And the winner is...

Dale Mortenson, Peter Diamond, and Christopher Pissarides! Wow - that was my wish list (with Peter Diamond thrown in for good measure).

They were awarded the prize for their analysis of markets with search frictions. This is very closely related to what I'm proposing doing doctoral work on. Congratulations!

UPDATE: Now here's some rich irony for you... one of the guys that just won a Nobel for matching frictions in the labor market is having his nomination for a Federal Reserve Board of Governors seat held up by Congress!

Don Boudreaux on the 1920-21 Depression

Don Boudreaux has an interesting post up on exports and the 1920-21 depression. He's trying to claim that Krugman's history is bad when Krugman says “Historically, [in] the aftermath [of large] financial crises countries recover by having a huge exchange-rate depreciation, which then leads to an export boom” because the 1920-21 depression itself was actually characterized by high exports, and the recovery and years subsequent to the downturn were characterized by low exports. First, I think this is kind of bad logic - and Don is buying into this whole "one downturn is basically the same as any other" thinking. But the 1920-21 depression was different from others.

Still, the coverage that Don provides is good. It's good that we talk about these historical episodes that most people don't talk about.

In the end, I think Don ends up supporting my position on 1920-21. It's kind of a nice "out of sample" test of my position, because I didn't even talk or think much about what was going on with trade at the time I was writing my article (which is revised and resubmitted and still pinging around the RAE I guess). To recap what I've said about it, the 1920-21 depression was caused by high interest rates and a supply shock. It was almost a perfect storm of characteristics that would render fiscal policy ineffective, and low and behold we didn't do fiscal policy and we ended up being fine and out of it relaively quickly. There are several points to make, but long story short - we did not have any demand deficiency.

Now - how would you expect exports to behave if you had a supply shock and no demand deficiency to speak of? Well to me, that sounds like a period where you'd expect to see high exports, right? Don suggests that was the case.

I wish being an economic historian was a surer job... I could definitely do that for the rest of my life. However, I feel like I should do real practical research to get a real practical job and write about this sort of stuff when I can.

DeLong on Wilkinson and Economic Realism

This is very good - Brad DeLong responds to Will Wilkinson with a dose of what I would call economic realism. He quotes from Keynes's The End of Laissez-Faire, which is one of my all time favorite books. If you had to be picky about what of Keynes you end up reading, I would strongly suggest you read this and pick up Keynesian economics from blogs or textbooks or from Hicks (Hicksian Keynesianism is probably scientifically better than Keynesian Keynesianism anyway).

DeLong talks about a naturally evolving economy that is not that best of all possible worlds, that occassionally runs into trouble and that can be plausible improved upon. DeLong says that economies have a tendency to "run themselves into the ground" - I would object to that phrasing - I would say that economies are naturally erratic and can grow at a sub-optimal rate. "Run themselves into the ground" makes it sound like the economy would be helpless without government, which I don't think is true at all and I would guess DeLong doesn't even necessarily mean.

This is what DeLong cites from Keynes, which I think meshes well with my Dewian contractarianism:

"Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately. We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed: "one of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion...""

Industrial Organization on 30 Rock

My senior thesis topic was featured on 30 Rock recently:



I specifically looked at the impact of trade on vertical integration - essentially a Smithian argument that increased trade would reduce vertical integration.

Although technically the example they give isn't vertical integration at all - it's horizontal integration. The NBC-Comcast merger, which this episode is parodying, is an example of vertical integration because Comcast is a cable provider.

Coase at the Beach

A good example of the Coase Theorem (HT Don Boudreaux). Coase is quite clear when property rights are well defined, but I've always been a little unclear (and it might be my own fault for not reading up enough on it) on exactly what Coase has to say when property rights are not well defined.

Assault of Thoughts - "We aren't Marginal Revolution or Conscience of a Liberal, But You Should Still Read Us" Edition - 10/8/2010

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

- Regular commenter stickman has a relatively new blog called Stickman's Corral that is worth following. He recently had a post up on "Why we need maths in economics". It's not every day you get to read a blog post where you agree with every single word. You all know I like to caveat and agree with parts of posts and disagree with other parts. I found myself agreeing with every single word of this post - it's worth a read.

- Stickman also has a newer post up illustrating his point about math in economics using a simple model of investment in oil fields. It's worth reading through the whole post. First, it's nice to see an actual model in a blog post. I'd never have the balls to put one up (right now at least) - I just blog on whatever comes to mind between 5:30 and 7:00 am, which usually isn't a full-fledged model. If you've had calculus you should be fine with this one. He demonstrates that the impact of the interest rate on investment is indeterminate because of the opportunity cost of capital. Now, there's a certain bit of irony in this conclusion. I've stumbled on several Austrians who think that they're the only ones that think about the opportunity cost of capital, and yet it's precisely this cost that introduces a stumbling block for cavalier assumptions (derived from less formal, less precise deductions) about the interest rate. Two thoughts on the model for stickman (which he is free to disregard, since it's not like I'm going to put in the work of implementing them): First, if you remove the assumption of up front payments, does that change anything? Second, usually Austrians (and honestly I'm not sure if you had them in mind when writing this up) think of the impact of the interest rate on investment as affecting investment in higher order vs. lower order production - i.e., causing malinvestment rather than overinvestment. Your result varies with c/p - the opportunity cost of capital, with some value of c/p where there would be no impact. If there were reason to believe that higher order production has a lower c/p and lower order production has a higher c/p, this would affirm the Austrian view (granted, I'm not sure if or why there would be any reason to believe that). Nice post.

- Jonathan Catalan also posts on math and the Austrian school, specifically econometrics. I have a few concerns with it - first, he cites Mises as if econometrics were used to derive theory rather than test theory. I'm not aware of any work that really does this, so I'm not sure exactly what Mises was thinking. We certainly theorize with some sense of the world (you can't theorize about the interest rate without observing the world and knowing about this thing called an "interest rate") but that's different from using econometrics inductively, which isn't done. The qualification Jonathan suggests Mises makes of mathematical models is that "those relationships are subject to change depending on the different factors that the model does not account for (thus, models rely on ceteris paribus)" - again, this isn't really a point that anyone would really dissent on. I'm not sure why Austrians have to go to Mises for approval, but if this is what Mises thought then there shouldn't be any major obstacles to mathematical and empirical Austrian economics. After all, this is how the vast majority of economists view math and empiricism. So maybe there's no problem? Perhaps Mattheus will weigh in on this - I know he sometimes differs from Jonathan on these points. One of the frustrating things about Jonathan's post is that he claims that math is less precise than using words, and he points out that people may get slopppy with their assumptions or premises with math. This is taking the standard argument in favor of math and standing it on its head. The whole point of math is precisely that you have to explicitly state all your assumptions or you can't solve the damn problem. This isn't the case with language. With language, the assumptions are implicit in the words themselves. Stickman can't write out his initial NPV equation without telling you what each symbol means. That's considerably more precise and the assumptions are considerably more out in the open than anything I've read on the Economic Thought blog about the determinants of oil rig investment. That's the whole point. Just saying it doesn't make it true, Jonathan. The English language is versatile and useful, but it is not more precise or clear than math.

- Scott Kuhagen continues his coverage of our activist Attorney General in Virginia. Jefferson would be rolling in his grave if he knew about this assault on academic freedom at his university. I don't like to use the memory of the founders to make a political statement. I hate it when the Tea Party does that. It oversimplifies very complex positions that they held and tries to pretend that the late 1700s are comparable to the 21st century. But in this case, I'm pretty confident Jefferson would abhor what Cuccinelli is doing at the University of Virginia.

- Lee Kelly has a post on currency, deposits, and monetary disequilibrium. He suggests private banknotes as a solution. I have a few concerns about that, which I note in the comment section of the post. Not a terrible idea - not even something I'd be especially opposed to - but I don't think it's quite the solution that Lee suggests it is.

- Evan had an interesting post up a little while back on Stephen Hawking's recent statements about God. He connects the spontaneity of Hawking's universe to the theological concepts of the "freedom" of God. I will stress that these are developed theological concepts - just like I talk in jargon here, he'll talk in his jargon there - so read with interest and google some stuff if you need more background on it, but know that there is a bit more depth and background to the concepts he's discussing than might meet the eye. I have comments in this comment section as well.

The Nobel in Economics is Coming Monday

Any thoughts on it? Boettke says Alchian and Kirzner (I think this is more of a hope than an expectation). Tyler Cowen provides a list as well (I think his Thaler and Schiller suggestion is especially likely). Any thoughts? I have no idea - I'm not that plugged in yet - but in the spirit of Boettke I'll say who I think it would be neat to see (even if unlikely): Mortenson and Pissarides for their work on search and matching. Also - what about John Taylor? He didn't make Cowen's list, but that seems like a reasonable one, doesn't it? All the other prizes this year seem to have very practical applications for their work, and Taylor certainly fits that mold. Cowen also mentions Bernanke as deserving, but as someone who will probably have to wait - I agree with that assessment. The current crisis has demonstrated how important Bernanke's work on financial mediation of monetary policy is.

Anybody else have any wishes or guesses?

Then again, they can always do what they did with the Peace Prize for Obama: award it to me even though I haven't done anything to deserve it yet, and I'll get up and reassure everyone that I'll work really hard to justify the award in the future.

Public Goods and the Role of the State

Frances Woolley has a good post in reaction to this Olbion fire department situation reminding us that (1.) fire fighting is not a public good and (2.) actual public goods are very, very rare. I think this is important to highlight and think about because so many people have this automatic reaction that public goods in some sense provide the economic justification for what the state does, and anything that's not a public good is (according to economics) not an appropriate area for state action.

I've never really thought of it that way (although perhaps that's because I've never taken an official "public economics" class). I've always thought about the rivalry/excludability cross-tab more as a pricing strategy typology than a blueprint for a political philosophy. "Club goods" gravitate towards a different pricing strategy than private goods - they introduce innovations on how to price goods. "Common pool goods" usually gravitate towards different rationing or supply strategies than private goods. A good resource for this is of course Elinor Ostrom (her Nobel Prize lecture is a good start).

But you'll notice I don't usually talk about "public goods" when I talk about the government - usually what I'm talking about is an externality. That's not to say I don't think public goods are important when thinking about the government, they simply aren't exhaustive. Externalities introduce a situation where the market has no ability to right itself (contra Jonathan Catalan) because the problem is in the nature of the property rights regime. You could always pay BP not to pollute the ocean, but then you would be paying them not to impose a cost on you when they should be paying you if they want to impose a cost. You could argue that tort law forces BP to take these externalized costs into account, but then BP would still get to decide whether to act or not - it would not be a mutual choice between you and BP - that's coercion. So externalities provide some basis for state action even when we're talking about externalities in non-public goods. But obviously an externality on its own doesn't give the state license to act (see Coase on this point) - it's not sufficient. But large, extremely generalized externalities that can be addressed adequately by the government and inadequately by some other institution provide a strong case.

The other thing that affects the role of the state is humanitarianism and the ability to pay. I'm no welfare economist, and I haven't looked at this in detail (I know others have), but on the face of it the problem with a Walrasian approach to welfare economics is that because a person's income is commensurate with their marginal productivity, their ability to satisfy their utility is going to be constrained by their productivity. Human welfare, in other words, is proportional to human productivity. There's a point where this is unavoidable, of course. We don't see it as a crime that less productive humans a thousand years ago lived in a poorer state than we do. That's just how it goes. But for our contemporaries, does this raise any ethical issues for us? It probably should. A child is born to a poor family, and doesn't get adequate nutrition or education, to say nothing of an inheritance. That child will be less productive and will earn less money. Market capitalism, for all it's allocative efficiency, will by virtue of its dependence on the property rights regime constrain that child's ability to live as well as another child born under better circumstances.

So how do we react to this? First - we don't react in a radical way. The allocative efficiency of market capitalism still provides this child with the opportunity to use whatever productivity it does have to better effect than any other system we have come up with. It also provides the child with the best opportunity to enjoy the fruits of the productivity of others in an efficient way. The only real problem is that it imposes limits or obstacles to the child's fulfillment as a human being because of the same property rights regime that drives all the good things we like so much about markets.

If we have an ethical framework where we think that human beings are essentially equally worthy of living a reasonably comfortable life, this may suggest that we have a social imperative to augment market outcomes. I have a fridge full of healthy food and a roof over my head. I believe people should receive only what they earn, but I also believe that any human being without healthy food and a roof over their head is living an unjustifiably unfulfilled life. Providing them with a basic amount of food and shelter does not change the fact that they should earn their marginal productivity and set those earnings equal to the marginal benefit they get from consumption. So far this is only a justification for charity, but if these ethical standards are sufficiently generalized and agreed upon, private charitable intuitions can naturally evolve into public agreement on basic standards and public provision. This is natural - after all, the state is the ideal way to equally spread the pain of poverty which we think of as being somewhat random and not determined by a person's own life choices. The state is not some alien institution. It's an emergent institution just like any other human institution. Presumably what the state might provide in this case - food, medical care, shelter, etc. - is not a public good at all! Which brings me full circle back to the point that we need to be careful when we talk about "public goods". The concept of a public goods tells us something about viable and unviable pricing strategies, but it doesn't furnish us with a political philosophy.

My view is that political philosophy should be done with the property rights regime in mind. The property rights regime is largely artificial - natural rights are "nonsense on stilts" after all. They are useful and even justifiable and legitimate, though. The fact that they're artificial doesn't mean they're contestable. But we have to have a political philosophy that recognizes the limits of the framework of rights that a given society has evolved: hence my emphasis on externalities and ability to pay, rather than public goods.

Sullivan on the Tea Party

Andrew Sullivan highlights the point a lot of people have been making, but that a lot of my libertarian friends have been fooling themselves about: the Tea Party is, for the most part, a populist movement and not a libertarian movement.

I say "for the most part" because the Tea Party is a lot of things to a lot of people. Certainly there are some important libertarian strains. But don't fool yourself into thinking this is anything other than what it is.

The evidence on the fiscal side of things isn't very explicit in this post at least, but I wouldn't expect anything substantial.

It'll be interesting to see how history remember the Tea Party. As I've said before, it's a mixed bag. The opportunistic man-handling of the Constitution and of American history bothers me a great deal. The fringe elements that have tinges of racism concern me, and the more common elements that abandon Jeffersonian principles with respect to religion in a free republic deeply disturb me. But they do seek out information, they do express themselves in the public square, and all this is very good. You get the sense sometimes that they think that because they expect something "the American people" expect something, but oh well - that sort of thing will happen. I'm not sure what we'll say exactly about the Tea Parties looking back on them, but I am quite sure we will not think of them as a libertarian groundswell.

Hey, at least it keeps them off the streets!

Regular commenter Xenophon shared the very elaborate new xkcd map of online communities. Good stuff. The blogosphere seems so small, but it features "libertarians" (none specifically identified), and Paul Krugman. However, I wanted to point out a small region that you might have missed - between the islands of Youtube and Twitter we have the "isle of teenagers who just discovered macroeconomics". I shit you not. Pretty cool! I'm not sure exactly what he's refering to, but I suppose there are worse things teenagers could do with their time.

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Some advice for these experimenting teens - (1.) don't confuse your accounting identities with behavioral laws, (2.) don't assume that two models describing two different macroeconomic phenomena necessarily amount to two contradictory understandings of the economy, and (3.) if anyone ever tells you to disaggregate your data when you're not comfortable with doing that, just say "no" - fallacies of composition will stay on your record (well... if you publish them at least).