Tyler Cowen recently discussed which single sentence contains the most valuable insight in the field of macroeconomics. John Lanchester claimed it was “Governments are not households.” Tyler responded:
At the very least I would ask for “In the short run, governments are not households.” I might even consider “Today is a long run from some time back.” And I have a suspicion what Scott Sumner would say.
Throughout keep in mind that 99% of all historic cycles have been “real business cycles,” and that sovereign bankruptcy is a historical norm, even though today many major sovereigns are quite creditworthy.
I like his second idea, which I learned from Robert Lucas. I believe it’s the most important thing that Lucas ever taught me. The RBC comment may be true in terms of cycles in RGDP, which have probably been mostly driven by war, drought, plague, etc. But I’m not sure it’s true for cycles involving mass unemployment of urban workers. (I presume farmers in ancient times were mostly employed, just at more or less levels of activity. Maybe that’s false.) Monetary shocks were causing urban unemployment in the 1700s and 1800s. Even Hume noticed the pattern.
I’m sorry that I can’t come up with a good single sentence, unless I’m allowed to cheat with a compound sentence:
The money (MOA) market drives cycles in employment, as well as long run growth in nominal aggregates, whereas government policies and cultural practices encouraging wealth creation drive long term real growth.
I suppose that’s actually about 4 sentences. I presume Tyler thought I would focus on the monetary part.
My compound sentence is how I see macroeconomics; the rest is details.
If I had to focus on one shorter sentence, it might be:
Money is really important, but no one understands it.
Tyler also asked “In which countries is crude libertarianism most and least true?”
For least true, I nominate South Korea. . . .
For “most true” you might say North Korea, but that is too easy a pick. How about India? Government there has done lots but most of it has worked out quite badly, whereas their deregulations generally have gone well (see our India unit on MRUniversity.com). Further deregulation of the economy would likely be a good idea.
Singapore can be claimed for either category.
I certainly agree about Singapore, which is a sort of Rorschach test for intellectuals. But there are lots of ways of thinking about this question. I’d prefer to think in terms of which examples strongly favor one model over another. North Korea has horrible policies by almost any standard, so whereas even Paul Krugman would view libertarianism as an improvement in North Korea, it doesn’t tell us much more than that.
Here’s a couple examples where the crude libertarian model does pretty well against my more “sophisticated” libertarianism:
1. The Hong Kong currency board
2. Private schooling in India
I think that Hong Kong would do a bit better with NGDP targeting, but I can’t deny that the currency board (sometimes viewed as a crude libertarian approach) has done awfully well. On average unemployment has been low, and although the rate does rise when NGDP growth and inflation fall, the recessions are short lived. Their labor market is fairly flexible. Interestingly, Hong Kong may have the most perfect Phillips Curve in the modern world from 1985-2011. So although crude libertarians may hate the Phillips Curve, and ridicule it, the R2 of around 80% is about the world’s highest in modern times.
I favor education vouchers, because, a priori, I can’t see how poor people could afford to send their children to private schools. But I’ve read that many poor people in India do so, and that the schools are often better than the public schools. That’s a strong “crude libertarian” argument against my views on education.
How about “In which country are cultural explanations of income differences most and least true?”
Least: Korea (viewed as a single country)
PS. I prefer the phrase “dogmatic libertarianism” or “principled libertarianism” instead of “crude libertarianism.” And I usually call people like myself and Tyler “pragmatic libertarians,” not “sophisticated libertarians.” Why not do so in this post?
Just to annoy people. Because I was following Tyler’s terminology.