thereafter. Spending advances rapidly on hope, and, on reality, contracts, and then recovers only slowly. Recent discussions about the “new normal” in reference to the post-crisis landscape leave the impression that the pre-crisis environment was “normal.” In fact, there are reasons to believe that the precrisis decade set a high-water mark distorted by a variety of forces. We have presented evidence here that many of those patterns are reversed not only in the immediate vicinity of the crisis, (as Reinhart and Rogoff, 2009 show), but also over longer horizons that span several years. [You say "liquidation of malinvestment build up by inappropriate subjective valuation", I say "the collapse of animal spirits" - we all say "subjective valuation in investment decisions can be very, systemically, wrong]

For whatever the initiating change, the real interest rate consistent with full employment of resources presumably falls as a consequence of slower economic growth. The logic is that households need less inducement to defer consumption when future consumption prospects are bleaker [in other words, "liquidity preference"]. In addition to the fall-out of a lower real interest rate on asset prices, monetary policy makers need to reconsider the benefits of an inflation buffer to protect from the zero lower bound to nominal interest rates [and that liquidity trap thingy is no joke]. If real GDP growth has permanently tilted down as a consequence of a severe economic dislocation, or at least has done so in a time frame measured by decades, fiscal authorities face lower prospects for revenue and higher pressure on outlays. Similarly, the apportioning of the current budget stance into its cyclical and structural components will shift with changes in the level and rate of growth of potential output."

"Locavores" and Libertarians, Part 1

In the comment section of this post, Evan inquires about my reference to the sometimes rough relationship between libertarian bloggers and the "buy local" movement. I've seen lots of posts on this over time, particularly on Cafe Hayek, but the recent series of posts started with Stephen Landsburg's post (cleverly interchanging "loca-" with "loco-") suggesting that locavores are wrong because more often than not, locally grown produce is more energy-intensive than non-locally grown produce (this shouldn't be too surprising to people who know about comparative advantage and scale economies and can put the two together for both agriculture and transportation). Don Boudreaux follows up on it here, and Arnold Kling follows up on it here. Their argument rests on the basic point about the information content of market signals. Markets know more than locavores about the costs and benefits of different food production, so when locavores eschew non-local foods they are somehow going against the market. I have two main complaints about this criticism - the first is economic, and the second is more philosophical.

First, the whole problem with the market for carbon is that the market doesn't have reliable informational content, as it doesn't with any product where externalities prevent markets from accurately communicating information. That doesn't make locavores who make the energy efficiency point right - I wouldn't be surprised at all if locally grown food was still more energy-intensive despite the externality problems associated with pricing it. I simply wouldn't go out on a limb to defend the market on accurately pricing anything having to do with fossil fuels. It seems a little odd, though, that Kling and Boudreaux are criticizing locavores for ignoring market signals even as they participate in a market. Clearly they use market signals, and they have different assessments of the value of non-locally grown food than Kling and Boudreaux do, and they act in the market accordingly. Most locavores don't eat entirely locally grown food. I don't even come close. Usually the margin I'm concerned about is price. I'm much more likely to purchase locally grown vegetables than meat because it's a cheaper product in which I can express my localist preferences. Crabs I often buy locally, other meat less often. I buy wine and beer from local producers far more often than I do from non-local producers. I'm taking my subjective value judgements to the market and interacting with market signals in all of these purchases. Nobody is bucking market judgements of the cost of non-locally produced foods. It's just not the only information that people use. The other side of the market process is consumer demand. So the juxtaposition of locavores and market signals was a little odd in that respect.

The second critique I had is actually my primary critique: people who buy locally generally speaking don't do it for energy-intensity reasons, in my experience. Maybe there are some environmentalists that give this justification primacy (although even for them I doubt it's the only reason), but I really don't get the sense this figures very prominently. I certainly don't - I don't get the impression Evan does - I've never heard the friends I mentioned in the previous blog post bring the energy-efficiency point up. In fact, it's precisely the energy intensity of local production that is praised in many circumstances. There's an ethic to the work involved in small-scale, unmechanized farming. There's an ethic to the work involved in gardening. The additional work of craft production is seen as a labor of love - a humanizing toil. It's the "shop class as soulcraft" idea. I could understand why people who live and breath neoclassicism might get confused about how to incorporate this subjective value into a framework where leisure is always considered a "good" and labor is always considered a "bad", but I'm surprised so many self-styled Austrians or Austrian sympathizers are tripping over this point.

Aside from the simple points that (1.) the market may very well be wrong in its pricing of carbon, (2.) just because you have subjective values doesn't mean you ignore the market, and (3.) in some cases energy and work-intensity is considered a feature, not a bug, there seems to be a lot Landsburg, Boudreaux, and Kling don't understand about the motivations for localism. My impression is that the major drive behind the movement is to personalize and diversify production and make local communities and social interactions more robust and fulfilling. One of the things our friends liked about the local cheese cake shop they told us about was that they knew both of the proprietors. I think I'm going to take this community-building point up in a subsequent post, because it's been featured on Cafe Hayek recently as well, and it's really a post in itself.

Birthday Acquisitions and Recommendations

Acquisition: Selected Lovecraft letters, 1929-1931; 1932-1934; 1934-1937. He died in 1937, so these are the final three volumes. There are two earlier volumes which might be nice to get eventually, but for insights into his views on economics and politics these are obviously the key ones. This is the wonderful thing about "you buy so many books we don't know what you'd like so here's some birthday money" presents.

Recommendation: For anyone in the Northern Virginia/Washington D.C. area, I recommend Grand Cru Wine Bar and Euro Cafe. Kate took me there for dinner last night - it's a very unassuming website, but the food is quite good. We had brie and honey as an appetizer (I've never had that together before - my family makes brie and brown sugar all the time, but this was a nice surprise). I had the duck with mashed sweet potatoes. Kate had the wild mushroom orzo. We each had a different flight of wine, which we always like to do if they have flights. We also shared a flight of ports, a nice cup of coffee, and a creme brulee for dessert. Also, we were at a friend's house for a joint birthday celebration on Friday night and they had some great mini-cheesecakes from Capital City Cheesecakes, in Takoma Park, Maryland. Kate also got me a key lime pie from Firehook Bakery. Firehook has several locations in the D.C. area, but we go to the Farragut Square shop for coffee all the time. All good, local shops to support - despite the wave of posts denouncing "locavores" on several libertarian blogs lately.

August 28th, 1963

"I am happy to join with you today in what will go down in history as the greatest demonstration for freedom in the history of our nation"

- Dr. Martin Luther King, Jr., August 28th, 1963

Space Economics

Excellent short article on the economic payoffs of NASA.

This is why (to my ears at least) when you argue that big externality-ridden, public goods like space exploration shouldn't be done because "if they were worth doing some private actor would have put his money on the line" you sound really, really dumb. This article deals mainly with the technology spin-off benefits which are hard enough to measure for the same reason that the benefits of information and research have always been hard to measure. It doesn't even begin to incorporate the economic benefits of making the human race an inter-planetary species.

And when you don't have costs and benefits markets don't function in the efficient way we apprecaite them functioning.

Good Macro Posts

Krugman and DeLong on cargo-cult macroeconomics

Krugman takes Kocherlakota to task and DeLong takes Williamson to task for mixing up cause and effect. As is often the case, nobody said it better than Milton Friedman:

"Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy... After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die."

We could say the same for Peter Boettke probably.

Cowen on savings and what to worry about

Tyler Cowen has lots of good points on savings rates that are all worth reading, but I especially like this point about where we should be focused now:

"I get nervous when I see Keynesian models emphasizing the short-term only or non-Keynesian approaches emphasizing the long-term only. The more insightful approaches see the short-term and long-term factors interacting in a not always so helpful manner."

I don't take it as a slight of Keynesians in general - after all, he quoted Keynes earlier in the post to help express his own concerns about the long run. I think this is basically right. The most sophisticated outlooks - the correct oulooks in my view - see in this crisis the same dynamics that we saw in the Great Depression and that we saw in Japan. These sorts of situations are legitimately medium-run sorts of crises, which means that they blend our short and long-run concerns. Inadequate short-run policies make the long-run worse. Concerns about long-run conditions influence behavior now in the short run. The Fed can't stick to paying attention to short-run rates only. The heart of a crisis like this is an immediate, short-run disruption of long-run expectations that we've been operating off of for a while. Demand expectations, inflation expectations, and policy expectations aren't as anchored as we usually expect them to be.

Reinhardt, Kling, and Thoma on how economists think and talk

- Uwe Reinhardt discusses how economists use and abuse the idea of "efficiency"
- Kling talks about the problems with relying too exclusively on GDP measures
- Mark Thoma talks about why economists abandoned the idea of price flexibility

Washington Area Economic History Seminar

It's time to get serious about PhD applications now - my GRE is scheduled, I've dug out old drafts of my personal statement I wrote a couple months ago, and I'm pulling info from the NSF Graduate Research Fellowship website. I've also been collecting info I'll need from the program websites. One program I'm looking at, because it's local and I know a few of the professors, is American University. I discovered that they host a regular Washington Area Economic History Seminar that I thought people in the D.C. area might be interested in. They don't have the fall schedule up yet, but some of the discussions from last year looked interesting. I plan on attending some of these this fall.

Inconvenient Classical Liberals - Montesquieu on Liberty

From The Spirit of Laws

"1. A general Idea. I make a distinction between the laws that establish political liberty, as it relates to the constitution, and those by which it is established, as it relates to the citizen. The former shall be the subject of this book; the latter I shall examine in the next.

2. Different Significations of the word Liberty. There is no word that admits of more various significations, and has made more varied impressions on the human mind, than that of liberty. Some have taken it as a means of deposing a person on whom they had conferred a tyrannical authority; others for the power of choosing a superior whom they are obliged to obey; others for the right of bearing arms, and of being thereby enabled to use violence; others, in fine, for the privilege of being governed by a native of their own country, or by their own laws.1 A certain nation for a long time thought liberty consisted in the privilege of wearing a long beard.2 Some have annexed this name to one form of government exclusive of others: those who had a republican taste applied it to this species of polity; those who liked a monarchical state gave it to monarchy.3 Thus they have all applied the name of liberty to the government most suitable to their own customs and inclinations: and as in republics the people have not so constant and so present a view of the causes of their misery, and as the magistrates seem to act only in conformity to the laws, hence liberty is generally said to reside in republics, and to be banished from monarchies. In fine, as in democracies the people seem to act almost as they please, this sort of government has been deemed the most free, and the power of the people has been confounded with their liberty.

3. In what Liberty consists. It is true that in democracies the people seem to act as they please; but political liberty does not consist in an unlimited freedom. In governments, that is, in societies directed by laws, liberty can consist only in the power of doing what we ought to will, and in not being constrained to do what we ought not to will.

We must have continually present to our minds the difference between independence and liberty. Liberty is a right of doing whatever the laws permit, and if a citizen could do what they forbid he would be no longer possessed of liberty, because all his fellow-citizens would have the same power.

4. The same Subject continued. Democratic and aristocratic states are not in their own nature free. Political liberty is to be found only in moderate governments; and even in these it is not always found. It is there only when there is no abuse of power. But constant experience shows us that every man invested with power is apt to abuse it, and to carry his authority as far as it will go. Is it not strange, though true, to say that virtue itself has need of limits?

To prevent this abuse, it is necessary from the very nature of things that power should be a check to power. A government may be so constituted, as no man shall be compelled to do things to which the law does not oblige him, nor forced to abstain from things which the law permits."

The Conservative and Liberal Impulse

Patrick Appel shares a thought from Jonathan Bernstein:

"I do think that there's something authentically different between liberals and conservatives, at least some of the time, and at least in some cases. If not first principles, though, perhaps we can call them impulses. To me, the liberal impulse is basically: We Can Do Better. And the conservative impulse? Don't Make It Worse. Liberals, or perhaps all of us when we're inspired by the liberal impulse, look around and see a variety of problems and available resources and want to alleviate pain and suffering; they want to solve problems. Conservatives, or perhaps all us us when we're inspired by the conservative impulse, remember all the cases of noble intentions gone awry, the cases of unintended consequences, the cases in which problems seemed terribly severe but then they seemingly melted away without anyone, and certainly not everyone collectively, trying to address them. Liberals appreciate the promise of the future; conservatives appreciate how rickety the accomplishments of the present are, and how easily what we think is safe can be destroyed."

This is of course reminiscent of the old adage that liberal economists say "markets fail, use government", conservative economists say "markets work, use markets", and an assortment of other economists say "markets fail, use markets".

I guess it makes some sense to assign these "impulses" this way, but the whole exercise strikes me as kind of dumb. Do people honestly have one of these impulses and not the other impulses? I suppose some people do, but that strikes me as wrong. The "impulse" we have oughta be context-dependent. With some market failures I'm tempted to say "markets fail, use markets" either because the public choice problems are so great, there's no feasible non-market solution, or there's an ethical reason to maintain the market. With other market failures, I'm tempted to say "markets fail, use government" because the public choice problems are not as significant and the prospects of success are greater.

But this doesn't seem like an impulse that you should naturally have based on an ideological predisposition. It seems like an impulse that should be contingent on the situation at hand.

I think it's also pretty dumb to say that the liberal impulse comes from the impulse to "solve problems" while the conservative impulse comes from the recognition of "unintended consequences". When a liberal suggests we act, it's usually precisely because they are highlighting the unintended consequences of the market institution. When a conservative suggests that we don't act, it's precisely because they want to see a problem solved. And that's all before we even get into the wrinkle that often liberals say "don't act" and conservatives and libertarians say "act".

The more I think about this quote the less I like it actually! If nothing else these judgements should be context-specific, not person-specific. And the underlying motivations they identify I think are all wrong.

Now I'm starting to feel like a political orphan again...

Setting the bar ridiculously low...

Apparently all you need to do to be a libertarian is oppose government book-burning. Or at least that seems to be the message of Jeff Riggenbach's labeling of Fahrenheit 451 as a "libertarian book". There's no point in getting too caught up in the semantics - Bradbury's classic is certainly consistent with libertarianism. But it seems odd to call it a libertarian book.

Anyway - it's a very good review by Riggenbach - it makes me want to go back and reread it. Its been years for me, as I imagine it has been for most people.

Still, I think we need to be careful about this. With that kind of attitude practically every American is a libertarian. Libertarian simply becomes "pro-liberty", and all the things that make libertarianism unique get washed away. It also ends up confusing people. It's like how some less informed conservatives and libertarians are actually shocked to hear that George Orwell was a socialist. You only get shocked by something like that when you get fed a juvenile, misleading ideological taxonomy.

Was Bradbury himself a libertarian? I honestly still don't know. The Atlantic wrote about an LA Times interview of his recently, and some of his remarks leaned libertarian:

"There is too much government today"... but it went on in the next sentence to something way too cozy with democracy for a lot of libertarians:

"We've got to remember the government should be by the people, of the people and for the people" followed by some curmudgeonly (albeit somewhat endearing) Ludditism:

"We have too many cellphones. We've got too many Internets. We have got to get rid of those machines. We have too many machines now" to a decidedly non-Luddite, non-libertarian sentiment I can applaud:

"He [president Obama] should be announcing that we should go back to the moon. We should never have left there. We should go to the moon and prepare a base to fire a rocket off to Mars and then go to Mars and colonize Mars. Then when we do that, we will live forever."

So maybe he's a libertarian, maybe not. My guess is he's probably got a few libertarian slogans and ideas but isn't what a libertarian would call "libertarian". Ultimately that doesn't really matter - the point is if all it takes to be libertarian is opposition to book burning, it seems to me you're setting the bar pretty low!

.

I sent an email to Riggenbach just asking about his thought processes on that and whether he knew anything about Bradbury's personal politics - if he responds with anything interesting I'll post it here.

*****

And speaking of book-burning... we've got our own budding fascists down in Florida.

Use "crude X theory" to avoid "strawman"

OK - something I should have done from the beginning, and now advice I have for anyone engaging in ecumenical squabbles: if you are disputing a specific idea held by a school of thought always refer to it as "crude X theory" as in "crude Austrian business cycle theory", even if you're talking about something pretty specific. This whole "crude Austrian" and "crude Keynesian" development is actually pretty ingenious. It allows us to criticize the really dumb stuff masquerading out there while steering clear of the strawman accusations. It also allows us to engage the stuff we actually do know about the other side without being a seasoned expert on it.

I still maintain I was pretty clear. And Krugman was absolutely unambiguous about what he was talking about (he provided quotes of what he was disputing for God's sake! How could you mistake him for trying to dispute anything else?!?). But nevertheless - better safe than sorry.

We still have an unresolved issue, of course. Do we really have a good arbitration between ABCT and traditional Keynesian explanations of the downturn? I still really, really, really don't think so. Powell, Woods, and Murphy propose 1920-21, but I think that case is epically bad. It's a test between ABCT and crude Keynesianism at best, and who really cares about that contest? I'm with Hayek every time in that match-up. So what is to be done? Ultimately, I think we're in a situation that Matthew Arnold described best:

" ...for the world, which seems
To lie before us like a land of dreams,
So various, so beautiful, so new,
Hath really neither joy, nor love, nor light,
Nor certitude, nor peace, nor help for pain;
And we are here as on a darkling plain
Swept with confused alarms of struggle and flight,
Where ignorant armies clash by night."

That's not meant to toss around the "ignorant" card - it's meant to emphasize that we're here as on a darlking plain.

Which really makes me feel like a pragmatist, a fallibilist, a skeptic, what have you.

Common Sense Economics(?)

Peter Boettke has a post up about certain economic issues that he declares "isn't rocket science". One of the things he highlights is the ill-advised nature of expansionary monetary policy. One starts to wonder about these claims when other people warn against the ill-advised nature of contractionary monetary policy and declare of that that it isn't rocket science.

It's funny how these "it's not rocket science" sort of arguments develop. You would think the two sides would hesitate more when the other side is so confident. If one side was surprised by what happened in the economy and caught off guard, then perhaps the other side of the issue could say "well duh - it's not rocket science", but when both sides of a debate feel like they've been vindicated by the data, should we exercise these claims with a little more caution?

I was a little surprised to see Boettke make such a confident statement on this issue, because of all points I would have thought that there is more agreement on expansionary monetary policy than on most other things. Maybe not on quantitative easing or some of these messier liquidity trap issues - but certainly on the low interest rates. But no - Boettke insists that his (minority) point is common sense.

Evan brought Quiggin's long-awaited book on "Zombie Economics" to my attention recently, and this has much the same approach: that there are fundamental common sense conclusions of economics, but that bad ideas don't die. Adam Posen had much the same thesis with respect to fiscal policy in a recent lecture on Japan's economy too. It's not just the Keynesians who make these arguments against non-Keynesians. In addition to Boettke's post above, it's absolutely astounding how unseriously Austrians take Keynesian economics (of any variety).

I have trouble knowing what to think when people make these appeals to common sense vs. "dead ideas". I think it's safest to err on the side of assuming that the economy is extremely complex and that you don't know as much about it as you think you do. But there are perhaps a few things I would put into the category of "everyone really needs to agree on this". I was surprised that Posen put fiscal policy in that category. I'm fairly convinced about what to do with fiscal policy under certain circumstances - convinced enough to have an opinion at least - but as far as scientific knowledge go that one still seems somewhat slippery to me. But I would have thought monetary policy could be put in this "common sense" category. Apparently not.

As Kartik Athreya reminded us a couple weeks back, economics is hard. I disagreed with some of the conclusions that Ahtreya drew from that insight, but I think the insight itself is still solid. I think a lot of people would do well to recognize that and approach the discipline with humility, especially when all sides of a question think their view is so common-sensical. At some point we have to make a judgement call and we're allowed to make judgement calls. Inaccurate fanatics will continue to cling to their ideas long after we've discovered the Earth is not flat, and we should feel free to leave them behind. But that doesn't mean we shouldn't be circumspect on most of these questions. It's always useful to see if your opponent is as confident as you are on a questions, and to think about whether that should augment your confidence.

Inconvenient Classical Liberals - Bastiat on Labor Unions

From Selected Essays on Political Economy

"Fellow Representatives:

11.2 I am here to support the amendment of my honorable friend, M. Morin; I cannot support it without also examining the proposal of the committee. It is impossible to discuss the amendment of M. Morin without entering involuntarily, so to speak, into the general discussion; this requires us to discuss the committee's conclusions as well.

11.3 In fact, M. Morin's amendment is more than a mere modification of the principal proposition; he is opposing one system to another system, and, to decide between them, we must compare them carefully.

11.4 Citizens, I do not bring into this discussion any partisan spirit or any class prejudice. I shall not seek to play upon your emotions, but the Assembly sees that my lungs*128 cannot struggle against parliamentary tumults; I need its kindest attention.

11.5 To evaluate the committee's system, let me recall some words of its honorable reporter, M. de Vatimesnil. He said: "There is a general principle in Article 44 and those that follow it in the Penal Code; namely: Combination, whether between employers or between workers, constitutes an offense only when an attempt or a beginning has been made to put it into effect." This is written into the law, and it is this that gave rise to an immediate response to an observation concerning it made by the honorable M. Morin. He said to you: "The workers, then, cannot join together, cannot come to their employer and honorably discuss their wages with him!" (That is the expression he used: "honorably discuss with him.")

11.6 "Pardon me; they can join together," interjects M. Vatimesnil; "they can decidedly do so, either by all coming to the employer together or by naming committees to come; the offense, according to the terms of the Code, begins only when an attempt or a beginning has been made to effect a combination, that is, when, after having discussed the conditions, and despite the spirit of conciliation that the employers in their own interest always bring to this kind of thing, the workers say to them: 'Since you will not give all that we ask of you, we are going to quit, and, by using our influence, by exerting pressures that are well known and that depend upon our identity of interests and our comradeship, we are going to get all the other workers in other shops to go on strike.' "

11.7 After reading this, I ask myself what the offense consists in; for in this Assembly there cannot be, it seems to me, what is called a systematic majority or minority on such a question. We all wish to repress offenses; we all aim at not introducing fictitious, imaginary offenses into the Penal Code, just to have the pleasure of punishing them.

11.8 I ask myself what the offense consists in. Is it in the combination, in the strike, or in the pressure to which allusion has been made? It is said: "It is the combination itself that constitutes the offense." I cannot accept this doctrine, because the word combination is synonymous with association; it has the same etymology and the same meaning. Combination in itself, aside from the end it aims at and the means it employs, cannot be considered as an offense, and the honorable reporter feels that himself; for, replying to M. Morin, who asked whether the workers could discuss wages with their employers, the honorable M. de Vatimesnil said: "They certainly can; they can come separately or all together to name committees." Now, to name committees, they must certainly come to an understanding, plan together, associate; they must form a combination. Strictly speaking, then, it is not in the mere fact of combination that the offense consists.

11.9 Nevertheless, some would like to make this the offense, and they say: "A beginning has to be made in effecting a combination." But can the fact of beginning to put an innocent action into effect render that action culpable? I do not believe so. If an action is bad in itself, certainly the law cannot deal with it until it has been begun. Indeed, I say that it is the beginning of the action that brings the action into existence. Your language, on the contrary, is tantamount to saying that a look is an offense, but it does not become an offense until one begins to look. M. de Vatimesnil himself recognizes that it is not possible to seek for the thought behind a culpable action. Now, when the action is in itself innocent and is manifested by innocent deeds, it is evident that it is not incriminating and cannot change its nature.

11.10 Now, what is to be understood by the words "beginning to effect a combination"?

11.11 A combination can occur, can begin to be put into effect, in a thousand different ways. But no, the concern is not with these thousand different ways, but with the strike. In that case, if it is the strike that is necessarily the beginning of the combination, then say that the strike is in itself an offense, punish the strike, and say that the strike will be punished, that whoever refuses to work at wage rates that he does not accept will be punished. Then your law will be honest.

11.12 But is there any conscience that can admit that the strike is an offense in itself, independently of the means employed? Does a man not have the right to refuse to sell his labor at a rate that does not suit him?

11.13 The reply to me will be: "All this may be true when only a single individual is involved, but it is not true when men have associated together for this purpose."

11.14 But, gentlemen, an action that is innocent in itself is not criminal because it is multiplied by a certain number of men. When an action is bad in itself, I admit that if that action is performed by a certain number of individuals, one may say that it is aggravated; but when it is innocent in itself, it cannot become criminal because it is the deed of a great number of individuals. I do not understand, then, how one can say that a strike is criminal. If one man has the right to say to another: "I don't want to work under such and such conditions," two or three thousand men have the same right; they have the right to quit. This is a natural right, which should also be a legal right.

11.15 However, my opponents need to impose a stigma of criminality on the strike. And how do they go about it? They slip between parentheses these words: "Since you will not give us what we ask of you, we are going to quit; we are going, by exerting pressures that are well known and that depend upon our identity of interests and our comradeship...."

11.16 This, then, is the offense: the well-known pressures—violence and intimidation. This is the offense; this is what you ought to punish. And, in fact, that is precisely what the amendment of the honorable M. Morin does. How can you refuse him your support?"

Guttenberg on Socialist Computer Games

Mattheus von Guttenberg has a post up on Mises about the computer game Caesar III. I haven't read it yet, but I'm guessing it's similar to a post that was up on the Economic Thought blog recently.

It's really a fantastic point, and one that I think any economist who's played this sort of game can sympathize with. Most people probably wouldn't even notice, but to put it in simple terms: the price mechanism is really fucked up in these games. Often what you have is not just price level stability, but stability of relative prices, which means any variation in what you need is borne entirely through output adjustments. I don't play a lot of computer games, and the one I'm most familiar with is Civilization IV. It's been a little while, but if I remember they do build in some moderate price deflation over time, presumably as your society gets better at producing a particular good. That's fair enough, but there's no diminishing marginal returns built in to counteract that natural technological development/division of labor effect. And what do you get when you're given increasing returns to scale? Well we can turn to the 2008 Nobel laureate in economics to answer that question: you get clumping and aggregation. Your armies are poorly balanced, your economy isn't diversified, etc.

Now - often in these games (at least in Civ IV) you can trade with your neighbors, and they'll pay more for things that they don't have. So that introduces something of a market. Usually, I've found that tradeable goods are produced in a more balanced way in response to this trading. But aside from that it simply doesn't work right. The dynamics and ups and downs you'd expect from unbalanced armies and economies probably makes the game exciting for most people. But it's very, very aggravating for a subset of us!

It's funny, I've noticed that when I play Civ IV I've naturally gravitated towards the pre-programmed scenarios for precisely this reason. I usually play the Revolutionary War scenario (alternatively as Washington and George III), or the WWII, Mediterranean theater scenario (the Italians are always fun to play in this one). In these scenarios you do some production, but you basically just fight. If I were trained in military strategy I might not enjoy these either, but I'm not - and ignorance is bliss.

The moral of the story: market efficiency and the price mechanism are inextricably tied together. You cannot have one without the other. This is why I take externalities and incentive problems so seriously. If you break or forgo the price mechanism, you're going to get messed up results, so you better have a good reason for departing from the price mechanism or ignoring a naturally occuring departure from the price mechanism.

Readjustment and Broad-Based Unemployment

What a strange day yesterday was – I post a quick link from Krugman suggesting that sectoral readjustment can’t explain the breadth of the crisis, and suggest that this is a recurrent concern that Austrians need to address seriously. For raising the issue – the not uncommon concern with ABCT – I get accused of not knowing what I’m talking about, lying, posting in bad faith, failing to write an extended critique of the Austrian school, etc. I’m told “we’ve answered this” when what is really meant is “we’ve answered this to our own satisfaction”. Anyway, I did not have time to do such a post justice yesterday – I hope I manage it here.

The Thesis: Readjustment from worker mismatch across sectors does not explain the severity of the downturn

Jonathan tries to respond to this here. He offers two main justifications:

1. “the lengthening of the structure of production relative to one good can have the consequence of lengthening the structure of production relative to a myriad of other goods. In this fashion, the structure of production tends to expand over multiple sectors of the economy—a basic way of saying this is, different sectors become interdependent… [ad hominems]… For all intents and purposes, Austrian theory predicts unemployment across a wide variety of sectors, and this ultimately affects both lower-order and higher-order industries.”

I’m not sure exactly how this suggests a broad-based downturn. Jonathan is not careful to distinguish here between vertical and horizontal production (in the traditional sense, not in the x, y, z coordinate plane that Jonathan mentions in his post). The whole problem with relying on readjustment of a sectoral distortion to explain the downturn is that it only explains unemployment in certain firms – namely, higher order production in more roundabout industries. Jonathan ably explains why we can expect to see a lengthening of the production process across multiple industries. I would go a step further than him and suggest that Austrian theory gives an excellent case for expecting a lengthening of the production process across all industries. But this doesn’t do anything to explain unemployment in lower order production (Jonathan’s use of “for all intents and purposes, Austrian theory predicts” rather than simply “Austrian theory predicts” indicates he may even be aware this doesn’t explain it). It still only explains unemployment in the higher order firms. Instead of explaining how a lengthening of production processes across all industries leads to unemployment of both high and lower order production, he spends his time telling me that I don’t understand any of these fundamental points.

So Jonathan comes back to a lengthening of the production process. Fine. But when the malinvestment is revealed, what happens to the lower order production? He doesn't address the question, but I'll try. Well we know there’s no input bottleneck because (1.) there has been a lot more higher order production than necessary so there should be ample inputs, and (2.) if there is any demand for those inputs, then provision of those inputs wouldn’t be malinvestment in the first place and would have remained profitable even after other malinvestments were revealed. So it can’t be a bottleneck issue that allows unemployment in higher order goods sectors to spread to lower order goods. It’s also not a problem of a lack of labor or capital. The whole point of ABCT is that labor and capital that was used in higher order goods needs to be moved to lower order goods, and while this adjustment process takes time there’s no reason to think that there would be a fall in lower order employment in the interim, while the adjustment is taking place. The increase may not be immediate, but there’s no reason to think there is a fall, as Krugman points out in the data. Jonathan, too busy insulting my understanding of ABCT, failed to provide any reason to believe that a lengthening of the production process across multiple sectors would cause unemployment in both higher and lower order goods. I provided two possible reasons to believe that here, and then provided a refutation to each. Come on man – I’m doing your job for you. If you have any other reasons, though, I’m happy to hear them.

2. “If a box of nails [previously employed in house construction] is suddenly pitted towards another industry altogether (let us say, the construction of a lumber factory), then the stage it is at suddenly changes, as well. While the lumber industry, in this case, is relevant to the housing industry, these kinds of switches can occur in industries which may not be directly related (as suggested above). This, as also mentioned above, causes the structure of production to intensify across multiple sectors. As a consequence of this interdependence (for lack of a better word), it only makes sense that a fall in productivity would affect several different sectors of an economy, not just the housing sector.”

The second argument Jonathan provides is based on the switching of capital goods between industries. This one isn’t quite as clearly sketched out, but I think the point is that if the marginal productivity of the capital good (the nails) falls, because industries are interrelated production in all sectors will fall. Capital goods are substitutable and switchable across industries. But Jonathan fails to even consider any magnitude for the elasticity of substitution between sectors, and implicitly assumes such an elasticity is extremely high. Otherwise productivity shocks couldn’t propagate across sectors. So that’s one implicit assumption of his that he chooses not to share with his readers. It’s a bad assumption I think (and an odd one for an Austrian to make – Austrians usually emphasize the heterogeneity and specificity of capital and labor, something which of course I concur strongly with them on), but I’ll grant the bad assumption for the sake of argument. That still leaves the question of how a fall in the productivity of a higher order good, even if it can propagate horizontally, leads to unemployment in lower orders of production in the context of a readjusting capital structure. Again, the adjustment may not be instantaneous, but it still should not produce balanced unemployment. You could assume an infinite elasticity of substitution between capital goods and it won’t change the fact that lower order production will face expansionary and inflationary pressures, not contractionary pressures.

If Jonathan assumes that all capital goods at all stages of production experience a fall in marginal productivity I can certainly accept that as an explanation for widespread unemployment. That’s Real Business Cycle Theory. That’s New Classicism. That sort of thing could happen. But ultimately that’s an “aggregate supply” explanation that mirrors the “aggregate demand” explanation that he oversimplifies and ridicules. The difference is, there’s a theoretical framework based on liquidity preference underpinning a precipitous fall in demand. There’s no good reason to assume the sort of economy wide technological retrogression that would be needed to put forward an aggregate supply explanation like Jonathan seems to be doing here (by assuming a broad-based reduction in the marginal productivity of capital). And even if you could provide such an explanation (dubious in our current case - and he hasn't proposed one at all), that gives you unemployment but it doesn’t give you downward pressure on prices, so you’d still have that to explain as well (one explanation might be a surplus of goods left over from the boom, of course).

Ultimately, I still see no good reason to believe that any explanation based on sectoral readjustment or on the rebalancing of the structure production after the lengthening of the production process could be a primary explanation of this downturn. Reading Jonathan's post didn't change that, and I quite well understood Jonathan's post. That’s not to say such a process isn’t occurring. I would be surprised not to see that unemployment was worse in higher order production processes than in lower order production processes (and it would be really nice to have empirically-inclined Austrians look into this more rigorously!). But that’s ultimately not an explanation for the broad based unemployment we’re seeing.

My Concession

Nevertheless, this doesn’t mean that Austrians are worthless. My claim and Krugman's claim was only that readjustment of the structure of production doesn’t explain the sort of unemployment we’re seeing. For some reason, in the criticism of my post, this got twisted into me dismissing the Austrian school as a whole.

Xenophon shared with me a link to a Bob Murphy lecture that I do think offers an explanation for broad based unemployment that Austrians can get behind: unsustainable growth and capital consumption. I didn’t mention this for two reasons:

1. It wasn’t what Krugman or I were talking about – the initial point was that the readjustment of the capital structure and ABCT can’t explain the downturn, not that an entire school of thought can’t explain it, and

2. I never really thought that the idea that inflationary monetary policy can create unsustainable growth belonged to the Austrians or was the "Austrian business cycle theory" – it’s one of those things like supply and demand or market efficiency that I never really think of as belonging to anyone.

So, as far as I’m concerned the initial thesis still stands and Jonathan didn’t really make much of a counter-argument. Nevertheless, it’s worth highlighting this point that Xenophon shares because it’s a good one. And honestly the worry about capital consumption is just icing on the cake. You don’t even need that. If growth was unsustainable across the board because of a loose monetary environment then when that monetary environment tightens (either because of an increase in money demand or a decrease in money supply… in this case we have the former), you’re not only going to have a decline in demand (a la Keynes), but you’re also simply going to have a lot of production that is revealed to be unsustainable.

Fine. That isn’t the Austrian business cycle theory, that’s basic bubble dynamics. I’ll certainly acknowledge that Austrians acknowledge this – I never claimed they didn’t. But it doesn’t change the fact that capital structure arguments offer no explanation for the kind of unemployment we’re seeing.

Another reason why I don’t readily associate this with ABCT is because of how many times Austrians drill into people that “malinvestment is not overinvestment!”.

A Note

I spend a lot of my time thinking about economics. It’s an interest, a calling, and a profession. I’ve come to many conclusions about economics, and those conclusions will change over time and have changed over time, but I don’t draw a conclusion lightly or without reason. I have absolutely no qualms about being ambiguous or "on the fence" if I honestly don’t know what to think. And if I think something, it’s because I’ve thought it through. When I blog, sometimes I’ll produce long posts, sometimes it’ll be just to share a quick thought or link. If you disagree with me, it’s not incumbent upon me to satisfy you on my time, and you really need to realize that and get over it. Don’t insult me by assuming I toss around ideas casually, and don’t have the hubris of assuming that because someone doesn’t agree with your argument they don’t understand your argument. Truth in the social sciences is extremely hard to come by. A lot of things remain quite ambiguous and are consistent with a variety of explanations. If you think you have an air-tight theory that someone would have to misunderstand to disagree with, then you probably don’t understand your own theory. Very few theories are that air-tight.

Two other things:

- I'm probably not going to respond much in this post unless I truly feel that a new argument has been offered that's convincing, or that there is a flaw in my own argument (as I did with Xenophon's point, which I appreciated him raising... I especially appreciate it because I haven't thought much of what I've heard from Bob Murphy in the past - probably because I only really have contact with things he's said on 1920-21 and the Great Depression - but the thoughts he shared in the lecture were often good). In all likelihood, I'm not going to post on this again either (unless there's a good counter-argument I haven't thought of that needs a response). I really need to spend a few mornings writing and working.

- I still haven't seen much reaction to Krugman besides on this blog and on Jonathan's. Does anyone else think that's weird? Usually the very term "hangover theory" is like catnip to Austrians. Feel free to direct me to any links I've missed.

Inconvenient Classical Liberals - Thomas Paine on Property and a Public Welfare System

From Agrarian Justice

"Nothing could be more unjust than agrarian law in a country improved by cultivation; for though every man, as an inhabitant of the earth, is a joint proprietor of it in its natural state, it does not follow that he is a joint proprietor of cultivated earth. The additional value made by cultivation, after the system was admitted, became the property of those who did it, or who inherited it from them, or who purchased it. It had originally no owner. While, therefore, I advocate the right, and interest myself in the hard case of all those who have been thrown out of their natural inheritance by the introduction of the system of landed property, I equally defend the right of the possessor to the part which is his.

Cultivation is at least one of the greatest natural improvements ever made by human invention. It has given to created earth a tenfold value. But the landed monopoly that began with it has produced the greatest evil. It has dispossessed more than half the inhabitants of every nation of their natural inheritance, without providing for them, as ought to have been done, an indemnification for that loss, and has thereby created a species of poverty and wretchedness that did not exist before.

In advocating the case of the persons thus dispossessed, it is a right, and not a charity, that I am pleading for. But it is that kind of right which, being neglected at first, could not be brought forward afterwards till heaven had opened the way by a revolution in the system of government. Let us then do honor to revolutions by justice, and give currency to their principles by blessings.

Having thus in a few words, opened the merits of the case, I shall now proceed to the plan I have to propose, which is,

To create a national fund, out of which there shall be paid to every person, when arrived at the age of twenty-one years, the sum of fifteen pounds sterling, as a compensation in part, for the loss of his or her natural inheritance, by the introduction of the system of landed property:

And also, the sum of ten pounds per annum, during life, to every person now living, of the age of fifty years, and to all others as they shall arrive at that age. "

Boettke on New Methods of Peer Review

I want to pass this post by Peter Boettke for reactions, although I don't have time to think in detail about it now. He mentions a New York Times article about a more open, blog-like "crowd-sourcing" of the peer review process. I didn't even get a chance to read the article in detail yet, but it sounds interesting.

I do have my doubts, though. I have very little experience with the peer review process, and the experience I have had doesn't entirely reaffirm the value of the status quo, but I worry that this is the wrong stage in the process for introducing a blog-like approach.

It seems to me peer-review is simply a way of ensuring quality and making sure important points in research were hit, right? I don't see how this blog-like approach helps with that. What blogging can offer is a way to formalize a much wider range of comments and critiques than the normal journal format for replies and comments. A good example of this is what Econ Journal Watch is doing to collect a series of critiques of the Buturovic and Klein article on economic ideology (which I participated in). We could have more of this sort of thing, and we could presumably have each of these critiques as blog posts with comment sections, methods of voting on the salience of different critiques, etc.

But is it really necessary as a gate-keeper? I don't think so.

This is not to say the current peer review process is perfect - it's not. But it seems to me the biggest problem with peer review are issues of (1.) elevating the most sexy, counter-intuitive findings and empirical tricks, regardless of whether they are the right findings, and (2.) having a bias against insignificant findings. I don't see how these would be solved with a blog-like approach.

I also imagine it would be a nightmare to respond to everybody in an equitable way. I had only two reviewers for my recent Review of Austrian Economics article, and on some issues they advocated exactly the opposite change! And this is RAE - presumably the reviewers of other journals are even less homogenous than the reviewers of this one.

So my initial reaction is to move forward with these possibilities and definitely experiment with them, but I'd hesitate to use them at the peer review stage.

Do others have thoughts?

Krugman on "Hangover Theory"

Well this is going to get some attention in the Austrian blogsphere today.

Krugman takes a big swipe at some dissenters using two terms that are like nails on a chalkboard for Austrians: "hangover theory" and "liquidationism".

What's a shame is that most of the back-and-forth is probably going to be about defending the honor of Austrians and not addressing Krugman's actual point, which is good although I think he makes it too boldly.

I would be the last person to discount matching problems in the labor market - it's what I want to build my research agenda around, for God's sake. But that doesn't mean that that particular problem is always the primary problem. Krugman makes the point that whatever matching problems are out there, and to whatever extent matching problems and malinvestments may explain unemployment rate differentials (we had a housing bust... the fact that construction workers are out of work after a housing bust is common sense), they do not explain the staggering collapse of employment across all sectors.

Which gets me back to what I continue to ask of Austrians - don't explain to me ABCT over and over again. I understand ABCT. I even believe ABCT. Give me a reason to believe that is the primary force behind the downturn right now, rather than the secondary or the tertiary force.

Unfortunately, I think this is just going to degenerate into a "Krugman doesn't understand us!" conversation, as it usually does. Hopefully not - but we'll see.

*****

Speaking of job matching... I've been working in the mornings on my data from 1880. I haven't developed weights yet, but it seems to be behaving relatively similarly to job creation and destruction in the 20th century, which is pretty cool. Job creation and job destruction are both somewhat lower than they are today, though. Could be real - could be recall issues (This is not strictly speaking a panel survey - firms are asked about employment retrospectively. Some may have good reliable records. Others are almost certainly giving it a guess).

UPDATE: Xenophon suggests this talk by Robert Murphy. There's nothing really new or surprising in here, but it's worth listening to. The point of capital consumption that he makes is actually good - I suppose I don't think of that as unique to ABCT, so I didn't think to mention it but that is a good point. I suppose presumably if the boom is driven by capital consumption rather than a capital structure distortion that's going to have a broad-based impact on the downturn. There's nothing really "Austrian" about this point, but it is a point that Austrians make and it has to be highlighted. Jonathan remarks on broader changes in the productivity of capital in this post as well, which is somewhat similar (this is not the only point that Jonathan makes - it's worth reading the rest of it). This is something that caught my eye a while ago, actually - both Keynesian and Austrian models are driven by a change in the perception of the marginal productivity of capital. How are these stories different between them? Anyway - I had forgotten about that because as I say it doesn't seem to be the heart of ABCT because it doesn't really speak to the capital structure and it's not particularly unique. I had wanted to work in my article tomorrow morning, but I think I'll have to work through all this and write on this.

Assault of Thoughts - Separation of Church and State Edition - 8/24/2010

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

I don't know of a single commenter on here that I think would object to the building of the so called "Ground Zero Mosque", but every day the rhetoric around this and its very existence as an "issue" becomes more disconcerting to me, so I thought I'd share a few links. As Evan remarked when he had shared something on this on Facebook, "This whole mosque kerfuffle is one of those issues where I thought "it's not even worth voicing my opinion... only crazies would oppose religious freedom like this, anyway" ...but then the conversation continues, makes its way into the mainstream, makes seemingly reasonable people say stupid things... and I regret not advocating the blatantly obvious a week ago."


- So anyway, today I saw this footage of a Ground Zero protest which was extremely disconcerting. This happened back in June:




- This is a video of the organizer of the protest talking with Mike Huckabee. Huckabee, of course, doesn't challenge her on much of anything. She takes the kind of compromise line that the more sophisticated opponents have - that the government shouldn't oppose this but that the Muslims involved should recognize how offensive it is and willingly stop development of the mosque. I don't personally see how this is much better. I suppose it's better not to enlist the state in your cause, but the point is she still identifies the terrorist act with the Muslim faith in general, and she still sees a contradiction between a patriotic American and being a Muslim. What's most frustrating is that she takes issues like the Danish Cartoon controversy and uses that very real problem of Muslim lack of tolerance and liberalism to justify her own lack of tolerance and liberalism. I've been unequivocal on here in support of the cartoonists and the satirists that have deliberately aimed their pens at fundamentalist Islam and I'll continue to support them - it's ironic and sad that this woman actually uses those champions of tolerance and liberalism to justify her own intolerance. I agree with her - sharia law as it is problematically enforced is worth censure, ridicule, and opposition. I don't think sharia law should be enforced in any setting other than a voluntary compact (like ecclesial law). I'm not one to shy away from the idea that we can't come down forcefully against these forces of fundamentalism. But you don't do that by violating the rights of Americans who have committed no such infraction:




- The protests aren't restricted to New York City - another location that's gotten attention is Murfeesboro, a suburb of Nashville. And it's not a few random civilians either. A former county commissioner in Murfeesboro opined "the Muslims coming in here will keep growing in numbers and override our system of law and impose sharia law".

- This is a great article from the Library of Congress on Jefferson's letter to the Danbury Baptists of Connecticut, where he first promoted the idea of a "wall of separation" between church and state.

- This is Jeff Goldberg on the imam behind the mosque.

- Christopher Hitchens on anti-Semitism. Not strictly on point but I can't help thinking of anti-Semites when I listen to Geller. If Hitchens is going to go soon - and I hope he's not - going out with a piece on the Ground Zero mosque, weaving together all his good work fighting fundamentalist Islam (and fundamentalism in general), his thinking on the war, and his unwavering defense of religious freedom would be a good piece to go out on. I don't know if he is writing or if he is planning on writing anything about this. I would think and hope he would support the construction of the mosque and embrace Muslim Americans as Americans, while maintaining that the faith itself is nonsense and reminding us of the very real problem of fundamentalist Islam (he strikes the right balance here, for example, bringing all his usual charges against fundamentalist Islam but declaring in response to accusations that he's "offended a billion Muslims" that "he would defend the freedom of religion of Muslims if there were only three of them, much less a billion"). But fallible human beings sometimes disappoint, and maybe Hitchens might not be so sympathetic to this mosque - but that would truly surprise me.

Inconvenient Classical Liberals - Montesquieu on Taxes

From The Spirit of Laws

"12. Relation between the Weight of Taxes and Liberty. It is a general rule that taxes may be heavier in proportion to the liberty of the subject, and that there is a necessity for reducing them in proportion to the increase of slavery. This has always been and always will be the case. It is a rule derived from nature that never varies. We find it in all parts — in England, in Holland, and in every state where liberty gradually declines, till we come to Turkey. Switzerland seems to be an exception to this rule, because they pay no taxes; but the particular reason for that exemption is well known, and even confirms what I have advanced. In those barren mountains provisions are so dear, and the country is so populous, that a Swiss pays four times more to nature than a Turk does to the sultan.

A conquering people, such as were formerly the Athenians and the Romans, may rid themselves of all taxes as they reign over vanquished nations. Then indeed they do not pay in proportion to their liberty, because in this respect they are no longer a people, but a monarch.

But the general rule still holds good. In moderate governments there is an indemnity for the weight of the taxes, which is liberty. In despotic countries10 there is an equivalent for liberty, which is the lightness of the taxes.

In some monarchies in Europe there are particular provinces11 which from the very nature of their civil government are in a more flourishing condition than the rest. It is pretended that these provinces are not sufficiently taxed, because through the goodness of their government they are able to be taxed higher; hence the ministers seem constantly to aim at depriving them of this very government, whence a diffusive blessing is derived, which redounds even to the prince's advantage.

13. In what Government Taxes are capable of Increase. Taxes may be increased in most republics, because the citizen, who thinks he is paying himself, cheerfully submits to them, and moreover is generally able to bear their weight, from the nature of the government.

In a monarchy taxes may be increased, because the moderation of the government is capable of procuring opulence: it is a recompense, as it were, granted to the prince for the respect he shows to the laws. In despotic governments they cannot be increased, because there can be no increase of the extremity of slavery.

14. That the Nature of the Taxes is in Relation to the Government. A capitation is more natural to slavery; a duty on merchandise is more natural to liberty, by reason it has not so direct a relation to the person.

It is natural in a despotic government for the prince not to give money to his soldiers, or to those belonging to his court; but to distribute lands amongst them, and of course that there should be very few taxes. But if the prince gives money, the most natural tax he can raise is a capitation, which can never be considerable. For as it is impossible to make different classes of the contributors, because of the abuses that might arise thence, considering the injustice and violence of the government, they are under an absolute necessity of regulating themselves by the rate of what even the poorest and most wretched are able to contribute.

The natural tax of moderate governments is the duty laid on merchandise. As this is really paid by the consumer, though advanced by the merchant, it is a loan which the latter has already made to the former. Hence the merchant must be considered on the one side as the general debtor of the state, and on the other as the creditor of every individual. He advances to the state the duty which the consumer will sometime or other refund: and he has paid for the consumer the duty which he has advanced for the merchandise. It is therefore obvious that in proportion to the moderation of the government, to the prevalence of the spirit of liberty, and to the security of private fortunes, a merchant has it in his power to advance money to the state, and to pay considerable duties for individuals. In England a merchant lends really to the government fifty or sixty pounds sterling for every tun of wine he imports. Where is the merchant that would dare do any such thing in a country like Turkey? And were he so presumptuous, how could he do it with a crazy or shattered fortune?

15. Abuse of Liberty. To these great advantages of liberty it is owing that liberty itself has been abused. Because a moderate government has been productive of admirable effects, this moderation has been laid aside; because great taxes have been raised, they wanted to carry them to excess; and ungrateful to the hand of liberty, of whom they received this present, they addressed themselves to slavery, who never grants the least favour.

Liberty produces excessive taxes; the effect of excessive taxes is slavery; and slavery produces a diminution of tribute."

Peter Boettke on Economics and Sociology

Peter Boettke has a new post on economic sociology, providing lots of links and his thoughts. As I've mentioned on here before (probably sharing many of these same points), I've also got a warm spot in my heart for economic sociology, which I studied with Deirdre Royster at William and Mary. A lot of Boettke's important influences - Weber, Granovetter, Berger - are quite important to my thinking too.

Boettke highlights a relatively new book by Swedberg on Tocqueville's Political Economy, which looks interesting.

He mentions Granovetter with respect to embeddedness, but doesn't really get into his work on networks. Smithian division of labor is something that is often appealed to but isn't really central to a lot of modern economics of any school, except for some institutionalists and Coasians. I think any serious modern exposition of the division of labor has to be along the lines of Granovetter and network economies.

Other economic sociologists that have influenced me have been Tilly, Evans, and Skocpol.

Boettke also recommends Alex Preda's Information, Knowledge, and Economic Life: An Introduction to the Sociology of Markets.

Conor Friedersdorf on Yglesias

Conor Friedersdorf discusses the Yglesias post I linked to earlier here. He agrees that statism is a strange way to frame the difference between liberals, conservatives, and libertarians.

It is, however, a politically strategic way of framing it, which probably explains why so many libertarians have been convinced by it.

Assault of Thoughts - "Macro Theory Edition" 8/23/2010

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

- Arnold Kling talks about a statement by Kocherlakota on job vacancies. It's kind of just a collection of thoughts, some of which I wish he'd develop more. For example, he writes this about Okun's Law - "We are getting stronger output growth than employment growth, which suggests that the job openings are not for end-stage production workers." Why does it suggest that, exactly? They call them the "national income and product accounts" because it's not "end-stage production" that's counted - it's all production or all income (the method of counting is interchangeable). I'm not quite clear on how you infer what stage of production has job openings from Okun's Law, but maybe I'm missing something. In the last paragraph he juxtaposes a "matching problem" with an "aggregate demand problem". I think this makes sense, but we still have low job openings relative to peak. Kling acknowledges this and concludes we still have a major demand problem.

- Paul Krugman has a great post on the bond market. He's actually had a series of good posts that deserve some reply from people who were predicting disaster about a year and a half ago. He uses some pretty standard techniques and some pretty standard data to point out that we're going to have these low rates for a while. What he makes a point of, though, is that the rates are only low nominally. Rates should be negative right now. From a purely Wicksellian perspectives, we have tight monetary policy and that's a major problem. The very scary thing is that many people who call themselves economists don't even seem to realize this.

- The NEP-DGE blog links to a paper on a "frictionless model of job flows and the Beveridge Curve". A modified Diamond-Mortenson-Pissarides model is presented that does a better job tracking the cyclical behavior of job flows and vacancies. This matching/job flow work makes mush out of these silly claims you hear out of places like the Mises Institute that other economists are blinded by aggregates conceal the most fundamental mechanisms of change. Before taking those claims at face value, people who are inclined to parrot Mises Institue broadsides should familiarize themselves with the literature they're critiquing, and then critique it for something that actually makes sense (i.e. - too much math or an empirical disposition) rather than concealing the most fundamental mechanisms of change. You'll still be wrong, but at least you won't come across as not understanding that which you critique.

Catalan on American Slavery

Jonathan Catalan has a post up on American slavery. First, he suggests that slavery in the South would have eventually died out:

I am certain that slavery in the United States would have been phased out naturally. Slavery was beneficial in the south because of low marginal productivity. The south was predominately an agricultural society, and it had not benefited from the mechanization it would benefit from in the decades directly after the American Civil War.

I have to agree with him on this. Slavery was dying out across the world, it would have been increasingly agitated against, it would have begun to get unprofitable (for the masters, that is - it was always unprofitable for the slaves). Many slave-owning Southerners felt it was a dying system and didn't even particularly like it - they simply didn't not like it enough to do much about it. Jonathan goes on:

"An important question to ask is whether or not the emancipation of the slaves during the civil war accelerated the post-war industrialization of the south. No longer benefiting from cheap labor, southern farmers had to radically increase production in order to remain profitable. This directly leads to another question: how long would it have taken to naturally rid the country of slavery?

There were important technological developments prior to the civil war: steel plows, seed drills, threshing machines, et cetera. The dramatic burst in agricultural productivity, however, occurred in the post-war (indeed, this increase in productivity directly after the war led to the industrial revolution of 1879-1906, since it allowed otherwise occupied labor to be restructured into more productive industries)."

I found all this very interesting, because I suppose I never really thought of the late twentieth century as a boom time for the South. Maybe you only learn this in Southern public schools, but I was always taught that the War retarded industrial development in the South, so the idea that the end of slavery encouraged industrialization seems unusual, albeit I suppose plausible, to me.

There are a couple of other developments that are worth considering here. First, the Jim Crow Laws were passed as the Reconstruction regimes began to subside during this same time period. In a lot of ways, blacks reverted back to a state of semi-enslavement. Sharecropping and credit extension from landlords cemented the reassertion of this semi-slavery, making labor cheaper and perhaps once again retarding the progress of industrialization.

By the early 1900s you had another force - the large-scale migration of blacks and others from the South to the North, known as the Great Migration. This would have increased the marginal productivity of labor and caused the South to substitute away from capital.

And finally, I hate to break it to my Austrian readers, but Southerners also often point to one source as the reason for the transition from being the "Cotton Belt" to the "Sun Belt": Franklin Delano Roosevelt. Between the New Deal, the military spending, and the military-industrial complex that continues to do a lot of work in the South, a lot of thanks goes to Southern Democrats and their allies in the White House.

Matt Yglesias on what it means to be a liberal

Matt Yglesias has a had a few posts up recently on how stupid regulating barber shops is. I haven't mentioned it because it's not really that interesting. Of course regulating barber shops is stupid. Doesn't everyone know that? What possible function could there be to barber shop regulation? It seemed like one of those issues where 98% of the public would agree on, but nobody would be bothered enough by it to make the effort to change the laws.

Matt has a more interesting post up today, though, that I do think is worth commenting on here. He responds to people who think his opposition to barber shop regulation makes him conservative:

"A colleague mentioned to me the other day that I’m “pretty conservative” on some state and local government issues, with reference to some recent posts on occupational licensing. Someone on twitter asked if I’m trying to score a date with a Cato staffer. I’m not. And I’m not. And I think that whole framing represents a bad way of understanding the whole situation.

I think it’s pretty clear that, as a historical matter of fact, the main thing “the state” has been used to do is to help the wealthy and powerful further enrich and entrench themselves. Think Pharaoh and his pyramids. Or more generally the fancy houses of European nobility, the plantations of Old South slaveowners, or Imelda Marcos’ shoes. The “left-wing” position is to be against this stuff—to be on the side of the people and against the forces of privilege. It’s true that some useful egalitarian activism over the past 150 years has consisted of trying to get the state to take affirmative steps to help people—social insurance, the welfare state, infrastructure, schools—but dismantling efforts to use the state to help the privileged has always been on the agenda. Don’t think to yourself “we need to regulate carbon emissions therefore regulation is good therefore regulation of barbers is good.” Think to yourself “we can’t let the privileged trample all over everyone, therefore we need to regulate carbon emissions and we need to break the dentists’ cartel.”"

These kind of assumptions are why I started posting my "what was Arnold Kling thinking?" series (so far there are only two posts but I'm sure he'll give us enough material to keep going through the fall). Kling makes a habit of making really weird, dumb statements about what liberals are and think that often boil down to "liberals hate markets and trust the state", and often seem to originate in the assumption that "since I like this liberals must not like this".

Yglesias demonstrates why this absolutely isn't the case, and he actually does it in a way I wouldn't have - which is kind of nice. What I think you have to remember is that modern liberalism is grounded in the same classical liberalism that modern conservatism and modern libertarianism are. There is no presumption that markets are bad, there is a presumption that markets are good. Whether markets are always the best solution to a given problem is up in the air, but there is no natural suspicion of markets. This is what separates liberals from "the left", which did emerge from a suspicion of markets (although even many leftists, since the fall of communism, are moving away from that).

As I've said before, I'm personally not really a liberal, although obviously I have some sympathies. That's why it was kind of nice to see Yglesias's distinctly liberal (i.e., egalitarian) take on why regulation is often bad. I would have put it somewhat differently and framed it in a less egalitarian way. I would have said we know what kinds of problems markets solve well. They solve problems where agents can bargain over all costs and benefits affected by the bargain, where both agents are relatively well informed and can't take advantage of each other, and where "ability to pay" isn't a major concern (i.e. - markets aren't always the best way to feed poor people, although they are the best way to produce food for poor people and they are the best way to distribute food to the vast majority of people). Markets are the ideal social institution for situations like this. Insofar as the situation departs from these requirements, something else might be more appropriate.

Readers please take note. If you think liberals disapprove of markets, like regulation, or if you at all were suprised to read Yglesias rail against barber shop regulations then you really need to reconnect with reality. You've invented a conception of a huge swath of the public.