What is Arnold Kling thinking?, Part 1

OK, for a while now I've been toying with the idea of a "what in the world is Arnold Kling thinking?" sort of post, but I never went ahead with it. Arnold presents a very interesting case. His posts on macroeconomics are often fascinating. He takes Minsky seriously, which is more than can be said for a lot of libertarians - and he integrates it with some innovative work on the macroeconomics of labor by Garett Jones. This stuff is always great to read.

But quite regularly, Kling writes up posts where he speculates on "liberals" or "the left" or some other formulation of mainstream, non-libertarian, non-conservatives that are nothing short of bizarre.

Here, Kling asks how people who think the state should solve market failures should in some way be evaluated on the basis of the fate of the Soviet Union. He describes the Soviet Union as an experiment that tests this "market failure" position, an experiment which inevitably liberals ignore. The problems with this framing of the question should be obvious to anyone that knows even a small amount of economics. Since when is state control of retail trade (the issue he specifically cites) an attempt at addressing a market failure? People who set out parameters for when markets succeed and when markets fail would have predicted the total failure of the Soviet excursion into retail trade, not to mention the Soviet experiment in general. Kling asks how we can cope with such damning empirical evidence. The logic is barely comprehensible.

If the "market failure" school of thought were to describe their ideal society, what kind of society would they describe? One like the United States, Western Europe, Japan, Canada, etc. - that's what. If you take market failure seriously you think these societies get it right and the Soviet Union, China, Cuba, etc. get it wrong. The problem isn't a lack of examples of societies that address market failures - the problem is a lack of a libertarian counter-factual to compare it to!

This is just one example of Arnold's odd take on liberals. There are many others that consistently lead me to ask "is this the same Arnold Kling that just wrote such an enlightening post about Minsky and Jones?"

For example:

- Liberals don't like markets and think markets are unfair

- Liberals don't like school choice, think that "technocrats" and social scientists have "mystical" powers, and don't understand "the knowledge problem" (i.e. - Hayek's point)

- Liberals "tend to affiliate themselves with Harvard types, and Harvard types believe that they are smarter than markets" (keep reading that quote... it gets even crazier and more conspiratorial)

- Liberals (1.) don't see inconsistency between legalizing marijuana while banning trans fats, (2.) want to ban trans fats, and (3.) don't want to legalize marijuana because they believe in limited government (they want to legalize marijuana because they don't think it's a problem)

- Liberals "are confident that they are smarter and better educated than conservatives"

What's weird is how insightful Kling can be in certain posts, and how completely disconnected from reality he can be whenever the topic of "what liberals think" comes up. Usually I'm not convinced by psychoanalytic interpretations, but I'm seriously tempted to think that there is some deeply-rooted, unresolved issue in Kling's past that leads to posting like this.

Anyway - very strange. I go back and forth between personally identifying as a "liberal", but I'm certainly left of center and I do think the ideas behind "market failures" are very important for understanding how a wide variety of social institutions work (or do not work). So apparently I identify with "Harvard-types", think I'm smarter than everyone else, and should have my ideas evaluated on the basis of the performance of the Soviet Union.

Hmmmm...

I labeled this "part 1" because from now on I'm not going to refrain from reposting the craziness here. It's just too weird not to share. If anyone else has any particularly egregious examples please feel free to share.

Bloomberg, the Mosque, and Religious Toleration

I had of course heard about Mayor Bloomberg's unequivocal opposition to those criticizing the mosque project at the World Trade Center site. I hadn't read the whole statement, particularly the interesting history he provides at the beginning:

"In the mid-1650s, the small Jewish community living in lower Manhattan petitioned Dutch governor Peter Stuyvesant for the right to build a synagogue, and they were turned down. In 1657, when Stuyvesant also prohibited Quakers from holding meetings, a group of non-Quakers in Queens signed the Flushing Remonstrance, a petition in defense of the right of Quakers and others to freely practice their religion. It was perhaps the first formal political petition for religious freedom in the American colonies, and the organizer was thrown in jail and then banished from New Amsterdam.

In the 1700s, even as religious freedom took hold in America, Catholics in New York were effectively prohibited from practicing their religion, and priests could be arrested. Largely as a result, the first Catholic parish in New York City was not established until the 1780s, St. Peter's on Barclay Street, which still stands just one block north of the World Trade Center site, and one block south of the proposed mosque and community center."

I know of at least one "formal political petition for religious freedom" in the American colonies before this 1657 event. In 1634-35, the town of Salem lodged a formal protest with the General Court of Massachusetts in Boston which demanded that they oust Roger Williams from the pulpit for his heresies. Eventually, under pressure from Boston involving some land deals, Salem relented and Williams left to found the colony of Rhode Island. Hopefully the supporters of the Cordoba Mosque initiative don't similarly buckle under pressure.

Scott Kuhagen has a great review of the issue here.

What are readers' fondest moments in the promotion of religious liberty in American history?

Keynes on Newton

Keynes was one of many dignitaries selected to speak about Isaac Newton on the 300th anniversary of his birth, in 1942, I'm assuming because of his painstaking efforts to track down and reacquire Newton's papers and return them to Cambridge. Keynes read through and reflected on these papers, and in many cases he was the first to have read them since Newton himself. The war delayed the event, and by the time it was held in the summer of 1946, Keynes had passed away. However, he did leave the speech he was intending to deliver, entitled "Newton, the Man".

Yesterday's exchange on science reminded me of it because of one line in the piece that I was familiar with, that "Newton was not the first of the age of reason. He was the last of the magicians." So last night I read it - it's a very interesting read. Here are some good passages:

*****

"In the eighteenth century and since, Newton came to be thought of as the first and greatest of the modern age of scientists, a rationalist, one who taught us to think on the lines of cold and untinctured reason.

I do not see him in this light. I do not think that any one who has pored over the contents of that box which he packed up when he finally left Cambridge in 1696 and which, though partly dispersed, have come down to us, can see him like that. Newton was not the first of the age of reason. He was the last of the magicians, the last of the Babylonians and Sumerians, the last great mind which looked out on the visible and intellectual world with the same eyes as those who began to build our intellectual inheritance rather less than 10,000 years ago. Isaac Newton, a posthumous child bom with no father on Christmas Day, 1642, was the last wonderchild to whom the Magi could do sincere and appropriate homage."

*****

"I believe that the clue to his mind is to be found in his unusual powers of continuous concentrated introspection. A case can be made out, as it also can with Descartes, for regarding him as an accomplished experimentalist. Nothing can be more charming than the tales of his mechanical contrivances when he was a boy. There are his telescopes and his optical experiments, These were essential accomplishments, part of his unequalled all-round technique, but not, I am sure, his peculiar gift, especially amongst his contemporaries. His peculiar gift was the power of holding continuously in his mind a purely mental problem until he had seen straight through it. I fancy his pre-eminence is due to his muscles of intuition being the strongest and most enduring with which a man has ever been gifted."

*****

"There is the story of how he informed Halley of one of his most fundamental discoveries of planetary motion. 'Yes,' replied Halley, 'but how do you know that? Have you proved it?' Newton was taken aback - 'Why, I've known it for years', he replied. 'If you'll give me a few days, I'll certainly find you a proof of it' - as in due course he did."

*****

"His experiments were always, I suspect, a means, not of discovery, but always of verifying what he knew already.

Why do I call him a magician? Because he looked on the whole universe and all that is in it as a riddle, as a secret which could be read by applying pure thought to certain evidence, certain mystic clues which God had laid about the world to allow a sort of philosopher's treasure hunt to the esoteric brotherhood. He believed that these clues were to be found partly in the evidence of the heavens and in the constitution of elements (and that is what gives the false suggestion of his being an experimental natural philosopher), but also partly in certain papers and traditions handed down by the brethren in an unbroken chain back to the original cryptic revelation in Babylonia. He regarded the universe as a cryptogram set by the Almighty - just as he himself wrapt the discovery of the calculus in a cryptogram when he communicated with Leibniz. By pure thought, by concentration of mind, the riddle, he believed, would be revealed to the initiate.
He did read the riddle of the heavens. And he believed that by the same powers of his introspective imagination he would read the riddle of the Godhead, the riddle of past and future events divinely fore-ordained, the riddle of the elements and their constitution from an original undifferentiated first matter, the riddle of health and of immortality. All would be revealed to him if only he could persevere to the end, uninterrupted, by himself, no one coming into the room, reading, copying, testing-all by himself, no interruption for God's sake, no disclosure, no discordant breakings in or criticism, with fear and shrinking as he assailed these half-ordained, half-forbidden things, creeping back into the bosom of the Godhead as into his mother's womb. 'Voyaging through strange seas of thought alone', not as Charles Lamb 'a fellow who believed nothing unless it was as clear as the three sides of a triangle'."

*****

"As one broods over these queer collections, it seems easier to understand - with an understanding which is not, I hope, distorted in the other direction - this strange spirit, who was tempted by the Devil to believe at the time when within these walls he was solving so much, that he could reach all the secrets of God and Nature by the pure power of mind Copernicus and Faustus in one."

*****

I suggest reading the piece in full. I think it's fairly common knowledge that Newton dabbled a lot in alchemy. Evan, you'll be interested in knowing that he also put a lot effort into thinking through theological points, eventually coming to a personal Arianism and other assorted heresies. He is a very interesting and conflicted guy, and it makes sense really. He lived in the seventeenth century, after all. What's truly remarkable is the coexistence of all these currents in Newton.

A Question

How do you define "science"?

One of the problems with the earlier exchange was that people were making claims without even establishing what "science" is. Eventually I came around to offering a rough definition. This was my critique of Razib Khan's article too - he was making critiques of social science with no clear explanation of what he was calling "science".

Anonymous comments are fine if you don't have an account and that's an obstacle to posting. No interacting or critiquing necessary. I'm just curious how readers define "science".

Social Science as a Science

More debate has flaired up over whether social science is really a science. The source of it is this City Journal article by Jim Manzi. The article is actually quite good, and highlights a lot of the empirical limitations I talk about a lot on here. Some of the commentary is less persuasive in my mind.

Razib Khan and many of his commenters overstate their case against social science as a science in this post, with many of the commenters clearly ignorant of how social science does its work, and confusing political claims with the claims of social science.

Arnold Kling, not exactly a huge cheerleader for the "social science as science" crowd, at least focuses on the original Manzi article and some of the good points that it made.

One of the frustrating things about the people who don't think social science is a science is that they're so shifty as to why. It usually starts with a methodological point, criticizing our ability to establish counter-factuals (something that is very explicitly talked about among us - this isn't a huge secret or embarassment - it's a fact of life working with the data we work with), and our lack of experimentation. When you point out the plethora of other sciences that don't experiment it jumps to another of other justifications: (1.) predictive ability (the right response: we have better predictive ability than meteorologists, and why do you blame us for not predicting recessions exactly but you don't discount geology for not predicting earthquakes exactly), (2.) ideology (the right response: ummm... yes, ideological social science is not scientific - if you're going to claim all social science is ideologically determined I'd like to see some data to support that - since I'm a social scientists of course), (3.) multiple theories (the right response: sure, but again that's just a result of the complexity of the system under study and the lack of counter-factuals. Falsification is a lot harder. You see more theoretical positions arguing in paleontology than in the rest of biology, and you see more theoretical positions arguing in biology than in chemistry - it's a function of the data, not of the "scientificness" of what we're doing).

I think there are two primary reasons why people make the mistake of thinking that social science is not a science:

1. Sentimentality: People don't like to think of themselves as objects of study. The universe can obey laws, but humans can't. We're special. An evolutionary biologist won't come out and tell you that we're made in God's image, but the residual hubris of that cosmology remains for a lot of people. We're different and you just can't study us and our social system. You can scientifically study the social systems of lower organisms, but not humans.

2. Cargo Cultism: I'm going to turn Fenyman on his head here. A lot of natural scientists are huge practitioners of cargo-cultism. If you don't do science their way - if you don't reproduce the forms of their research, then you're not scientific. The best example of this is when people say that you need experimentation to be scientific - that's cargo cultism par excellance. They often don't think about how the nature of the subject determines the form of how you approach it. I've always said social science is most like biology - and probably the paleontology comparison is even better since for the most part we're looking at historical data. Physicists and chemists don't impose the forms of their science on paleontologists because it would be inappropriate - that would be cargo-cultism. Something goes out the window when humans are concerned. The Fenyman point was really unimpressive to begin with - I think people accepted what he said just because they respect his other work and it reinforced what they wanted to believe. What was his example? People who "sit at a typewriter" and make claims that "food grown with fertilizer that is organic is better for you than other food". What does this have to do with social science? This isn't even social science - it's an anatomical/medical example, and not even an example - it's something that Fenyman just made up off the top of his head. The idea that people would cite this as an authoritative point is more than a little disappointing. It was a poorly reasoned argument on Fenyman's part without any evidence and ultimatley it was probably symptomatic of the very cargo-cultism he thought he had identified in social science.

I have yet to see a good argument for why social science isn't a science. Everything I've ever read reduces to cargo cultism or sentimentality about human beings. None of it references the requirements for a science to be a science, and if it tries to it usually fails miserably.

Assault of Thoughts - 8/3/2010

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

- Jennifer Ouellette discusses new modeling that suggests that the duration of alien civilizations may be a strong determinant of our ability to make contact. This may address the so called "Fermi Paradox" of why despite the fact that we should expect a lot of life in the universe, we don't see any evidence of it. The point that we need proximity in time as well as space is to alien civilizations is very important, but I always find the way that people frame the Fermi Paradox interesting. We do have evidence of alien contact, or at least we have considerable data on contact. Literally tens of thousands of UFO and abduction experiences catalogued and corroborated. Now - is that useful data, or is it just noise? It's likely that it's all noise. But I always wonder if people who talk about the Fermi Paradox have even looked at the extant sighting data. It seems like a natural place to start. I think it's illogical to assume that there aren't alien civilizations out there. If you're serious about the conjecture, the first place you oughta go is the UFO sightings data. Once you accept that life must exist beyond this planet, the data at least becomes plausible enough to look at, if not accept outright. Anyway - interesting article - Malthus gets a mention. You can search the largest database of UFO sightings that I'm aware of here. They really oughta make this easily available in a format that can be analyzed, though. Make of it what you will. Like I said, I wouldn't be surprised if 100% of the reports are crap and we have never legitimately made contact. It wouldn't surprise me at all. But since I do accept that life has to exist elsewhere, the plausibility that we've made contact is very real.

- Oh, and some people think there's a chance we may make contact with fossilized alien life soon (if we haven't already - there are some claims about microbial fossils in asteroids).

- Paul Krugman dampens hopes for a Martian colony, citing someone that uses the logic from his paper on increasing returns and economic geography (for which he won a Nobel Prize). I'm not sure I entirely agree. The argument is that complex societies need lots of people to function. True, there will need to be a centrally planned umbilical cord to Earth in the beginning. True, the market division of labor will not be able to provide everything for the early human Martians themselves at first. I don't see why this means that we can't plant a colony.

- David Gelernter discusses how Judaism, specifically some Talmudic sources on cruelty to animals and some of Martin Buber's work, can help guide us on how we should respond morally to machines with artificial intelligence (HT Andrew Sullivan).

Some Defunct Economist - John Stuart Mill - 8/2/2010

"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist" - JMK

- From Brad DeLong's recent article at Project Syndicate:

"In 1829, John Stuart Mill made the key intellectual leap in figuring out how to fight what he called “general gluts.” Mill saw that excess demand for some particular set of assets in financial markets was mirrored by excess supply of goods and services in product markets, which in turn generated excess supply of workers in labor markets.

The implication of this was clear. If you relieved the excess demand for financial assets, you also cured the excess supply of goods and services (the shortfall of aggregate demand) and the excess supply of labor (mass unemployment).

Now, there are many ways to relieve excess demand for financial assets. When the excess demand is for liquid assets used as means of payment – for “money” – the natural response is to have the central bank buy government bonds for cash, thus increasing the money stock and bringing supply back into balance with demand. We call this "monetary policy."

When the excess demand is for longer-term assets – bonds to serve as vehicles for savings that move purchasing power from the present into the future – the natural response is twofold: induce businesses to borrow more and build more capacity, and encourage the government to borrow and spend, thus bringing the supply of bonds back into balance with demand. We call the first of these “restoring confidence,” and the second “fiscal policy.”

When excess demand is for high-quality assets – places where you can park your wealth and be assured that it will still be there when you come back – the natural response is to have credit-worthy governments guarantee some private assets and buy up others, swapping them out for their own liabilities and thus diminishing the supply of risky assets and increasing the supply of safe assets. We call this “banking policy.”"

What's interesting is that he has an entirely money-demand-centric depiction of fiscal policy here. That's important, but I don't think it's really exhaustive of the case for fiscal policy. Putting it this way, though, makes it sound like a lot of the stuff the MMT school says.

- A couple months ago, Harper's Magazine had this post on John Stuart Mill and independent judgement. The first thing I thought of reading the passage was Emerson. The author of the article then of course went on to connect the sentiments with Emerson, as well as Shopenhauer. It's an interesting piece - it ties in some literary treatment of the sort of lack of judgement that Mill was concerned with, and then it questions the extent to which technological development has dulled our ability to make these essential judgements.

- This is the New School for Social Research's John Stuart Mill page.

- This is a post I wrote a little while back on Mill's "fourth principle" that "demand for commodities is not demand for labor". This point has actually come up in some research I've done recently on the interwar literature on technological unemployment, which I'm going to be incorporating into the Lovecraft piece and in an encyclopedia entry on technological unemployment that it looks likely that I'll get to write.

- Finally, Ayaan Hirsi Ali is quite smitten with John Stuart Mill (and John Locke, and Jon Stewart). She recently told Stephen Colbert that she prefers all three of them to Jesus Christ.

Damn it Cthulu movie promoters!

OK, so previously I've linked to this pretty cool Youtube video alleging to be an H.P. Lovecraft interview by the WPA. It brings Lovecraft and the New Deal together, it's the only video I've ever seen of the guy, and it's also probably a fake to promote the movie. I simply jumped on it and assumed it was real - I've always thought it would be neat to check out WPA records for more info, but since I never did much besides link it in blog posts I never made that effort or thought much more about it.

Bah! Egg on my face now. Most serious of all problems, of course, is that there was no WPA until 1935!

Based on my reading of what Lovecraft had to say about the New Deal the sentiments expressed here, as well as the regional affinities, the Oswald Spengleresque views on civilization, the talk about religion, etc. are all pretty faithful to what he might have said. Unfortunately, that doesn't quite cut it.

Oh well. No harm done I suppose. I still feel pretty dumb.

This is a list of WPA interviews in Rhode Island, where Lovecraft was from. This is a list of WPA interviews in Massachusetts, which was usually the setting of Lovecraft's stories.

Jonathan's Liquidity Trap Article

I've gotten a chance to read Jonathan's Mises Daily article on the liquidity trap, and I certainly don't regret recommending it in previous posts - it's very good. I jotted down thoughts as I was reading it, so I think the best way to present it in a blog post is just to go through the points the caught my eye, quoting him and then posting my response to him. It might be hard to follow this without reading the article, but I'm not sure how else to organize my essentailly bullet-point response.

JFC: “Broadly speaking, the economics profession is divided into two camps. One side is made up of "liquidationists" and "deficit hawks," supporting tight monetary policy and low — or no — government spending. The other group is composed of those fearing a fall in prices, who support easy credit and expansive fiscal policy to combat it.”

- I don’t think deflation is the primary concern – although it is an important one. Depressed output is the primary concern, and deflation is a concern because of the complicating factors it introduces to a depressed environment. The fact that this is not the major bone of contention is made clear by Hayek and Rothbard’s insistence that deflation is problematic, as well as recent expressions of the Austrian School’s allegedly close relationship to monetary disequilibrium theory.

- We need to appreciate how Jonathan goes on to delve deeply into the literature that provides context to this debate. For example, Krugman’s treatment of the Austrian school in 1998 isn’t strictly necessary for understanding his view of the liquidity trap. I’m not personally familiar with the details of this exchange, but Jonathan has done impressive due diligence by providing all these references here.

- On Krugman’s recent treatment of Hayek – I think the critique of Krugman has been overdone. I agree with Jonathan that Krugman doesn’t really seem to demonstrate an understanding of the macroeconomics of the capital structure (although he’s closer than many suspect – he does the sort of sub-sector analysis in his critiques that I’ve never seen an Austrian do thoroughly. I complain often on here about the lack of empirical verification of Austrian theory – Krugman’s blog comes closer to doing that than mises.org does). But he does correctly summarize what Hayek has said: that a “slow process of adapting the structure of production” is necessary. That sure sounds like we have to just wait and suffer through unemployment to me. Didn’t Mises call this purging the rot out of the system? I think we’re being disingenuous if we don’t accept that the Austrian school sees high unemployment as, to a certain extent, functional.

But later, Jonathan seems to agree with Krugman! He writes:

JFC: “This [the "Misesian-Hayekian" malinvestment framework] suggests — like Krugman accuses — that following a boom of malinvestment there will be a period of relatively high unemployment.”

If he really thought that, he shouldn’t have said that Krugman was “erroneous”.

Jonathan zeroes in on what I agree is the important point:

JFC: “As a general concept, the liquidity trap is legitimate in the sense that we are currently in a situation in which, despite the extreme provision of liquidity on the part of the Federal Reserve, there has not been a substantial increase in real private investment. As such, any Austrian rebuttal to Krugman should concede this point.

The real debate is whether or not fiscal stimulus can effectively revive an economy (or pull it out of a "liquidity trap") or if fiscal stimulus contributes to the existence of a liquidity trap — there is the distinct possibility that this so-called liquidity trap is the product of regime uncertainty, which may or may not be aggravated by government policy.”

- And it’s about more than just that. Does monetary policy work? The original purpose of highlighting the liquidity trap was to demonstrate a circumstance under which it wouldn’t. But is that really the case? A lot of people don’t think that is the case. I’m not sure what I think, but I’ve been content to say that “monetary policy is less effective in a liquidity trap than it would otherwise be”

- When he describes the liquidity trap here, he’s really describing the symptoms rather than the underlying cause. That’s fair enough, but it would have been nice to explain exactly what a liquidity trap is near the beginning: it is a situation where cash and bonds become interchangeable. How that is depicted in a model has been debated, but that’s the fundamental point.

JFC: “Keynes believed that such a situation occurs out of a change in the "state of expectation."[10] In other words, an increase in uncertainty leads to an increase in the demand to hold money and a decrease in investment,[11] based on the belief that money's relatively riskless qualities makes it more desirable to hold than bonds and assets”

- Yes, there’s that – but presumably the risk premium can be compensated for. The point is, at low interest rates there is no longer any compensation for the risk. So I think the key here is the interest rate, not the relative risk.

JFC: “Given a "virtually absolute" liquidity preference, monetary policy becomes ineffective at stimulating "aggregate demand" since an increase in the supply of money cannot increase wage-earners' incomes.”

- Does monetary policy stimulate aggregate demand by increasing wage-earners’ incomes or by lowering the interest rate? I always thought it was lowering the interest rate.

JFC: "Between 1940 and 1970, the liquidity-trap theory went through major changes and reformulations, only for Hicks to recant, suggesting that, "[w]hile one can understand that large balances may be held idle for considerable periods, for a speculative motive, it is harder to grant that they can be so held indefinitely."[24]"

- I’ve always been suspicious of this “recantation” by Hicks. Whoever said they would be held indefinitely? I know Hicks’s change of heart was broader than this and perhaps there was more to it than this, but this particular quote never struck me as particularly convincing. He seems to be recanting a strawman, in other words. I don't see the later Hicks making a convincing argumetn against the earlier Hicks, in other words.

JFC: “Where Krugman parts ways with Keynesian precedents is in applying a theory of intertemporal expectations, where monetary policy is ineffective because of the expectation of future deflation — the public believes monetary policy to be only temporary, as opposed to sustained.”

- This is actually probably better put as “Krugman parts ways with Hicksian precedent”. Keynes actually uses these expectations arguments quite frequently in the General Theory. Hicks put it into a static model, so a lot of the original Keynesian discussions of expectations were forgotten. I don’t mean to be argumentative with Jonathan on this point – I actually mean to deflate Krugman’s originality a little bit and give more credit to Keynes (who may not deserve original credit himself, in all likelihood).

JFC: “While Keynes and Hicks would have perhaps shied away from massive monetary stimulus, operating with the understanding that monetary policy was ineffective during a liquidity trap, New Keynesian theory puts much more importance on a growing money supply.”

- This is what I’ve always thought as well, and that’s the impression I get from the General Theory, but what’s interesting is that Keynes does express a very similar monetary prescription in an open letter he wrote to Roosevelt – I believe in 1938. He said two things were needed: fiscal stimulus, and the reduction of long-term interest rates. Presumably one would reduce long-term interest rates with the sort of quantitative easing policies being proposed today.

JFC: “Austrians instead see the resulting fall in the price level as the cure for deflation (or fall in the money supply).[54] Recognizing the problem as the result of a fall in profit, due to the deceleration of credit expansion, the problem of demand necessarily stems from the inability to pay for products demanded. The solution is a fall in prices of relevant goods and services, to the point where demand for them can once again rise.[55] In other words, conceding that a fall in the money supply will lead to a decline in spending, the only method by which spending can rise is through a fall in the price level.”

- I could see why a falling price level as a "solution" would result in re-equilibration. I don’t see how it addresses the fundamental dynamics of the deflationary spiral. The whole point of the deflationary spiral is that deflation further constricts the money supply, which causes more deflation. At some point, one may think that a real balances effect would put a brake on this. I am more persuaded by the idea that at some point the need to replace capital will put a brake on this. Either way – simply letting prices fall alone doesn’t seem to provide a solution to a problem that is caused by falling prices, unless you reject the logic of a deflationary spiral in the first place (which Jonathan doesn’t seem to).

JFC: “The alternative method, or the Keynesian "solution" of inflation, can lead to a temporary "recovery."[56] Nonetheless, such a policy would inevitably result in greater malinvestment and a greater net loss of wealth.[57]”

- This is probably an instance where it would have been better to distinguish between Keynes and Krugman explicitly. Not that inflation didn’t play an important role for Keynes, but it plays a much more important role for Krugman. However, I think even for Krugman this is only the monetary half of the story.

JFC: “However, rising uncertainty and low expectations for the future, brought about by economic depression, can be considered legitimate factors behind a liquidity trap. In this case, we define a liquidity trap as a situation in which private investment stagnates despite the readjustment of the structure of production. One such situation of this occurring was during the Great Depression. This topic is tackled by Robert Higgs, in which he attaches the blame to "regime uncertainty," or uncertainty caused by a general antibusiness climate produced by the government.[58]”

- The policy uncertainty argument always seems odd to me. Empirical evidence suggests that the policy uncertainty is of minimal concern to businesses relative to other uncertainties (i.e. – demand uncertainty). The arguments of Higgs and others always strike me as a case of post hoc ergo propter hoc. The policy reacts to the business climate, not vice versa. This at least seems to be what we see in the business confidence data.

JFC: “Wealth-producing investment relies on two underlying factors: that there exists a demand for the product and that the producer can satisfy that demand at a profit or by receiving greater satisfaction in return. That government cannot satisfy another's demand at a profit can be extrapolated empirically, because if it could, there would be no need for deficit spending — the capital necessary to fund these programs would come from received profits.”

- I think this whole statement is problematic. I could probably agree with the first part of the definition – that there exists a demand for the product. I don’t see what profits have to do with it. What about a competitive situation where economic profits are driven to zero? What about non-profit institutions – do they not produce wealth? Profit seems to me to be important because it provides an incentive and information on consumer demand. It doesn’t seem to me to be definitionaly essential to wealth. I’m also having a hard time understanding what deficit spending has to do with it. Firms finance projects in a variety of ways – why should the government be any different? The share of government financing coming from debt can easily be explained by the unique qualities of the government – its status as a sovereign guarantor of currency, its longevity, etc. I really would have preferred that Jonathan defend this understanding of wealth more sufficiently.

JFC: “Fulfillment of satisfaction is dependent on individual subjective evaluations and voluntary exchange. Government, instead, distributes capital towards otherwise unwanted ends, taking it away from the private sector and "producing" at a net loss.”

- This seems to assume complete property rights. Otherwise, how else could Jonathan conclude that capital is moved to “unwanted” ends. Whether the ends that government moves capital towards are “unwanted” or not is indeterminate unless you are assuming complete property rights. Therefore, I’m forced to conclude that Jonathan is assuming complete property rights. It’s a bad assumption.

JFC: “The difference between Hayek and Krugman is that Hayek was not a utopian, and realized that economic growth can only once again take place if the structure of production adapts to society's time preference — there is no formula by which government can centrally plan wealth creation.”

- The non-utopianism is a quality of Hayek, but I don’t see how it is a point of difference between Hayek and Krugman. Hayek and Krugman are simply different kinds of non-utopian. Krugman certainly doesn’t believe there is a formula by which government can centrally plan wealth. They both think that there is a course which is closer to an ideal than an alternative course. If that belief alone is utopian, then they are both equally utopian – but I don’t think that simple belief is enough to qualify someone as a “utopian”.

I think one of the biggest liabilities of this piece is that it goes from a reasonably relevant Krugman v. Hayek discussion, to the liquidity trap, and then on to questions of deflation in general, ABCT, etc. I think the transition from the liquidity trap to deflation was perhaps appropriate given the important of inflation and deflation to Krugman's version of the liquidity trap, but I think it gets a little farther afield when it gets into the deflationary spiral - which it seems to me is quite different from the liquidity trap.

Part of the problem is that the liquidity trap is hard to incorporate into a theory like the Austrian School's, which for the most part doesn't incorporate anything like liquidity preference. Hayek's "loose joint" of money was the passage of time. For Keynes, the loose joint was more than that, and it came from liquidity preference (Garrison calls it a "broken joint" for Keynes - I think "looser joint" is probably more accurate). Without a well incorporated concept of liquidity preference, it's hard for Austrians to engage the liquidity trap. Policy uncertainty is invoked to explain what we see empirically and the concern with low rates and the capital structure is invoked to address the theoretical symptoms of the liquidity trap. But the real heart of it - the indifference between cash and bonds - is left completely untouched.

The Tea Party happened in Boston, but it's come to Williamsburg

The Washington Post has a great article this morning on the influx of Tea Partiers into Colonial Williamsburg. For those of you who weren't aware, this is of special interest to me because I attended the College of William and Mary as an undergraduate. I spent my freshman year living in (and met my future wife in) Monroe Hall, which was right across the street from Colonial Williamsburg. That part of campus itself is in many ways an extension of Colonial Williamsburg, with the Wren Building - the oldest continually operating academic building in the country - not far from Monroe Hall (the Wren was also the building I was married in). You can still see Civil War bullet holes and fire damage on this building, where Jefferson himself studied.

Anyway, now I'm starting to reminisce and wax poetic, which I suppose just goes to show how important this place is to me. It's also important to the Tea Partiers who are increasingly frequenting the tourist destination, often in colonial garb. The reasons are obvious, of course. Colonial Williamsburg does a fantastic job recreating the history of the revolutionary era, with founding fathers roaming the streets and interacting with tourists. The Post article highlights this point:

"General, when is it appropriate to resort to arms to fight for our liberty?" asked a tourist on a recent weekday during "A Conversation with George Washington," a hugely popular dialogue between actor and audience in the shaded backyard of Charlton's Coffeehouse.

Standing on a simple wooden stage before a crowd of about 100, the man portraying Washington replied: "Only when all peaceful remedies have been exhausted. Or if we are forced to do so in our own self-defense."

The tourist, a self-described conservative activist named Ismael Nieves from Elmer, N.J., nodded thoughtfully. Afterward, he said this was his fifth visit to Colonial Williamsburg.

"We live in a very dangerous time," Nieves said. "People are looking for leadership, looking for what to do. They're looking to Washington, Jefferson, Madison."

Sometimes, they didn't get the leadership they were expecting:

"Sometimes, the activists appear surprised when the Founding Fathers don't always provide the "give 'em hell" response they seem to be looking for.

When a tourist asked George Washington a question about what should be done to those colonists who remain loyal to the tyrannical British king, Washington interjected: "I hope that we're all loyal, sir" -- a reminder that Washington, far from being an early agitator against the throne, was among those who sought to avoid revolution until the very end.

When another audience member asked the general to reflect on the role of prayer and religion in politics, he said: "Prayers, sir, are a man's private concern. They are not a matter of public interest. And nor should they be. There is nothing so personal as a man's relationship with his creator."

And when another asked whether the Boston Tea Party had helped rally the patriots, Washington disagreed with force: The tea party "should never have occurred," he said. "It's hurt our cause, sir.""

The organizers of Colonial Williamsburg have embraced the Tea Partiers enthusiastically. It's good for business, obviously. That's an important reason. But they also feel the dialogue is important:

""If people . . . can recognize that subjects such as war and taxation, religion and race, were really at the heart of the situation in the 18th century, and there is some connection between what was going on then and what's going on now, that's all to the good," said Colin Campbell, president and chairman of Colonial Williamsburg. "What happened in the 18th century here required engagement, and what's required to preserve democracy in the 21st century is engagement. That is really our message."

...Campbell's hope is that such visitors come away having learned something about the nuance and messiness of history -- a theme that runs through all of Colonial Williamsburg's programming."

One thing I wish the Tea Partiers would appreciate more is that the history of our founding does not provide an unequivocal stamp of approval on their modern political outlook and ambitions. I'm not saying "the founders would have disagreed with the Tea Party". Probably many of them would have agreed, and many of them would have disagreed. But this attitude that people have "forgotten the founding" because they disagree with the Tea Party is extremely condescending (someone more disposed towards populism than I might even call it "elitist"). History is complex, particularly the history of the founding, and as Marshall once said "nothing is gained in the long run by pretending it is simple and reducing it to a series of elementary propositions".