Happy Birthday to the General Theory!!!

The General Theory of Employment, Interest, and Money was published 75 years ago today. I can think of one or two competitors, but it would not be absurd to argue that this is the single most important book published in the field of economics.

- The full text of the General Theory can be found here. - Paul Krugman's introduction to the book is here.
- The New School for Social Research's page on the Keynesian Revolution is here.

- A good video on Keynes by historian of economic thought Mark Blaug is here.
- Bloomberg memorializes the anniversary here. They note the Harry Potteresque expectations about the book:

"Never has a book on economics been so anticipated.

John Maynard Keynes’s “The General Theory of Employment, Interest and Money” was published 75 years ago today. Back then, there were queues outside the Economists’ Bookshop in Houghton Street, London. Opening hours had to be extended to deal with the rush of those eager for an alternative to policies that had ruined the global economy.

The impact on the field of economics wasn’t unlike that on the scientific community when Charles Darwin published “On the Origin of Species” in 1859. Just as with Darwin’s book, Keynes’s shook the foundations of economic orthodoxy and had profound effects on his profession. The main thrust of Keynes’s work was also met with outright denial from his peers, including close colleagues, who reduced his theory to what one described as “diagrams and bits of algebra.” Above all, they denied the centrality of his theory of the rate of interest.

This “bastard Keynesianism,” as British economist Joan Robinson called it, subverted and continues to block the Keynesian revolution both in vision and in method."

Assault of Thoughts - 2/4/2011

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

- First - I have to say it's really odd for me to write a post promoting a doubling of NASA's budget and then have people write "In almost all areas, the private sector has been the cause of breakthrough technologies. It leads the public sector in research and development by leaps and bounds". Let's leave aside for a minute the fact that it's not clear at all that this is true for space exploration. Why does the private sector spring to people's minds when I write positively about NASA? I expect commercial space exploration will grow tremendously in the coming decades. In all likelihood it will be much more substantial than NASA. It's like people who juxtapose the transcontinental railroad with railroads that had less public support - as if Lincoln and the rest of them somehow had an animosity towards non-public railroads! What gives? I don't get this piece of the libertarian mind that thinks the private sector is somehow threatened simply because the public sector is doing something. A big part of the reason why I support a bigger NASA budget is that I fully expect private sector activity to grow with it. If NASA puts a man on Mars, do you honestly think this will make it less likely for private companies to put a man on Mars? No! It would make it more likely. This Ricardian crowding out hokus pokus has an incredible strangle-hold on the modern mind.

- Daniel Little discusses persistent racial inequality in the US. The persistence of this issue suggests it might not be an entirely microeconomic problem. Microeconomic problems tend to equilibrate, and they don't always appear so persistently across the nation and across time. It could be legal, cultural, etc. - but it could also be macroeconomic. Persistent poverty raises lots of macroeconomic red flags. I talk about the macroeconomics of the black community here. It's still stewing in the back of my head - I think this could be a profitable approach to the problem.

- Mark Thoma reflects on an old Krugman post about why macroeconomics is so important, and Richard Baldwin reflects on a new Leijonhufvud statement on what macroeconomics should be.

Libertarians, Logic, and "Free Liberals"

Andrew Sullivan shares a great post by Tim Lee contrasting Hayek with Rand and Rothbard. Lee writes:

"One of the more pernicious influences of Rand and Rothbard on the libertarian movement was their tendency to treat every policy problem as almost reducible to a logical syllogism. Too many libertarians act as though they don’t need to know very much about the details of any given policy issue because they can deduce the right answer directly from libertarian principles. The practical result is often to shut down internal debate and discourage libertarians from thinking carefully about cases where libertarian principles may have more than one plausible application. Hayek seems to have written “‘Free’ Enterprise and Competitive Order” with the explicit purpose to combat that kind of dogmatism. He thought it “highly desirable that liberals shall strongly disagree on these topics, the more the better.”"

I've critiqued the Austro-libertarian fetish for deduction on here before, and Lee makes largely the same point here. I think you have to start a step back, though, and simply point out that human society is immensely complex. You can take a few first principles that you make up, like mathematical axioms, and derive a logical system from it that you can apply to situations that seem to be relevant to those first principles (like physical matter). That's a deductive project that can have real payoffs. But you simply can't do that with human society. Too much is going on. Even if you have a true axiomatic claim about human action, you're very likely to miss lots of other first principles and contingencies that could completely change the picture. Imagine if we just dropped half the field axioms in mathematics. The set of deductions you would be able to come up with would be incomplete! You wouldn't be able to demonstrate nearly as much, and you'd certainly be missing substantial portions of the way classical mechanical systems behave. Or, as another way of putting it, think of what happens when you add additional field axioms in higher mathematics. We have a hard time getting to the bottom of physical reality this way, and yet many Austro-libertarians go through life as if they can rule out empirically derived social science because their deductions from their axioms don't come to those conclusions.

I've recently been in contact with Jan Helfeld - a fairly well known libertarian interviewer - that covers these same frustrations that Lee is sharing. Jan uses a Socratic Interviewing method based on a few underlying claims that he uses to try to demonstrate inconsistencies in the arguments of various politicians and media personalities. Kevin Rollins (editor at Econ Journal Watch and a GMU student) suggested I debate with him and exchange some thoughts. We're still trying to set that up, but I sent him some written thoughts I had on his whole project. This is a selection of what I sent him that is relevant to this point about libertarians and their use of logic:

"Your interviewees note this [the problems with his axioms], but they don’t always articulate it in the best way (probably because they are caught off guard or just haven’t thought about these issues). But they do realize there are fundamental problems with the deductions that you make. My concern with some of your interviews is that your interviewees tell you this – they tell you your questions miss the point – but you never change or try to think about what may be wrong with your questions, or work with them to figure out a better way of approaching the problem. You keep asking the same question over and over again instead of considering the possibility that you’re asking the wrong questions. You may catch them in logical inconsistencies, but if the logical structure you impose on them is meaningless that doesn’t really prove much except that you were able to trap them in a word-game. Is the point to prove Congressmen are not the greatest logicians or that they don’t understand basic principles of a liberal society? You may succeed at the former – it’s not clear to me you succeed at the latter.

It reminds me of something Keynes said about Hayek. He wrote that one of Hayek’s books was an “example of how, starting with a mistake, a remorseless logician can end up in bedlam”. You strike me as this sort of “remorseless logician”. You take a first principle that you don’t appear to closely interrogate (or at least that you don’t appear to think has the problems that I see in it) and then you persist at it until you elicit a reaction from your interviewees."

Jan seems like a great guy but I feel like the method that strikes him as being so effective can be very misleading. People will nod their heads to claims like "individuals don't have the right to initiate violence" and "individuals can't delegate rights they don't have". These sound like pretty reasonable assertions. There's nothing particularly absurd about them. So his interviewees nod their heads in agreement. Jan then takes those axiomatic building blocks, shorn of their qualifications and problems, and makes a quick case for libertarianism out of them. But that seems to just gloss over the really hard questions! What are rights really? Is government just an institution that individuals delegate their rights to or is it something else? What are some extenuating circumstances where an initiation of violence might be justified? Are rights themselves an initiation of violence (a la Proudhon)? Is government action that seems on the surface to be an initiation of violence really an initiation of violence? Most of the time these secondary questions (which come up because of flimsy "axioms") don't even come up - or if they do come up they get plowed through as if the interviewee is changing the topic.

The confidence that libertarians get from this deduction-fetish, which Lee points out in Rand and Rothbard, is very dangerous when they start talking about organizing society. It raises the specter of libertarian social engineering, which I've critiqued at length here. I have no quarrel with social engineering, but this sort of large-scale social engineering and the risks that it involves simply isn't conceivable for a more empirical framework that does not insist that its deductions are universal and unimpeachable (except by another logician's ability to see a flaw in the logic).

One solution is simply to be more open minded and pluralistic when it comes to libertarian thought. That sounds like a "no duh" solution, but the simple willingness to be speculative, entertain alternative possibilities, and impute significance to competing priorities can go a long way. A good example of this is Kevin Rollins' own "Free Liberal" project*, which is outlined at his website and carried out socially in a variety of venues. Kevin's approach is interesting - I've had lots of opportunities to correspond with him and his group at this point, and their willingness to embrace a pluralist inquiry and perhaps most importantly a speculative inquiry is impressive. They are quite libertarian, but their discussion seems to be a lot more productive than the discussion you see in other venues. This is the sort of thing that is going to move liberal thought forward. Not every libertarian is a Misesian or a Rothbardian or a Randian either (and these three gangs don't always get along with each other). There are lots of libertarians that don't use these logic games, and there are lots that like the logic-games, but don't rely exclusively on them.

*I am hereby issuing an open invitation to Kevin to offer a guest post here exploring Free Liberalism further.

Ditch Ag Subsidies - Double NASA's Budget

A little while ago I proposed that we should be able to get decently broad agreement on at least one deficit neutral budget proposal: eliminating all agricultural subsidies and doubling the size of NASA's budget. They're roughly the same size, and the contrast in their justifiability is stark.

Agricultural subsidies make everyone furious. They hurt the developing world. They hurt relations with our developed trade partners. They hurt small farmers. They hurt the environment. Oh, and they're completely insane when it comes to the economics of the question. I'm not aware of a single economist - left, right, or center - that likes agricultural subsidies. But they have concentrated benefits and dispersed costs, which makes the whole mess work out politically.

Space exploration and colonization is exactly the opposite - it has concentrated costs and dispersed benefits. That means it's the sort of thing government should consider doing, which is ultimately why the government is doing space exploration. But it also means it's going to have a very different set of incentives. Government has created concentrated benefits in the space programs with jobs (if you are from Florida, Alabama, or Texas you like NASA no matter what party you're from). But for the most part, the benefits accrue to future generations. Future generations don't vote, nor do they participate in the market. That means we underinvest - both publicly and privately - in space exploration and colonization. It's a market failure and a government failure, if you like to use that terminology.

I put together a few graphs, which I highly encourage people to repost, share, comment on and write their own posts on if you agree with me. The data is from Wikipedia and an agricultural subsidy data resource, which in turn derive it from OMB sources. One day I'd like to get into the original data myself, but for now this will do.

First - you'll see that nominal spending on agricultural subsidies and NASA are roughly on the same order of magnitude. Agricultural subsidies are somewhat more erratic, because they are influenced by price levels.

Sources for NASA here and USDA subsidies here.

What could a doubling of the NASA budget do? All kinds of things. It would be a good down-payment on Mars (even more so if we keep that spending level up). We are seeing a movement towards private space exploration, which is a very important trend. We could establish lots of prize funds with an extra $15 billion or so.

The last time NASA's budget was doubled from its steady state level we did great things. Here is the budget of NASA since 1958 in constant 2007 dollars:

When we made it to the moon in the late sixties, we were essentially doing it from scratch. We have much more groundwork laid today. If we could make this switch from subsidizing activity we have done for thousands of years to subsidizing frontier-expanding activity and maintain that higher level of spending in a deficit neutral way, we wouldn't have an Apollo program spike. We would have year after year of effort approaching what this endeavor deserves.

Eliminate all agricultural subsidies and double NASA's budget - spread the word, people.

Nobody has expressed the logic of overcoming externalities more eloquently than Armstrong: "one small step for man, one giant leap for mankind".

Alex Tabarrok on Instrumental Variables

Tabarrok shares some interesting thoughts about instrumental variables. He cites a tragedy of the commons type problem in these studies, from Morck and Yeung:

"A Tragedy of the Commons has led to an overuse of instrumental variables and a depletion of the actual stock of valid instruments for all econometricians. Each time an instrumental variable is shown to work in one study, that result automatically generates a latent variable problem in every other study that has used or will use the same instrumental variable, or another correlated with it, in a similar context. We see no solution to this. Useful instrumental variables are, we fear, going the way of the Atlantic cod."

All I can say is - sounds fantastic. A lot of instrumental variable analysis is just academic masturbation. Or perhaps exhibitionism is a better term. It's just a way of showing off, and yet nobody seems to be as impressed with the show as the exhibitionist himself. The motivation behind instrumental variables is absolutely essential, of course. But I've always found regression discontinuities, abrupt policy changes, and even "natural experiments" far more convincing (although these have their own problems).

My thoughts on this are not completely exogenous. I picked up my suspicions from Prof. David Jaeger, my undergraduate labor economics and econometrics professor. Aside from a good education in general, it's probably the single concrete insight/prejudice that I've taken with me from college. That's not to say none of my other professors ever said anything worthwhile - just that this is the one thing I've consciously carried with me. Always be suspicious of IV and discount the truth-value of the findings heavily.

The Stability of Democracy

Michael Singh at Foreign Policy (HT - Kate):

In kayaking, you can choose one of two types of stability, but you cannot have both. A flat-bottomed kayak has high "initial stability" -- it appears to ride smoothly in the water, with little rocking back and forth. But it has low "final stability" -- in rough seas, it tends to quickly and catastrophically capsize. An angled-bottom kayak is just the opposite. With low initial stability, it takes more effort to guide and is prone to constant shifts from side to side. But these kayaks are faster and more efficient, and their high final stability means that they remain upright in stormy seas, and can recover even when turned nearly upside down.

Things are not so different with democracies and dictatorships. Democracy is messy -- look at the United States, where in the last five years alone we have experienced swings from right to left and back again, and where political discourse can often be raucous. Dictatorships, on the other hand, often possess a superficial stability -- until they reach the tipping point, which often comes more quickly than expected. Such was the case in Tunisia, which seemed an oasis of calm until a small spark quickly grew to consume the longstanding rule of Zine el Abidine Ben Ali.

Dictatorships lack the self-righting mechanisms and institutions which provide democracies with their deep stability. Free expression, free assembly, multiple and accountable political parties, free and fair elections, and independent courts -- all of these form the vital structure of a democracy and provide an outlet for people's grievances. In a dictatorship, people are denied these outlets and anger simmers beneath the surface, occasionally bursting through society's calm veneer in violent fashion.

Community Level Solutions to Social Problems

Christina Holt shares an interesting resource for sharing information on community-level problem solving:

"Communities can solve their own problems. Hunger. Disparities. Access to clean drinking water. Youth substance abuse. You name it.

We are reminded of the innovation of the human spirit and the power of people working together to bring about community change over and over again. Most recently, by the response to a recent Out of the Box Prize contest hosted by the Community Tool Box at the Work Group for Community Health and Development at the University of Kansas. 309 communities submitted inspiring stories of change from 42 different countries around the world – from the Americas to Zambia.

An international panel of judges selected ten finalists whose meaningful work ranged from an effort in India to prevent birth defects and disabilities by discouraging child marriage, delaying conception of the first child and promoting breast feeding, to a neighborhood project to foster citizen activism, to an effort to provide sanitary napkins to girls in Kenya who would otherwise stay home from school when menstruating.

Learning from these innovations reminds us of the power inherent to each community to solve its own problems. And, for tips, tools, and inspiration, people from around the world can learn from one another by viewing each other’s ideas stories of change online."

*****

The discourse around local knowledge, decentralized decision making, and emergent order is really troubling for me sometimes. Progressives who recognize the importance of things like community organizing, collective action, grass-roots initiatives in developing countries, etc. don't exactly oppose - but they don't get excited about market order. Libertarians will embrace market order, but be suspicious about self-government. They say they aren't but it's hard even to find small-scale community level governance that they are enthusiastic about. Local public schools and fire stations have come under fire recently - where is the self-governance that's actually embraced? Why is there such widespread hesitance to embrace emergent order in human society?

One of the nice things about the recent events in Egypt is that we seem to have found a common ground of sorts. They're not us, so were not arguing about whether the Tea Party or the Obama campaign is really "spontaneous order" or not. We can all look at them and say "This is spontaneous order. It is designed and organized, but in an emergent way. This is self-governance evolving before our eyes. It may go right, or it may go wrong - but it's a response to something that we all agree was not spontaneous order".

I wish our discussions about these issues were more comprehensive and less contentious on a more normal basis. Localist movements, Hayekian economics, democratic philosophy, federalism, community organizing, the market, experimental grasping towards collective action on macroeconomic policy, scientific advancement, etc. can all coexist in the same framework of spontaneous social order. I just think a lot of work on these issues obscures more than it enlightens.

Another blog post on the 1920-21 article

It's here. Not a lot of discussion because he can't access the article, but still nice to see people taking notice. He calls it an "interventionist" response... I suppose that's fair enough.

I like the blogger's description of himself:

"I am a law student at Rutgers University in Camden. My main career goal is to use the law to force my Libertarian ideals on people I’ll never meet. If these people could subsidize me as well, that would be a bonus."

Sounds reminiscent of my post on libertarian social engineering :)

Nick Rowe on Analysis vs. Forecasting

Nick Rowe has an excellent, easy to understand post on the difference between economic analysis and economic forecasting that anyone that's ever waxed poetic about economics not being a science because it's not the greatest forecaster should read. It's very basic stuff, but important stuff.

When the Romer-Bernstein unemployment forecast ended up being wrong it barely registered with me. I could care less. The fact is, forecasting has almost nothing to do with the impact estimates you see when you read about policy analyses.

To Supplement, Not Supplant

"I have come to the conclusion, and I have thought a great deal on the subject, that there is a great deal more in the old classical doctrines than people are now willing to admit. It is not true that there is no ‘invisible hand’ as Marshall called it. The trouble is it’s such a damned slow hand. But there is no doubt that the deep currents of the economic system do run in the way in which the classical system suggested. The trouble is that, if you rely on them alone, you impose an intolerable strain.We need some drops of the classical medicine. They are essential to keep the long-run interests before us, even though we use new methods to tackle short-run problems. In fact, it will only be able to work in the long run if we do solve these short-run problems. We must devise new methods to supplement, not supplant, the doctrines of Adam Smith."

- John Maynard Keynes, 1946