Getting shrill

- Krugman talks more about the rentier. I'm generally not much of a class warrior, but blatantly regressive policies sure do push me in that direction (btw - I hope people got my reference in the Kevorkian post - there wasn't much commentary but I was pretty proud of that!).

- Howard Gleckman says, in no uncertain terms, that Republican spending cuts would be terrible for the economy. This is good to see. Often, the Urban Institute's quite responsible position on the budget and unmanageable deficits (which was one of the things that first attracted me to UI) can overshadow the fact that deficits have different implications in depressions. It's good to see Gleckman coming out strong on this. We need spending right now. We need deficit reduction later.

Everything that non-political stimulus advocates said would play out has played out. All the evidence of the bond markets, all the evidence in inflation, and all the evidence in the real economy butresses the case of non-political stimulus advocates. Why do I say "non-political stimulus advocates"? Because as Christie Romer points out, politics distorts the science. We need:

1. QEIII
2. An abolition of as many state balanced budget requirements as we can get
3. A job creation tax credit along the lines of the one proposed by Tim Bartik and John Bishop
4. More fiscal stimulus with emphasis on infrastructure and other spending and investment programs that will end by their very nature (rather than new benefits or entitlements that will stick around)

I don't know if this will be "enough" - perhaps we'll never be able to do "enough". But the point is we can do better than we're doing now and better than what we've done. And what is the worst that could happen if we overshoot? Then we're just erring on the side of progressive policies whereas before we were erring on the side of regressive policies. After a period of stagnant wage growth and increasing inequality, that's not the worst thing in the world.

I'm sick of seeing people continue to struggle with this downturn while ostensibly liberal politicians ignore them, and when we have remedies available that don't threaten the market, the Constitution, or the republic.

Conan the Barbarian! And some Lovecraft stuff...

Today I came across a trailer for a new Conan the Barbarian movie! I hadn't realized this was in the works. It's been a while since I've seen the old ones (well, the first one - didn't like the second all that much).



It's worth noting for those that aren't aware that the creator of Conan, Robert Howard, was a good friend of H.P. Lovecraft, and they exchanged many letters in the 1930s. Howard is one of a couple of Lovecraft's correspondents with whom he would discuss economic issues of the day. Speaking of Lovecraftian things - for those that haven't heard the film version of At the Mountains of Madness is put on hold for the time being. Guillermo del Toro rightly insisted that it not be made PG-13, so that he could be faithful to the story, the box office be damned. Some firms demand more of a profit margin than others, and he is currently hoping that it will be taken up by someone else. I sure hope so.

Also - I was reading Lovecraft's letters recently and found a reference to an FDR speech in Providence, Rhode Island that he attended on October 21st, 1936. This is that speech.

LK on Keynes's German Foreword

I was too busy to repost this morning, but I would be remiss if I didn't bring people's attention to LK's post on the German Foreword. Of course this is something I've written on in the past too. This is something I would like to revisit again in the future - there's a ton of implicit German intellectual history in that foreword that gets obscured by the low quality analysis and simple demagoguery surrounding it.

LK makes an explicit comparison to some of the less savory things Mises has said about fascism. After providing the material, he writes: "If anyone is a candidate for having (in Rothbard’s words) a “strong fascist bent,” then it would be Mises, not Keynes."

I would put it this way - as far as I can tell, neither Keynes nor Mises were anywhere remotely in the neighborhood of sympathizing with fascism. However, I would say that if we found out that one of the two of them was a closet fascist or collaborated with fascists to reach other ends, I would be much less surprised to find out that it was Mises. The fact is, neither men were fascists - and that should be the take away. But Mises skirted the boundary in ways that Keynes never did. There is a pretty bold line between libertarianism and fascism. Libertarians are liberals, after all - and fascists are not. But insofar as libertarians tell a society they cannot make certain decisions for themselves and insofar as libertarians weaken the basic liberal institutions of representative democracy, they can make that bold line between liberalism and illiberalism fairly porous. This is a small, small minority, of course. I'm sure you all can think of one well known example of what I'm talking about. That's the sort of thing that worries me about libertarianism. But Mises the man was unequivocally a liberal - as was Keynes the man.

UPDATE: I want to be clear - just because I offered how I would have phrased it, and just because that emphasized that I don't think either are fascists - I didn't mean that to imply that LK thinks Mises was a fascist. He clearly doesn't.

On Human Action

Jonathan Catalan tells me that "all purposeful action is market action".

This strikes me as absurd. All market action is certainly purposeful action, I'll agree - and understanding human pursuit of purpose is clearly going to help you understand market action. But there is a lot of purposeful action that is not market action at all.

Economics ought to restrict itself to market action in my opinion. Psychology has done well as a science of the mental and behavioral processes underlying all human action, and thus has a lot of good things to say to any scientist considering the human species. Economics has done well as a science of market action. Sociology and political science, despite a few gems, have faltered in important ways, so you see economists doing reasonably good work in both fields ("economics of the family", etc. for sociology - public choice theory for political science). We have good tools that any science of these types of action ought to consider using (and in many cases they have), but ultimately this is niche-filling.

But the fact that economic scientists have transferable skills that can fill these niches doesn't make these other purposeful actions "market actions". Market action is action in the context of networks of transactions. Not networks of interactions (that's sociology). Not networks of domination (that's political science when it is state domination, sociology otherwise). But networks of transactions. That is market action, and it's important not to fool ourselves into thinking that we're experts in more than what we are experts in. I know bits and pieces about the science of human domination of other humans, or the science of human non-market interactions with other humans. But mostly I know about market action.

Anyway - I thought this would be a fruitful comment thread. Why on Earth would anyone think that all purposeful action is market action? What exactly does "market" mean if that's the case?

Romer on "Unemployment or Insolvency"

HT - Paul Krugman. Here is Romer.

I have thoughts similar to this, but I should probably wait until September to share them...

Clarification on the marginal efficiency of capital

Gene Callahan laments a poster who writes of Keynes "I admit that I’m commenting as someone who’s not intimately familiar with Keynes’ work...". He responds "My interpretation: "not intimately familiar" can be translated as "I have not read a single word of Keynes's." So why does he have any opinion on it at all?". Gene specifically avoids naming the blog where he read this (perhaps he's embarassed he visits it?) but I have no such restraint. He read it on Cafe Hayek in the post about Smith and Keynes's shared birthday that Jonathan pointed us to.

That wasn't the only person on that blog post that seems to have some degree of unfamiliarity with Keynes - but at least he admitted it. Don Boudreaux himself wrote in the comments:

"I’m sorry, but I do believe that on matters of economics Keynes was indeed a simpleton. I offer here but one quotation, from page 220 of The General Theory, as evidence of Keynes’s simple-mindedness on matters of economics: “I should guess that a properly run community equipped with modern technical resources, of which the population is not increasing rapidly, ought to be able to bring down the marginal efficiency of capital in equilibrium approximately to zero within a single generation.”

Keynes here argues that capital can be made non-scarce (and, as he puts it in the preceding paragraph, that one key to making it non-scarce is “that State action enters in as a balancing factor to provide that the growth of capital equipment shall be such as to approach saturation-point….”). These are the words of an economic simpleton – a simpleton about the nature of capital, about the nature of scarcity and human wants, and about the nature of the state and “State action.”" [emphasis is mine]

Let's nip this one in the bud, shall we? Because this is a line that has been adopted by much more dangerous people than Don Boudreaux: people who wield video cameras and youtube channels.

If capital were non-scarce we would expect its price to be very low, right? If it were truly infinite, the price would be zero. Marginal productivity would go right down with it for the normal reasons. That's the diamond/water paradox for you - water is cheap because it is (relatively) non-scarce (and of course where it is scarce it's not cheap!). As far as I can tell, this is what Don thinks is going on here when he quotes Keynes as saying that we can drive the marginal efficiency of capital down to zero within a generation.

Don Boudreaux is wrong.

I don't know why these things even pass the smell test for people, but apparently they do. Does Keynes come across as a utopian? He doesn't come across as a utopian because he's not a utopian.

The marginal efficiency of capital is not the same thing as the marginal cost of capital or the marginal productivity of capital. Keynes defined the marginal efficiency of capital as the discount rate at which the price of capital was just equal to the present value of the stream of benefits proceeding from that capital. So the marginal efficiency of capital could be zero at a time when the marginal cost and the marginal benefit of capital were both very, very high (but equal). A high marginal cost and marginal benefit of capital, of course, means that capital is scarce. A lower marginal efficiency of capital is associated with more capital, to be sure - because a lower discount rate means more investment becomes viable, driving down the marginal benefit of capital. So certainly a more capital-rich future is part of the Keynesian vision. But "non-scarcity"? Of course not. He never says that anywhere, and the marginal efficiency of capital is not the marginal cost or the marginal productivity of capital. The point is this - since the level of investment is determined by the interest rate (through the marginal efficiency of capital - what investments are viable at what interest rates), capital owners commanded a return simply by virtue of the scarcity of capital (or - put another way - by virtue of artificially high interest rates). A low interest rate and potentially even a zero marginal efficiency of capital was Keynes's way of separating out the rentier from the entrepreneur.

And in Keynes's vision there were entrepreneurs. Why? Because capital is still scarce and the expertise of the entrepreneur was still needed.

Hmmm...

Jack Kevorkian dies on Friday and by Monday the rentier makes a comeback.

Coincidence?

We report - you decide.

Assault of Thoughts - self-indulging citations edition - 6/6/2011

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

- Matt Yglesias picks up my post on Jefferson.

- Bob Murphy cites my 1920-21 paper in a post on the "soft patch" we've hit that may turn itself into a double-dip. The article itself is very odd to me. Murphy writes:

"But go look at Krugman's analysis at the time. His point was not so much that the Romer team's numbers were wrong (though he did think their projections of what would happen without the stimulus were very optimistic). Rather, he was saying that on their own projections, they weren't anywhere near to closing the "output gap." In other words, in terms of the above graph, Krugman wasn't warning, "Guys, I think actual unemployment with the stimulus package will look like the red dotted line, so you need to spend a lot more." Rather, he was saying, "Guys, that blue line is still pretty miserable, and the Republicans might classify the stimulus as a failure. So you'd better spend more.""

As for the first bolded statement - what exactly is Bob under the impression the "output gap" is? That is a proclamation that the estimates are too rosy, is it not? And what's this talk about Republicans? Nothing Bob links to seems to mention Republicans at all. Certainly Krugman and others were worried that Republicans would scuttle the stimulus, but from the beginning the complaint was that this wasn't enough - that it would help but we would still have high unemployment. How Murphy gets this: "Therefore, when it comes to the effects of the "stimulus" package, the free-market economists (including the Austrians) were right, and the Keynesians were wrong" is beyond me (kind of an oddly constructed sentence too - although I guess in the same way that I'm not a "classical liberal" to Bob, I'm also not a "free market economist", so in the mises.org world it makes sense). Is anyone aware of any Austrian forecasts of unemployment for 2009-2011? I bet if we paired the Austrian forecasts (I doubt there are any) with the actual unemployment with stimulus, it wouldn't look quite so bad. But then again, it wouldn't serve their interests to forecast and subsequently post such a thing. This is all bizarre to me.

- And speaking of Krugman, the blog Beats and Pieces likes my "On Paul Krugman" post.

- In a comment on what I have to say in a spectacularly bad post by Don Boudreaux on Keynes and Smith, a commenter writes this of me: "You have the potential to become the Walter Kaufmann of John Maynard Keynes. Kaufmann scrubbed all the naughtiness of Friedrich Nietzsche and made him palatable to the English-speaking public. You are doing the same for Keynes. Congratulations on your new role." My response: "The English-speaking public on both sides of the Atlantic found Keynes quite palatable even in his own time."

Things I have been thinking about lately

Richard Posner, John Maynard Keynes, pragmatism, G.E. Moore, Frank Knight, Dewey, popular presentations of Keynesianism, intellectual conversions, and the Chicago School.

Has anyone read The Failure of Capitalism? What did you think? What about The Crisis of Capitalist Democracy or How Judges Think?

Happy Birthday Smith and Keynes

Jonathan reminds me that it is John Maynard Keynes and Adam Smith's joint birthday today! The two are ranked together in the highest echelons of economic science for good reason. To a large extent (and admittedly simplifying many other great economists) they provide bookends to an interlude in economics where one simply fact was often forgotten: we do not sit comfortably and automatically on a production possibilities frontier. Smith destroyed the poor arguments of British protectionists by discussing how the division of labor and mutually beneficial exchange could make us more wealthy with the same inputs. After Smith, the Ricardians and the classical economists slipped the discipline into a world of diminishing returns - not because it was necessarily realistic, but for the sake of tractability. Themes of increasing returns, innovation, and spillovers from specialization were underemphasized (although thankfully the gains from trade were still maintained as a theme in classical economics). There were innovations in this Ricardian interlude - the marginal revolution being the chief among them. And while Walras made important contributions in this respect, his general equilibrium system continued the tradition of a perfectly calibrated, balanced systems where general gluts were inconceivable. At the Walrasian auction block, everything was sold and everyone was employed. Keynes revived the tradition of Smith in a subtle way. Smith studied the economy as it really existed and uncovered the key to rapid economic growth and innovation beyond a production possibilities frontier. Keynes filled in the other side of the equation and explained how the complex emergent system of Smith could discoordinate and collapse at regular intervals. The key was the relationship between money, the interest rate, and investment levels. The economics of Ricardo, Walras, and the classics was both Panglossian and stagnant. Smithian economics dispells the stagnation of the classics, while Keynesian economics unravels the Panglossian myth.

It is fitting that two of the greatest economists we have and two of the greatest champions of liberalism share a birthday.