Market monetarism is making inroads into Britain
Lars Christensen has an excellent new post showing that the British government seems increasingly receptive to market monetarist ideas. Lars quotes from a speech by Britain’s Business Minister Vince Cable. I’ll quote from the same speech, and hence this post will partly (but not completely) overlaps Lars’ post:
Tight fiscal Policy; Loose Money
. . .
The right way to understand loose monetary policy is in terms of expectations: of whether future money demand will be growing fast enough to make borrowing to invest or spend worthwhile. It is not enough just to look at the base rate. Look at Japan: because of its persistent deflation, its zero-interest rates still do not reflect easy money conditions. Anyone investing is facing the persistent pressure of falling prices and falling profits.
. . .
Aggressive monetary policy, enhanced by QE, has now been operating for four years. And the IMF has recently argued strongly for a reinforcement of supportive monetary policy through the liberal provision of liquidity to the banking system- as announced on Thursday -, QE (with a wider range of assets) and more aggressive interest rate policies.
I would supplement these useful moves with an observation about how monetary policy is communicated. Quantitative Easing can sound like a powerful instrument – but if it does not succeed in making people expect rising money spending in the economy, it is likely to be far less effective than leaving gold proved in the 1930s.
. . .
[Our challenge] is the deficit, a record structural deficit for peace time that demanded a clear plan for its elimination in order to maintain the confidence of markets. Our policy is far more flexible than our opponents claim – we have shown this by extending the period from 4 to 6 years for bring the budget to structural balance. Automatic stabilizers still function. But no-one within the Coalition doubts the need to get the deficit under control over a sensible time frame.
Innovative Policies
Given these constraints, what tools does the Government have? The first is continued use of monetary policy, and stronger communication of the policy aim it is meant to achieve – robust recovery in money spending and GDP. The Mansion House speeches signalled a clear intention to continue aggressive monetary policy.
I am sure that all the candidates to take over from Mervyn King are thinking very had about how best to do this.
Low rates aren’t easy money. Britain needs tight fiscal policy and easier monetary policy. The BoE needs to shape expectations—QE isn’t enough. What sort of expectations? Expectations of faster growth in NGDP. And the new head of the BoE needs to understand all that.
Admittedly Mr. Cable in Business Minister, not Prime Minister. So it’s unclear how much of this will actually get done. But it’s nonetheless encouraging to see important policymakers who are aware of market monetarist ideas.
PS. Mr. Cable also has some astute comments comparing between the interwar period and today.
Update: Commenter 123 linked to a post by Giles Wilkes in 2010, which endorses market monetarist ideas (including this blog.) Apparently Chris Giles Giles Wilkes is a key economic adviser to Vince Cable.
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18. June 2012 at 06:09
Scott, loving the blogging. Good to see your brand of policy making its way into discussion in the UK.
I have a small technical question I’ve been meaning to ask you… I’ve been waiting for it to come up in a blog, but I haven’t seen it recently. You talk about the real balances effect a little, especially when the people of the concrete steppes are asking about the transmission mechanism.
I thought the empirical evidence showed that the relevant real balances are only a tiny part of wealth, even as far back as Patinkin 1965. Do you think it’s a little larger? Or are you happy just to talk about the effects on real balances at the margin?
Obviously the expectations are the key, target the forecast, etc etc, but I just wanted to hear your thoughts on this.
18. June 2012 at 06:59
Giles Wilkes his Special Advisor used to blog before he took the job and was follower of your blog. Cable is an economist and lectured for a time at Adam Smith’s old university. Maybe you should make it known you would be interested in the job of governor when King retires. It will be almost certain to be a break with tradition by appointing someone from outwith the Bank.
18. June 2012 at 07:13
Scott – Just wondering: is your opposition to fiscal stimulus primarily because it adds unnecessarily to the national debt, or because it is a distraction from monetary policy? Or do you think it is harmful in and of itself?
18. June 2012 at 07:16
From above…”Quantitative Easing can sound like a powerful instrument – but if it does not succeed in making people expect rising money spending in the economy, it is likely to be far less effective than leaving gold proved in the 1930s.”
Right, So how about QE along with actual rising spending? Fiscal stim.
How does cutting spending translate into making people expect rising spending? “Your spending is my income, and my spending is your income.”
Right now if we had not cut the stim off and fired cops, teachers and firefighters our unemployment rate would be about 7% instead of about 8%. Just that would go a long way toward making people expect rising spending…and would have the added benefit of actually raising spending by putting money in the pockets of cops, teachers and firefighters.
People are far more likely to believe their own eyes about actual spending rather than some abstract theory about how restoring confidence among the investor class will eventually move them to spend so that their spending “trickles down” to them.
If the Investor class does not have demand for their products then why would they spend on producing more products ?
Innovation can’t do it all, but even if you believe it can, remeber the elite in America have been sitting on 2 Trillion since 2008. If there was economy transforming innovation waiting for money…the money would have found it by now.
18. June 2012 at 07:34
From what Richard W wrote, it seems that in the digital world one has not to be dead for a long time before his ideas are embraced!
18. June 2012 at 07:39
Richard W, Vince Cable actually in his speech hints that the new BoE governor should be somebody in favour of NGDP targeting.
18. June 2012 at 07:44
“The right way to understand loose monetary policy is in terms of expectations: of whether future money demand will be growing fast enough to make borrowing to invest or spend worthwhile.”
Vince Cable is also ignorant of how the market process works (it’s probably why he’s in politics, and most probably why he was lured to market monetarism. It takes errors and fallacies to get to MM).
He is making the very common mistake of believing that total spending has to keep increasing in order to “make room” for investment and labor today, such that if total demand doesn’t rise, or remains fixed, then there will arise a sort of glut of invest-ready resources and labor.
Investors and entrepreneurs in the real world consider relative demands, and relative prices. They consider the difference between input prices and output prices.
If expected nominal demand does not rise, or remains stable, or falls, whatever the case may be, then investors and entrepreneurs will just set current factor prices accordingly. If expected nominal demand does not rise, then they will not seek to raise prices of current means (factor inputs, including resources and labor).
It is a fallacy to believe that REAL investment will be reduced if expected NOMINAL demand is reduced. Full resource utilization and full employment can be had will rising, falling, or stable “aggregate demand”, as long as the differences in relative prices and demands are learned about and exploited. That’s the foundation of business activity, employment, and production.
Money is a tool of economic calculation. In a free market, there will always be a pressure on aggregate input demand to be lower than aggregate output demand, because of the existence of time preference.
To see this, a short explanation of the determinant of profits is required.
Aggregate profit is aggregate revenues minus aggregate costs.
Aggregate revenues is composed of the sum of spending on capital goods and services, B, and consumer goods and services, C. Capital goods and services spending is equivalent revenues for the sellers of capital goods and services.
Thus AD = B + C.
Note:Since the government does not produce real wealth, ALL their spending is consumption spending.
Aggregate costs is composed of the sum of (depreciation quota of) investment in capital goods and services, plus wage payments. In an economy with a fixed money supply, as gross investment B is continuously made, the depreciation quota (and thus costs) will eventually rise up to match the gross B.
For example, suppose each year 1000 computers are bought for $1 million each year, and each batch of computers last 10 years. First year gross investment is $1 million. First year depreciation costs are $100k (assume straight line depreciation for simplicity). Second year gross investment is $1 million. Second year depreciation costs are $100k (from the first year’s investment) plus $100k depreciation from the second year’s gross investment, for a total of $200k in depreciation costs. Third year’s depreciation costs are $300k. And so on. The tenth year’s depreciation costs are $1 million. After that, depreciation will remain at $1 million, because in the 11th year, the first year’s batch of computers are fully used up, and in the 12th year the 2nd year’s batch will be used up, and so on.
As long as the money supply remains fixed, and gross investment remains fixed, then the phenomenon of net investment (Gross investment (revenues) minus costs) will eventually disappear. The only reason we have net investment at all is because of monetary inflation. This shows that the importance of investment is actually at the gross level, which market monetarists have some sense in grasping, as they include spending on ALL investment in their analysis, unlike the Keynesians.
Thus, with fixed money supply and spending, aggregate costs come to be:
AC = B + W.
Aggregate profits come to be:
AP = AD – AC = B + C – (B + W) = C – W.
In other words, aggregate profits in an economy with fixed money and spending, comes to be equal to the excess of consumer spending over wage payments.
How does consumption spending exceed wage payments? It does so by way of those who earn their income by means other than wage payments, investors and entrepreneurs, spending money on their own consumption.
In other words, aggregate profits are determined by the consumption spending of those who pay wages, i.e. investors and entrepreneurs, that is in excess of the consumption spending coming out of wage payments. This consumption spending is financed by such things as dividends, interest, and other sources of income to investors and entrepreneurs that are not re-invested, but consumed.
——
WITH inflation of the money supply on the other hand, there is an additional component to aggregate profits, which is the inflation and additional money spending itself. So WITH inflation, aggregate profits become:
AP = (C – W) + (Gross B – Depreciation quota of B)
——
Vince Gable is making the common mistake of believing that the SECOND term, the (Gross B – Depreciation quota of B) term, is NECESSARY in order for AP to be positive, such that investment takes place at all. This is why he is lured into believing the state needs to print more money and bring about more spending and thus an addition to aggregate profits. But as we have seen above, that second term is not actually necessary at all in order for an economy to grow and full employment to be had! The second term, the net investment term, can collapse to zero, and aggregate profits will still be positive to the extent that consumption exceeds wage payments, and that will always be the case as long as investors and entrepreneurs live, as long as they spend any money on their consumption at all.
Hardly any entrepreneur, seller, or investor cares about NGDP. Most business in this country is composed of small businesses who don’t even have CFOs. The only way investors and entrepreneurs would care about NGDP is if they inferred from an expected NGDP change that their OWN expected revenues will be different. But even if that were the case, which it is not, since NGDP can rise and fall independently of the individual investor and seller’s expected revenues and profits, it still won’t be decisive in making or breaking investment as such. If a seller’s expected revenues are $0.95 million instead of $1 million, then they will just reprice current factors of production, of resources and labor, accordingly lower than they otherwise would have. This doesn’t require REPRICING, it only requires a different initial set of factor prices.
Now, does this mean that the economy can be all hunky dory if most investors expected 5% increase in revenues, but NGDP plunges as actual expected revenues for most individual sellers is lower than they expected? Of course not.
But, and this is the mother of all buts, this does not imply that the solution is to start from square one, and give the banks and investment firms more newly created money, so that they can quickly invest it and bring about higher wage payments and capital goods demand, which then, hopefully, covers the costs that have been bid too high by sellers in the past, so that bankruptcies and unemployment can be avoided. For you have to ask WHY aggregate demand all of a sudden plunged, DESPITE the fact that the central bank never stopped printing money. There is no reason why aggregate demand should collapse even though the Fed didn’t destroy money, unless the reason is BEYOND the Fed’s purview. This is where actual economic science leaves market monetarists behind in the dust, because market monetarists can only interpret this as not enough inflation.
At this point I won’t go into why aggregate demand, and aggregate money supply, should suddenly fall, despite the Fed not destroying money, because the above is enough to digest for now.
I am not at all surprised that Cable, a non-economist state bureaucrat, whose only function is to promote the state to further his own career, would find market monetarism attractive. Non-economists who band together like hyenas and call for continued/increased coercion because they can’t deal with economic reality with their minds, who find existing central planning a failure, but still believe in central planning, not surprisingly become interested in a new inflation flavor of the month. Maybe “this time” it will work.
Monetarists have predicted 14 of the last 0 inflation plan successes. “B-b-b-b-but Australia!” Ah yes, the country with almost 20 years of unsustainable accelerating money supply growth (almost 25% annualized by early 2008 from a low of 2% in the early 1990s!) until the collapse/correction of 2008, after which it is again accelerating the growth of money from a low of 5% in 2008, to already 10% today:
http://research.stlouisfed.org/fredgraph.png?g=85S
Market monetarists are ignorantly rejoicing Australia as a success story, but it is anything but.
I am convinced that if Australia keeps NGDP growth stable once again, then they’ll again have to keep accelerating the growth rate of the aggregate money supply, just like they did 1990 to 2008, and this time the acceleration will be even faster because of the additional errors that have been piled on since the early 1990s that requires more inflation to make believe is sustainable and hence nominally profitable.
The data of Australia is consistent with my theory that accelerating inflation is required to keep nominal spending on a long term constant growth path.
18. June 2012 at 07:52
Australia’s economy shed 100,000 jobs last year, the first time more jobs were lost than created in any year since 1992:
http://www.news.com.au/business/gripped-by-recession-fears-as-jobs-decline/story-e6frfm1i-1226248897891#ixzz1y9zfeAJO
This likely brought about an NGDP being lower than it otherwise would have been. As a result, 2011 NGDP probably barely changed relative to 2010 NGDP.
18. June 2012 at 08:19
Scott,
This speech is your victory. You were the inspiration of Giles Wilkes, Cable’s advisor:
http://freethinkingeconomist.com/2010/03/25/i-had-hoped-this-would-happen-us-attention/
BTW in this same post Wilkes also links to me and quotes the mission statement of my blog.
18. June 2012 at 08:32
I think that cat’s been out of the bag a while that Britian is going Market Monetarist for awhile. I’m still not convinced about the need for tight fiscal policy-where’s the need with British yields at all time lows. Supposedly deficits are bad as it will scare away investors.
Greek austerity parties get enough votes, market still sags http://diaryofarepublicanhater.blogspot.com/2012/06/greek-austerity-parties-get-enough.html
18. June 2012 at 09:08
Mike,
How will decreasing demand through austerity attract investment ?
18. June 2012 at 09:25
Ben J, Yes, I think the real balance effect is rather weak, I rely more on the “hot potato effect.”
Richard, Thanks, but I’m sure they wouldn’t want me. I’d be willing to do the job, but it would be a thankless job, as Britain also has supply-side problems.
Negation, It’s inefficient (partly for debt reasons), and it doesn’t work very well at all.
Bill, Fiscal stimulus won’t work unless the Fed changes its policy–so that’s my focus.
MF, You said;
“As a result, 2011 NGDP probably barely changed relative to 2010 NGDP.”
Too lazy to look up the data, which would show you are wrong, as always.
123, Thanks, I added an update.
18. June 2012 at 09:43
ssumner:
“As a result, 2011 NGDP probably barely changed relative to 2010 NGDP.”
Too lazy to look up the data, which would show you are wrong, as always.
I was just using NGDP theory of there being a correlation between NGDP growth and employment. I thought that was obvious. Guess not.
But looking it up, we get:
http://www.indexmundi.com/australia/gdp_(official_exchange_rate).html
25% NGDP growth in 2010, and (from CIA estimate of 2011 NGDP of $1.501 trillion) 22% NGDP growth in 2011. NGDP growth has skyrocketed 2010 and 2011, after falling 6.8% in 2009.
Why was there a net loss of 100,000 jobs in 2011? With all that NGDP growth, you’d expect the NGDP theory to be put to a good test on this one.
What’s the excuse this time?
18. June 2012 at 09:57
Richard W,
Interesting to hear. Speaking of Adam Smith’s university, would you happen to be Scottish as well?
18. June 2012 at 10:00
My apologies for the off-topic comment, but do please find the time to read this — now being hailed across the interwebs as one of the greatest blog posts of all time; Deirdre McCloskey, naturally.
http://bleedingheartlibertarians.com/2012/06/factual-free-market-fairness/
18. June 2012 at 10:15
Scott, there is a typo in the place you mention Wilkes second time: “Giles Wilkes in 2010, which endorses market monetarist ideas (including this blog.) Apparently Chris Giles “
18. June 2012 at 11:15
Bill you said:
“How will decreasing demand through austerity attract investment ?”
I don’t think it will
Scott did you ignore my comment or not notice it? The main point is I don’t see what the need for austerity is in Britian as yields are at all time lows
18. June 2012 at 11:33
If the BOE adopts market monetarism in 2012, does that mean the Fed will follow in 2014 and the ECB in 2018?
18. June 2012 at 11:54
Cedric:
My apologies for the off-topic comment, but do please find the time to read this “” now being hailed across the interwebs as one of the greatest blog posts of all time; Deirdre McCloskey, naturally.
Hailed by who, exactly?
I agree it’s quite good, very good, but one of the best of all time? I think that might be an exaggeration. Her arguments in that blog post have been made many times before, by Austrians naturally, and she has transitioned to being an self-described Austrian economist.
18. June 2012 at 12:09
Mike Sax:
“How will decreasing demand through austerity attract investment ?”
I don’t think it will
As long as there is a demand for consumer goods, there are opportunities for profitable investment in capital goods.
As long as there is a demand for capital goods, there are opportunities for profitable investment in capital goods once removed.
Austerity doesn’t eliminate investment. It eliminates investment dependent on government. That is a good thing, because it increases the opportunity for investment in things individuals peacefully want, rather than what statesmen coercively want.
The main point is I don’t see what the need for austerity is in Britian as yields are at all time lows
Never reason from interest rates.
18. June 2012 at 12:20
“Never reason from interest rates.”
Why not Major? The reason we always get for why austerity is necessary is that “bond vigilantes” are going to all drop our debt. This is clearly not happening.
This is why I’m “reasoning from interest rates” this is their argument. I’m refuting it.
“As long as there is a demand for consumer goods, there are opportunities for profitable investment in capital goods.
There is no demand or not enough right now that’s the whole problem. I know you Austrians think that you just let things fall and fall and if prices fall low enough demand will return. But this doesn’t work. Not in a depression like now.
I’m not a supply sider and don’t believe that supply always creates its own demand
18. June 2012 at 12:27
On the McCloskey Post:
I was all set to dismiss McCloskey’s rant as a tirade directed at a strawman. But then she changed my mind somewhat by quoting Elizabeth Anderson: “Externalities, asymmetrical information, and other collective action problems are . . . pervasive in economic life. Countless ways of conducting business reap gains for some while imposing unjust costs on others. Create a cartel. Stuff rat feces in sausages.” Hopefully this is not representative of all the BHLs. I know Will Wilkinson for one is better than that, also Matt Zwolinski.
Efficiency is not the chief merit of a market economy: innovation is.
I’ve always seen this as a false dichotomy,
Some of the New Deal prevented rather than aided America’s recovery from the Great Depression.
Modest as always.
The capitalist-sponsored Green Revolution of dwarf hybrids was opposed by green politicians the world around, but has made places like India self-sufficient in grains
Not that that’s a goal per se.
But above all, I see this sort of libertarian talk as committing a “Nirvana fallacy” of its own. States are always the enemy of markets, as in, ” State power in many parts of sub-Saharan Africa has been used to tax the majority of farmers in aid of the president’s cousins and a minority of urban bureaucrats. ” I agree that to the extent that activity is statist or coercive more generally it is not market activity, and inferior to it. But that is not to say that states supplant markets. It is simply not entertained that there may not be a “first-best” alternative – that all the horrible waste and ruin of states is not something we can toss away by marching forward into the bold future of anarcho-capitalism, that all this is part of the cost of a peaceful, liberal order; that it does not do to say, “ahh, what foolishness gripped the Nehruvians of India, this shows the folly of centralized power” as though there were such a thing as a power vacuum in equilibrium, as though the basic fact of human life were not that each one of us (no matter how curative of humility) of neccesity believes that what he believes is better than what others do, and seeks to effect the transformation of what he surveys in that mold. I take it that readers here have read More, and also are familiar with the literal meaning of Nirvana.
Will Wilkinson put it best recently: “Liberalism is, at its roots, a philosophy of mutual disarmament in the face of intractable disagreement”. And David Friedman opens a book saying, “If there were only one man in the world, he would have a lot of problems, but none of them would be legal ones.” Or as I like to tell people, “People disagree. Get used to it.”
18. June 2012 at 12:30
Mike Sax, you don’t see any structural problems whatsoever in the UK budget? You say you’re not a “supply-sider” – you don’t see any merit whatsoever in the notion that an expansive public sector reduces potential output, i.e. is inefficient? You think none of Britain’s troubles are on the supply-side? Your universe must be a queer place indeed (and not in a good way).
18. June 2012 at 12:31
And i dont know if you saw this Ygslesias post, from the Department of Holy Crap What Just Happened: Bill Gross calling for higher ndgp growth in the EU. when did he start making sense??
It really scares me when cooky people like Jerry Falwell (on pot) and Bill Gross (on economics) start making sense.
http://www.slate.com/blogs/moneybox/2012/06/18/the_wisdom_of_bill_gross.html#article_comment_box
18. June 2012 at 12:33
Actually, when McCloskey says that the Green Revolution was “capitalist-sponsored”, doesn’t she mean that it received support from the US government? Borlaug didn’t attract venture capital, did he?
18. June 2012 at 12:34
Scott,
Why don’t do a graph of nominal interest rates versus expected (or actual) NGDP. You could throw in V as well. It should show when money is loose or tight.
18. June 2012 at 12:37
But don’t get me wrong – I agree with McCloskey’s scathing tone towards the High Liberals – they honestly call themselves that, apparently.
18. June 2012 at 12:38
dtoh, there’s a strong positive correlation, as Scott’s always said. I don’t see what a graph would add to what we already know from NGDP trend.
18. June 2012 at 12:39
“Mike Sax, you don’t see any structural problems whatsoever in the UK budget? You say you’re not a “supply-sider” – you don’t see any merit whatsoever in the notion that an expansive public sector reduces potential output, i.e. is inefficient? You think none of Britain’s troubles are on the supply-side? Your universe must be a queer place indeed (and not in a good way).”
Sautoros well start from teh most important questions first and work down in order of importance. No I’m not gay not that there’s anything wrong with it-LOL.
I don’t see the problems we are facing as being driven from the supply side no. As a Market Monetarist why do you?
I look at this whole demand for structural reforms as just convenient opportunism. Rather than dealing with the real problem-that is demand driven it’s used as an excuse to force through things that were wanted anyway.
See even Scott’s next post on “Warsterian fanatical anti-statism
I see the main problem as being demand and that austerity makes things worse by beating down demand even further.
18. June 2012 at 12:41
Mike Sax:
“Never reason from interest rates.”
Why not Major?
Because it presumes a constancy in human action that is not logically tenable.
The reason we always get for why austerity is necessary is that “bond vigilantes” are going to all drop our debt. This is clearly not happening.
That’s because austerity is not happening.
This is why I’m “reasoning from interest rates” this is their argument. I’m refuting it.
By implying something that does not exist?
“As long as there is a demand for consumer goods, there are opportunities for profitable investment in capital goods.
There is no demand or not enough right now that’s the whole problem.
There is plenty of demand. NGDP has been growing at 4-5% per year since 2010. Even if NGDP were falling, there would still be NGDP, there would still be consumer and capital goods spending, there would still be profitable investment opportunities.
You’re saying “there is no demand or not enough.” Well, we can eliminate the “no demand” alternative outright, because no demand would mean zero spending. Clearly there is spending taking place.
So that leaves “not enough spending.” But there is enough spending. Consumer goods buyers are spending. Capital goods buyers are spending. That spending provides opportunity for profitable investment!
I know you Austrians think that you just let things fall and fall and if prices fall low enough demand will return. But this doesn’t work. Not in a depression like now.
Of course it works. Falling prices, especially wage rates, is a part of the healing process for recovery out of a depression, since it enables the lower nominal demand to clear the market.
It can minimize/eliminate unemployment. It can minimize/eliminate idle resources.
I’m not a supply sider and don’t believe that supply always creates its own demand
Well that’s because you believe in the straw man version of Say’s Law set up by Keynes. The actual content of Say’s Law does not claim that producing just anything will automatically attract a demand for it. It was just a refutation of a common myth believed at the time (and still believed today) that there is such a thing as a general overproduction of goods. No, there is such a thing as a relative over-production of goods, and thus relative under-production of other goods.
Prices will fall down to clear the market if the Fed promises to stop inflating tomorrow. All the prices of goods will fall, and with the lower prices, investment and employment will be maximized.
18. June 2012 at 12:42
here is a link to Bill Gross that seems to work (the above quote is from around 1:36-2:30).
http://www.bloomberg.com/video/94857367-gross-too-many-sharks-in-bond-market.html
18. June 2012 at 12:45
Saturos,
If you don’t like graphs, r will do just fine as well. Why wouldn’t you want to more precisely analyze and understand the correlation.
18. June 2012 at 13:01
“That’s because austerity is not happening.”
So interest rates are low because austerity is not happening?
Again, the interest rates arguments is not mine but the austerity advocates. They say if we don’t do structural reforms the market will punish us with higher market rates. I’m pointing out that their claim is falsified.
NGDP is rising but not enough. It’s not enough to say it’s rising at trend which it isn’t right now. Inflation is under 2 again and GDP was only 2.2 in the first quarter. If you look at recoveries historically there are periods of higher than trend NGDP. In the 30s we regularly saw 7 or 8% GDP growth.
Even in 2003 we had blowout period of 8.2% GDP growth. When you fall well below trend you need some periods of much higher than trend. So we are not seeing adequate demand. This is why Market Monetarists are right that it’s not enough to say as you do that NGDP has being growin at trend for 3 years.
We can say mission accomplished when we have caught up to the 2007 level. Again previous recoveries always saw this-even teh Depression-super normal periods of NGDP growth. That the last three years of recovery have only seen a return to trend rather than being strongly above trend underscores this has been a weak recovery.
18. June 2012 at 13:10
Mike – did you read Scott’s post that you’re commenting on? As a Market Monetarist I agree with Scott, who said Britain needs tight fiscal policy. And not for the first time, either…
18. June 2012 at 13:14
Mike Sax:
“That’s because austerity is not happening.”
So interest rates are low because austerity is not happening?
I don’t reason from interest rates! Are you especially slow today? I usually give you some leeway, but come on, I just said don’t reason from interest rates.
Again, the interest rates arguments is not mine but the austerity advocates.
No, you made this argument:
“The main point is I don’t see what the need for austerity is in Britian as yields are at all time lows”
You’re saying YOU don’t see a need for austerity in Britain as yields are at all time lows. You may believe you’re just addressing the enemy’s arguments, but in the process, you’re making your own argument.
They say if we don’t do structural reforms the market will punish us with higher market rates. I’m pointing out that their claim is falsified.
There is no austerity in Britain, so you can’t say their claim has been falsified. You have to wait for austerity to take place, THEN we can see if the vigilantes are right.
NGDP is rising but not enough.
It’s enough, since a demand for goods makes investment in the production of those goods profitable. Profits are available.
It’s not enough to say it’s rising at trend which it isn’t right now.
Then what is enough to say if it isn’t rising at trend right now? And what is trend? Going back how long? To William Wallace’s conquest of northern England?
Inflation is under 2 again and GDP was only 2.2 in the first quarter.
That’s plenty.
If you look at recoveries historically there are periods of higher than trend NGDP.
Never reason from NGDP either.
In the 30s we regularly saw 7 or 8% GDP growth.
We also had a depression during that time.
Even in 2003 we had blowout period of 8.2% GDP growth. When you fall well below trend you need some periods of much higher than trend.
On what basis?
So we are not seeing adequate demand. This is why Market Monetarists are right that it’s not enough to say as you do that NGDP has being growin at trend for 3 years.
We are seeing adequate demand. If investors can’t make nominal profits in this economy, and you believe in NGDP theory, then you have to accept that the problems must be structural.
We can say mission accomplished when we have caught up to the 2007 level.
What is so special about the spending growth of 2007?
There’s nothing to “catch up”, if you consider the notion that spending in 2007 was higher than it should have been.
Again previous recoveries always saw this-even teh Depression-super normal periods of NGDP growth.
Never reason from NGDP.
That the last three years of recovery have only seen a return to trend rather than being strongly above trend underscores this has been a weak recovery.
The last three years of record monetary inflation, which has been far above trend, “underscores this has been a weak recovery.” Now what?
18. June 2012 at 13:15
Yes I read his post. Did he not use the term “fanatical Warsterlrian anti-statism” and that you should let the political process make its decisions on fiscal matters?
I didn’t claim that Scott is my authoirty on everything or that I agree with him 100% far from it. I don’t agree about supply side being the main cause in Britian or otherwise. If it is what’s the proof?
18. June 2012 at 13:16
Mike Sax:
I didn’t claim that Scott is my authoirty on everything or that I agree with him 100% far from it.
Far from it? Out of curiosity, what do you disagree with him about?
18. June 2012 at 13:22
“I don’t reason from interest rates! Are you especially slow today? I usually give you some leeway, but come on, I just said don’t reason from interest rates.”
Your the one who’s slow if you haven’t heard this argument made that we must do austerity to protect bond yields.
What’s “magic” about 2007 should be obvious. If it’s not again-you’re the one who’s slow. We don’t have to go back any further than 2007 slow one. No reason to speculate about how far back.
That unemployment is 8.2% and the economy continues to crawl is enough to say it’s not fast enough yet.
No wonder why you hate democracy so much. Very few people would agree with you that the economy is fine as it is.
18. June 2012 at 13:25
Major you first. Tell me where you disagree then I’ll tell you where I do. Out of curiousity.
18. June 2012 at 13:28
Steve Horwitz has responded thoughtfully (as one would expect) to some criticisms I made of Austrian economics
http://critical-thinker.net/?p=1361#comments
It is nice to have a dialogue instead of a self-righteous monologue.
18. June 2012 at 13:34
Major I mean that sincerely. I wasn’t just saying that because I dont want to tell you. But as you broached it you first.
I would start by saying I think Scott is legitimately Friedman 2.0-in all the good and bad things that implies.
He’s Friemdan for the Internet Age. What he is then more than anything-is shrewd.
I thimk Monetarism has always been shrewd. Very much with a political agenda.
18. June 2012 at 13:56
I would start by saying I think Scott is legitimately Friedman 2.0-in all the good and bad things that implies.
What good and bad does that imply?
18. June 2012 at 13:56
Thanks Lorenzo, very interesting. Quoting:
“I find Steve Horwitz, along with George Selgin (prominent advocate of free banking and supporter of a productivity norm [pdf] for monetary policy), the most accessible of contemporary Austrian school economists as they are both clear writers who seek to engage with those who are not of their school and are refreshingly free of the nastiness that so many Austrian school commentators seem prone to. (Little, if any, of what I have to say in the following applies to Selgin and some applies to general tendencies in Austrian commentary rather than Horwitz.)*
See that Major? It is possible to have civil conversations with the “unwashed.”
18. June 2012 at 13:57
C’mon Major I did say you first. What would you think it implies? It depends on your perspective.
18. June 2012 at 14:00
The obvious point about Britian anyway is that it’s not much of a success story right now falling into a double dip.
Maybe this is why Cameron is actually backing away from austerity
http://notthetreasuryview.blogspot.com/2012/06/chancellor-accepts-logic-of-more.html
18. June 2012 at 14:21
Major Freedom,
Do you have your own blog or not ?
Why hide it from us ? Most folks want traffic to their blogs.
18. June 2012 at 14:58
Mike Sax said…
“That unemployment is 8.2% and the economy continues to crawl is enough to say it’s not fast enough yet.
No wonder why you hate democracy so much. Very few people would agree with you that the economy is fine as it is.”
I guess it depends on your morality weather you think the economy is just fine as it is. Some folks, Rand and Mises devotees especially, believe that free markets always supply justice, and to mess with them is to mess with justice.
In their wold markets are not tools to effect morally desirable outcomes…In their world morality and economics are not separate things.
They tend to fall into two camps.
The first believes that the “Free hand” will, if left with out government interference, supply the best possible out comes for all. To these guys ultimate Liberty, as it pertains to property, is the ultimate solution. More liberty = better outcomes.
These guys are utopian dreamers, cloaked in a persona of steely eyed realism. They believe that if we would just stop coddling the weak, a better world awaits us all.
Their flaw lies in their blind spot to basic human nature. The fail to realize that too much liberty for the elite WILL result in the elite rigging the game, ensuring to themselves dynastic power, and limiting opportunity for the rest. (like has happened to us now to a degree)
The second believe much the same as the first, except they understand that the elite will rig the game. As they see it they have earned the right to power and the right to keep it until some one can take it from them. Call them Neo Feudalist.
Of course these are gross generalizations and unfair to any individual, but still I think the are a helpful way to look at where they are coming from.
18. June 2012 at 15:06
I miss Giles Wilkes, very briefly lived but excellent UK Economics Blog. He originally sent me your way Scott, good to see you mentioning him.
18. June 2012 at 15:36
Major F says, re: Deirdre McCloskey:
“Hailed by who, exactly?”
Welp, here’s the stuff that popped up on my Google Reader feed this morning.
http://cafehayek.com/2012/06/the-greatest-blog-entry-ever-written.html
http://marginalrevolution.com/marginalrevolution/2012/06/assorted-links-484.html
http://mjperry.blogspot.com/2012/06/factual-free-market-fairness.html
“I agree it’s quite good, very good, but one of the best of all time? I think that might be an exaggeration.”
Ug, YOU GOT ME. It was an exaggeration. I exaggerate every minute of every day.
“Her arguments in that blog post have been made many times before, by Austrians naturally. . .”
You say that with such . . . I dunno . . . meanness. Have I not told you that I am extremely sympathetic to the Austries? Hayek is up there with St. Paul and Locke on my intellectual hero list.
18. June 2012 at 15:36
Bill Ellis,
I can’t imagine Major telling anyone here, who he actuallly is. Some of us on the other hand use our real names in spite of it all!
18. June 2012 at 15:43
Lorenzo, great analysis of Austrianism. I really like your blog.
18. June 2012 at 15:55
Saturos, you say:
“But that is not to say that states supplant markets. It is simply not entertained that there may not be a “first-best” alternative – that all the horrible waste and ruin of states is not something we can toss away by marching forward into the bold future of anarcho-capitalism, that all this is part of the cost of a peaceful, liberal order.”
—
“Liberalism is, at its roots, a philosophy of mutual disarmament in the face of intractable disagreement.”
I absolutely loved your entire comment, but I think there is some tension between these two quotes above. You’re attempting to combine economics with law here; as a lawyer who studies economics in his spare time, I’m especially sensitive to how my legal heroes can misapply economics, and my economics heroes can misunderstand law. I’m not sure that anarcho-capitalism is an actual philosophy, whereas classical liberalism as recognized in your Wilkinson quote has a Roman natural law tradition that most people don’t understand. I could never call myself an anarcho-capitalist because it lack a coherent view of the state as preventing negative sum transactions, including the use of force.
So, you seem to concede that Deirdre accurately identifies the ways that the state interferes with markets, but then — and correct me if I’m wrong — you seem to indicate that such downsides are the consequences of living in a liberal society. But maybe the Wilkinson quote shows a way out — a vision of government based on protecting individual autonomy from aggressors.
The only person — literally, the only person — who I see get this right consistently is Richard Epstein, possibly because he’s one of the only lawyers in America to begin his legal education by studying Roman law. Please fast-forward to minute 33 of this video to see Epstein’s gentle critique of Hayek’s Constitution of Liberty. http://www.youtube.com/watch?v=YAw1E0S_gMc
The Q & A around the 1 hour mark is also terrific.
18. June 2012 at 16:08
MF, You said;
“25% NGDP growth in 2010, and (from CIA estimate of 2011 NGDP of $1.501 trillion) 22% NGDP growth in 2011. NGDP growth has skyrocketed 2010 and 2011, after falling 6.8% in 2009.”
My God! I’ve never seen such an idiot.
123, Thanks, I correct it.
Mike, No one is proposing austerity for Britain, they are proposing deficits. I answer your question in my newest post.
Steve, Yup.
Cedric, I like McCloskey, so I’ll definitely take a look.
dwb, I’m not worried unless MF endorses NGDP targeting–that’s when I go back to inflation targeting. And yes, I see all Yglesias posts.
dtoh, There’s a strong correlation, but the level of RGDP relative to trend also matters a lot.
Lorenzo, Steve is a very smart guy.
Thanks Left Outside.
18. June 2012 at 16:22
Scott,
Steve is a very smart guy.
And…(hint to one of your long winded commenters) civility and conciseness in dialogue is usually proportional to the intelligence of one’s argument.
18. June 2012 at 16:28
Scott,
There’s a strong correlation, but the level of RGDP relative to trend also matters a lot.
But isn’t that built into “expected” NGDP.
18. June 2012 at 16:47
ssumner:
“25% NGDP growth in 2010, and (from CIA estimate of 2011 NGDP of $1.501 trillion) 22% NGDP growth in 2011. NGDP growth has skyrocketed 2010 and 2011, after falling 6.8% in 2009.”
My God! I’ve never seen such an idiot.
Wonderful. You’ve succumbed to childish name calling. I knew it was in you.
The data I cited above is in US dollars, so if that’s what caused you to have a conniption, then local currency data is:
http://www.economywatch.com/economic-statistics/Australia/GDP_Current_Prices_National_Currency/
2011 1,443.79 trillion AUD
2010 1,343.70 trillion AUD
2009 1,248.34 trillion AUD
2008 1,240.61 trillion AUD
2007 1,137.21 trillion AUD
2006 1,041.30 trillion AUD
NGDP grew by 7.45% YoY in 2011, and 7.64% YoY in 2010.
The question remains on why there was a net job loss of 100,000 in 2011, despite NGDP in AUD growing by around 7.45% that year.
Feel better now? haha
18. June 2012 at 17:03
Mike Sax:
“I find Steve Horwitz, along with George Selgin (prominent advocate of free banking and supporter of a productivity norm [pdf] for monetary policy), the most accessible of contemporary Austrian school economists as they are both clear writers who seek to engage with those who are not of their school and are refreshingly free of the nastiness that so many Austrian school commentators seem prone to.”
See that Major? It is possible to have civil conversations with the “unwashed.”
I thought we were having a fairly civil discussion the last couple of days, after you found me accessible in the area of social (civil) liberties.
C’mon Major I did say you first. What would you think it implies? It depends on your perspective.
I asked you about what you disagree with Sumner about, after you said you have “a lot” of disagreements with him. I can’t answer for you. You said “He’s Friedman 2.0”, but that doesn’t tell me anything regarding specific ideas.
Cedric:
Welp, here’s the stuff that popped up on my Google Reader feed this morning.
http://cafehayek.com/2012/06/the-greatest-blog-entry-ever-written.html
http://marginalrevolution.com/marginalrevolution/2012/06/assorted-links-484.html
http://mjperry.blogspot.com/2012/06/factual-free-market-fairness.html
Cafe Hayek cites Todd Seavey as calling it the best of all time. Seavey is, uh, kind of a marketer.
Marginal revolution called it a “gale force.”
Mark Perry called it a “defense of free markets.”
That’s one relatively obscure guy calling it the best of all time, two positive mentions, and I read you saying the interwebz are calling it one of the best of all time. Maybe I just have a pet peeve for exaggeration.
“Her arguments in that blog post have been made many times before, by Austrians naturally. . .”
You say that with such . . . I dunno . . . meanness. Have I not told you that I am extremely sympathetic to the Austries? Hayek is up there with St. Paul and Locke on my intellectual hero list.
???
McCloskey considers herself an Austrian now. Of course her arguments in defense of free markets will be Austrian oriented. They have the best arguments in favor of free markets anyway.
Regarding Hayek, I think he is actually dwarfed by Mises.
I just think that a blog entry that is going to be called one of the best of all time, should at least have a key originality to it.
Kind of like when Sumner made a blog post that there was no stagflation in the 1970s. That was original. Ignore the best of all time part.
18. June 2012 at 17:08
Becky Hargrove:
I can’t imagine Major telling anyone here, who he actuallly is. Some of us on the other hand use our real names in spite of it all!
In spite of what though? What you say tends to be “safe”.
I stay anonymous so that I can keep discussions as honest and frank as possible. I can’t imagine Sumner calling you an “idiot.” But he can call me one. If he knew who I was, I doubt he would say that. That’s why I stay anonymous. I am deadly serious about ideas, and ideas flourish when you can’t connect an idea to a person’s identity. Although my time as Major_Freedom is almost up, as many on the internet know too much of the name. I’ve gone through about 10 usernames so far in the last 5 years or so. Some people can recognize me when I do change the name, though.
18. June 2012 at 18:23
Major Freedom,
People may well recognize you should you change your identity, I have little doubt they would recognize me should I change identity. I appreciate that you think what I say is ‘safe’ because to me, there is nothing safe about suggesting that knowledge and service economies need to be removed from production and manufacturing support, so that they might flourish in their own right. That is why I try not to push it too hard. Once you said, why not promote yourself in person, and that is exactly what I am working towards. For many ideas to truly matter, they have to be worked out locally, just as Elinor Ostrom so aptly illustrated in her lifetime. People have the ability to tend to their needs in organized ways when government and business cannot do that for them. But those are things that have to be applied, measured and understood one person at a time in local settings. Is it time to change strategy? Only you can answer that.
18. June 2012 at 19:16
In all seriousness Major this guy is very good at explaining Austrianism.
http://critical-thinker.net/?p=1361#comment-6323
Here he explains what he sees as the Austrian version of Say’s Law
http://myslu.stlawu.edu/~shorwitz/Papers/Say%27s%20Law-Elgar.pdf
18. June 2012 at 19:16
You may well have read him I don’t know but I’m impressed.
18. June 2012 at 19:34
Becky Hargrove:
People may well recognize you should you change your identity, I have little doubt they would recognize me should I change identity. I appreciate that you think what I say is ‘safe’ because to me, there is nothing safe about suggesting that knowledge and service economies need to be removed from production and manufacturing support, so that they might flourish in their own right. That is why I try not to push it too hard.
Let’s be upfront about this.
How exactly will you go about abolishing knowledge and service from production and manufacturing, given the fact that individuals in free exchange want to integrate them because gains can be made for all parties involved? Suppose they don’t listen to you. Then what? What will you do then? What should others do? Should those in the state use coercion to stop it, and put people in jail if they refuse? If the maximum you’re willing to go is verbal pleading only, then that’s what I would call “safe.”
Once you said, why not promote yourself in person, and that is exactly what I am working towards.
I don’t think that was me. I might have forgotten, but that doesn’t sound like something I would say. Maybe I am misunderstanding you.
For many ideas to truly matter, they have to be worked out locally, just as Elinor Ostrom so aptly illustrated in her lifetime.
Ostrom is a fine thinker.
Her Nobel co-winner, Oliver Williamson, in my opinion made an even greater significant contribution, about how individual firms can be used as institutions to settle conflicts.
That year was a pretty good year for Nobel winners. Neither were rabid statists, which is a rarity.
Incidentally, I am curious. How “locally” are you willing to go? Are individuals to be coerced into nothing smaller than neighborhood states? City states? State states? Locally is a very vague term. Can a single household family be “local”?
Does “locally worked out” ideas include money production as well, in your opinion?
People have the ability to tend to their needs in organized ways when government and business cannot do that for them. But those are things that have to be applied, measured and understood one person at a time in local settings. Is it time to change strategy? Only you can answer that.
Whose strategy? If you’re talking about one person at a time, then you basically already answered the question. Individualist anarchism, where each individual, one at a time, is free to join or abstain from joining any community they want, provided of course they are granted permission to join.
18. June 2012 at 19:56
MF,
Well, I think we agree that I’m an exaggerator, and that Deirdre is totally sweet. I prefer Hayek to Mises, but that might be because his Nobel lecture had such a profound impact on me while I find Mises to be a bit dense (but I haven’t read a ton of him).
Hey, common ground! Honestly, for all the crap you take, I bet you and I agree on about 95% of economic stuff that isn’t monetary policy.
18. June 2012 at 19:58
Major,
No need to completely abolish knowledge and services from production and manufacturing. However in the long run with production efficiency differences, the former might only have representation for a third of the populace in monetary terms. Therefore lower to middle classes need different forms of knowledge wealth capture, which in some ways might work like the commons Ostrom studied for physical resource use. ‘Prices’ (time management)for services might be indicated by long and short range (yearly and work/education semesters) voters’ targets, in which a locality shows certain basic service preferences. People would bid to supply other optional services and again voters would express community support or lack of for diverse knowledge entrepreneurs. For instance locals might ‘vote’ for certain kinds of healthcare services which if in short supply, the community could arrange for more providers to teach locals the necessary skills.
18. June 2012 at 20:02
Mike Sax:
In all seriousness Major this guy is very good at explaining Austrianism.
http://critical-thinker.net/?p=1361#comment-6323
The set of responses from Horwitz was doing so well until he got to point 9. It is here where Horwitz and myself part ways. I submit that he is wrong to assert that Austrians hold “general gluts” are possible. Mises for example never tired of pointing out that relative overproduction and underproduction of real goods is the problem even with general declines in sales.
My guess is that it comes down to how money is treated. Horwitz seems to treat money as a consumer/capital good in addition to being a medium of exchange, whereas I and most others who are partial to Austrianism hold that money is only valued because of its medium of exchange attribute, and its direct value is outside the scope of its money attribute. It would be like saying 1 ounce of gold is money when it is universally accepted, but when 1 ounce of gold is composed as a necklace for direct utility, it is not money.
The notion that general gluts are founded upon sticky prices being any stickier than instantaneous price flexibility, would mean that general gluts are a permanent phenomenon, and hence it would lose its entire meaning, since an absence of general gluts would become an impossibility.
Other than that, I agree, that post was very good. I guess Horwitz found the patience to refute Lorenzo line by line.
Here he explains what he sees as the Austrian version of Say’s Law
Yeah I read that a while back.
I still think the best Austrian explanation of Say’s Law is in Reisman’s “Capitalism.” His explanation that uses potatoes is I think “the” best explanation.
18. June 2012 at 20:16
Cedric:
Well, I think we agree that I’m an exaggerator, and that Deirdre is totally sweet. I prefer Hayek to Mises, but that might be because his Nobel lecture had such a profound impact on me while I find Mises to be a bit dense (but I haven’t read a ton of him).
Yes, it had an effect on me too.
If you want to read a more rigorous treatise on what Hayek was talking about in his Nobel lecture, I HIGHLY recommend you read Hoppe’s “Economic Science and the Austrian Method”, which is a short book that explains the epistemological foundation of Austrianism, as well as Mises’ “Ultimate Foundation of Economic Science”.
If on the other hand you want a general overview of this in video form, then this 1 hr video:
http://www.youtube.com/watch?v=hiXcO3pcR8I
Is one of my favorites.
Hey, common ground! Honestly, for all the crap you take, I bet you and I agree on about 95% of economic stuff that isn’t monetary policy.
Absolutely. I have been saying that exact thing many times to Sumner. For all the crap I give him, we probably agree on most things non-monetary related. But it’s no fun, for me at least, to just sit around and nod and agree at each other.
I agree with the German Idealists that the good stuff in intellectual battles is borne out of critique. I basically stay away from the rest of what they said.
I honestly welcome vitriol, smearing, attacks, ad hominem, name calling, and all of that. I think that everyone is at the end of the day trying to understand themselves and their place in the world, so if I can bring out of people what they really think, instead of what they think others want to hear, then I have succeeded in establishing the proper foundation for debating, learning, and teaching.
Sumner probably thinks I am the biggest idiot of all time, but I have been called worse things by better people, so it’s water off a duck’s back. It’s just releasing pent up frustration. It’s probably why his responses to me have dwindled to a crawl, but when he does respond, hoo boy, it’s guns blazing and take no prisoners. That’s a good thing, because that’s when people think at their best.
18. June 2012 at 20:28
Becky Hargrove:
No need to completely abolish knowledge and services from production and manufacturing.
So abolish a PART of it, through imposition of legal force?
However in the long run with production efficiency differences, the former might only have representation for a third of the populace in monetary terms.
So minorities of the populace in monetary terms should be biased against in terms of laws?
Therefore lower to middle classes need different forms of knowledge wealth capture, which in some ways might work like the commons Ostrom studied for physical resource use.
Wouldn’t these people require the freedom to do so if they want? How can they do this if they’re not free to form their own communities away from state control? I like what you’re proposing, but what you’re talking about is political revolution that results in an eradication of state control in whatever areas are to become Ostromean “communities”.
‘Prices’ (time management) for services might be indicated by long and short range (yearly and work/education semesters) voters’ targets, in which a locality shows certain basic service preferences. People would bid to supply other optional services and again voters would express community support or lack of for diverse knowledge entrepreneurs.
These communities would have to be relatively small, because “majority voting” lacks knowledge in specialized fields, and the larger communities become, the more specialized knowledge tends to become, and the more imposing majority voting will become on individual specialists.
Imagine a dim witted majority voting on nuclear matters, or cancer treatment matters.
For instance locals might ‘vote’ for certain kinds of healthcare services which if in short supply, the community could arrange for more providers to teach locals the necessary skills.
What of the minority? The individual innovators?
18. June 2012 at 20:29
MF, thanks, I’ll check those out those resources. One of my old professors had this to say last month:
“In just about every class I teach I tell students about the meaning and the significance of Hayek’s idea of the decentralization of knowledge in society. This idea alone has the power to change minds dramatically. One student told me it changed her life. I do not care if students remember the Weak or Strong Axiom of Revealed Preference or the necessary conditions for perfect competition if they remember Hayek’s The Use of Knowledge in Society.”
http://thinkmarkets.wordpress.com/2012/05/08/happy-birthday-professor-hayek/
I’ll never be an economist, but I’d like to think I’ve picked up some of the more meaningful bits.
18. June 2012 at 20:51
Mike Sax:
“I don’t reason from interest rates! Are you especially slow today? I usually give you some leeway, but come on, I just said don’t reason from interest rates.”
Your the one who’s slow if you haven’t heard this argument made that we must do austerity to protect bond yields.
I have heard that argument. I still don’t reason from interest rates!
What’s “magic” about 2007 should be obvious. If it’s not again-you’re the one who’s slow. We don’t have to go back any further than 2007 slow one. No reason to speculate about how far back.
Huh? What is this, “If you don’t know I am not telling you”? Seriously, what is so special about 2007 NGDP? I was being sincere.
That unemployment is 8.2% and the economy continues to crawl is enough to say it’s not fast enough yet.
Only if you believe in the theory that demand for goods is what drives the demand for labor!
If you don’t adhere to that theory, then the high unemployment doesn’t say anything about what needs to happen to NGDP.
The low NGDP could be in part an EFFECT of low employment. You can’t infer one or the other from the data alone.
No wonder why you hate democracy so much. Very few people would agree with you that the economy is fine as it is.
I didn’t say the economy is fine as it is. It is not fine. There is too much government control, especially in money.
You keep saying “that’s why you hate democracy so much”, accompanying your pet theory for why I hate it, even though I have repeatedly said I hate initiations of violence, and democracy is based on the majority coercing the minority. That’s why I hate democracy, so I would suggest you cease straw manning me.
18. June 2012 at 20:59
Cedric:
“In just about every class I teach I tell students about the meaning and the significance of Hayek’s idea of the decentralization of knowledge in society. This idea alone has the power to change minds dramatically. One student told me it changed her life. I do not care if students remember the Weak or Strong Axiom of Revealed Preference or the necessary conditions for perfect competition if they remember Hayek’s The Use of Knowledge in Society.”
I’ll never be an economist, but I’d like to think I’ve picked up some of the more meaningful bits.
I am not as smitten with the Hayekian “decentralization of knowledge”, because I don’t think it is sufficient at explaining why socialism (defined as government ownership and/or control of the means of production) leads to impoverishment. I think it also cannot deal with large multinational corporations with business in many different fields, that remain viable.
I think a more definitive foundation is individual property rights.
18. June 2012 at 21:20
MF:
“I am not as smitten with the Hayekian “decentralization of knowledge”, because I don’t think it is sufficient at explaining why socialism (defined as government ownership and/or control of the means of production) leads to impoverishment.”
I’d say it’s sufficient — certainly there are other reasons why socialism leads to poverty (perverse incentives, corruption, etc.), but I think Hayek was responding to the Marxist notion of creating a “new man.” I think Hayek is explaining why EVEN IF socialists can create a new man who won’t let perverse incentives or temptations to corruption get in the way of his dedication to his fellows, they will still be poor.
“I think it also cannot deal with large multinational corporations with business in many different fields, that remain viable.”
Two responses: (1) I don’t think bigness has much to do with centralization or decentralization of knowledge and power. Successful multinational corporations tend to have very little central control in the day-to-day operations of their subsidiaries — rather, they tend to set general standards, principles, and systems that can be adapted by local managers to be successful.
(2) Technology can help overcome some of Hayek’s worries about centralized knowledge. If we can accurately collect, analyze, and employ statistics in a hierarchical setting, we have a good start to combining the best of localized knowledge and aggregated knowledge. In any event, bigness, especially in today’s world, doesn’t necessarily pose Hayekian worries.
18. June 2012 at 21:45
Cedric:
Your point (2) is showing exactly why I don’t hold the decentralization of knowledge problem as sufficient to showing how socialism leads to impoverishment. You just said that technology can “overcome” “Hayek’s worries.” In other words, socialism can lead to prosperity, as long as:
A. The central planners are “moral”; and
B. There is sufficient knowledge accumulated by the central planners via technology.
But Mises showed that EVEN IF central planners are moral, and even if they collected as much information about people’s behavior as possible, they still could not rationally produce, because they would still lack a price system for the means of production. Production would become chaotic because there would be no way to compare input prices with output prices, to see if a production project wasted resources or created net resources. The central planners, even the moral and informationally aware central planners, would be “groping in the dark.”
Thus, it is property that is definitive. Information problems are not.
Back to your first point, (1), business firm activity, households, clubs, and so on, are very much in the crux of centralization of knowledge. The CEO “runs the firm” intellectually. This can work in the division of labor because business firms are private property, and the investors (and CEO) have access to the price system for the means of production. They know when the firm makes net gains and net losses because they can see the prices, despite the firm being centrally planned. Firms are not decentralized. They are centralized. There is a hierarchical structure to them, intellectually and responsibility-wise.
Hayek’s knowledge problem has difficulty reconciling centralization of knowledge in individual firms, and firm viability. It is because Hayek didn’t take into account the private property aspect of them, which Mises did. That’s why Mises could explain why large centralized firms are able to be successful, when Hayek’s theory suggests they should not be.
Believe me, the private property aspect is more fundamental than the knowledge problem, because the knowledge problem is overcome with a price system for the means of production. The knowledge problem in socialism on the other hand cannot ever overcome the lack of a price system for the means of production. Private property trumps knowledge problems.
19. June 2012 at 00:51
Just went back to the McCloskey post – she actually wades into the comments, very Sumnerian! And I now realize that we are essentially in complete agreement. Except for the minor factor, that I am increasingly less fond of the normative, rhetorical version of the term “economic liberty”, though not of its implications and entailments.
19. June 2012 at 01:59
Shame it’s Vince Cable making this speech and not a Conservative government minister. They, and indeed Cable, all remain basically creditist at heart. More posts on the irrelevance, and even the dangers, of creditism might help.
The speeches at the Mansion House by King and Osborne had much more creditist nonsense than usual. “We must reduce our debts, but we must also lend more.” Martin Wolf in Saturday’s FT ridiculed this rather nicely.
19. June 2012 at 03:11
James in London,
Creditism is certainly a big problem with UK macroeconomic thinking these days. Another one is the idea that “Money isn’t special”, in the sense that the recapitalisation programme was almost universally praised, despite the fact that there is no way to recapitalise bank balance sheets without (ceteris paribus) reducing the quantity of money. It was assumed back in 2008 (and still is, insofar as people remember it at all) that bank deposits and bank shares are equivalent.
19. June 2012 at 10:02
Saturos, glad to hear it. I haven’t had time to peruse the comments yet, but I’ll do so soon. Somebody has to make sure these Fortune 500 companies don’t get crushed under the heel of the common man.
MF,
A few things here — I don’t read Hayek as ignoring the price problems you point out — on the contrary, I think localized knowledge is key to setting prices and letting them work.
For the multinational company debate, I still think you’re conflating bigness with degree of centralized knowledge and power. This conflation is most evident where you say:
“They know when the firm makes net gains and net losses because they can see the prices, despite the firm being centrally planned. Firms are not decentralized. They are centralized. There is a hierarchical structure to them, intellectually and responsibility-wise.”
But just because a firm is hierarchical doesn’t tell us anything about how power and knowledge is distributed within a firm. I think you’re underestimating the degree to which law & economics types have contemplated how firms work. The most famous example is this, by Coase:
http://purao.ist.psu.edu/532/Readings/Coase1937.pdf
19. June 2012 at 10:16
Cedric:
A few things here “” I don’t read Hayek as ignoring the price problems you point out “” on the contrary, I think localized knowledge is key to setting prices and letting them work.
But all the knowledge in the world cannot enable a price system for the means of production in a socialist economy.
A price system for the means of production requires private ownership of those means.
I don’t know if Hayek is purposefully ignoring property or not, but knowledge and property are two different, albeit tangentially related, kettles of fish. They are different arguments. When I say ignore, I mean the argument ignores it, not that Hayek the man ignores it. Yes, that is a sloppy way of using the word ignore, and so that’s my fault.
For the multinational company debate, I still think you’re conflating bigness with degree of centralized knowledge and power. This conflation is most evident where you say:
“They know when the firm makes net gains and net losses because they can see the prices, despite the firm being centrally planned. Firms are not decentralized. They are centralized. There is a hierarchical structure to them, intellectually and responsibility-wise.”
I don’t see how that implies a conflation of “bigness” with “degree of centralized knowledge.” I didn’t even mention size. I just argued that there is centralized hierarchy and knowledge in various single institutions like firms, clubs, homes, etc. Of course I am not saying the head of the hierarchy knows everything everyone below him knows, and the the second in line knows everything below them, and so on.
I am saying that individual firms are not anarchic. They have identifiable intellectual managers and there is a hierarchy to them.
But just because a firm is hierarchical doesn’t tell us anything about how power and knowledge is distributed within a firm.
Indeed it does. A hierarchical organizational structure IMPLIES a hierarchy of knowledge and control. The CEO has knowledge of the overall trajectory of the company, its business, and its competition. This information is then broken down into more detail the more we move along/down the hierarchical structure. The manual laborer knows primarily his own direct task. He can be intelligent and know more, but his function requires him to focus his attention on his tasks at hand.
I think you’re underestimating the degree to which law & economics types have contemplated how firms work. The most famous example is this, by Coase:
I think you’re overestimating the degree to which firms are “flat”, and “organic.” Maybe you have an ideal conception of what firms should be, and you want to believe that’s what they are in reality?
The reason why we have the saying “head of the household”, is because of the knowledge and control hierarchy associated with it. The reason why we call CEOs CEOs because they are the head, the chief, of the company. They are responsible for the company’s health and productivity. Their knowledge is expected to produce gains that a leaderless company would not be able to make.
This is why the largest (now I am invoking sizes) companies in the world are incredibly hierarchical in structure, both in knowledge and in control. A company that has no leader, no direction, is going to struggle against companies that do.
19. June 2012 at 10:39
MF:
“Indeed it does. A hierarchical organizational structure IMPLIES a hierarchy of knowledge and control.”
This is just plain wrong, but I don’t know how to prove it to you, so we might just have to disagree. In my work, I am continually amazed at exactly how little knowledge and control of large corporations is centralized. As I said before, successful executives articulate general principles and missions and hire good people to problem solve. Arrogant executives who falsely believe that they have more knowledge than they do tend to lose control very quickly. Successful big corporations are extremely flat and organic.
19. June 2012 at 10:57
Cedric,
I agree that democracy is the worst system of government save all the others, and I agree that the best way to cope with the problem of social order is to devise a government which will control the governed whilst also being obliged to control itself. I would extend this more broadly: it is not merely the government which is engineered to restrain itself but the social order as a whole, sometimes crudely summarized as “civil society” but in fact encompassing the entire equilibrium pattern of incentives which holds the system in place. As you can see, I am largely a Stiglerian (and I worship Alchian and Tullock) – but there is a breach in my system. The most famous counterargument to Stigler was a man named Milton Friedman. So if that’s what you mean by “advocating a vision” (*having* a vision means nothing, you have to specify the path between equilibria, however unlikely), then I agree we can hope for better. For instance that’s why I come to this blog. So that vision is the one I aim for too, but it’s a question of how we can get there. But moralizing over the cost of having a state, or the cost of having our current states in the transition from these ones to better ones, is as useless and misguided as complaining about selfishness under communism.
When you say that the role of the state is to prevent negative sum transactions, I assume you include transactions whose “dynamic sum” is negative. When I steal from you, even if there is no immediate DWL (in a sequential move game) it affects your dynamic incentive to produce and save, and also changes the incentives to compete for power. But I also agree with you that “natural law” can be an effective jurisprudential tool for achieving your ideal “vision of government based on protecting individual autonomy from aggressors”. I think this has to do with what Hayek called “law as opposed to legislation”. And check out all the Ostrom obituaries.
I promise I’ll take a look at those videos as soon as I have a spare hour or two – I like Epstein. Also, thank you Cedric, for eliciting what is probably MF’s sanest comment of all time.
MF, you’re citing Rothbard’s confused take on calculation. What matters is not the prices per se but rather the information they contain about MRS and MRTS for all agents, which could be derived if one had perfect knowledge (Pareto and Barone explained this) of all the facts, both quantitative and qualitative. (Think of it as agents’ individual propensities for exchanging one commodity for another at various ratios.) Hence after Lange and Lerner rebutted Mises’ original position, Hayek had to emphasize the famous “knowledge problem” – none of us individually ever acquires all the facts, save in textbook problems. Of course, there is the added task of simultanaeously coordinating everyone’s knowledge of the facts. Without the “bulletin board” of market prices, the planner would have to individually keep everyone synchronously updated on all the data. Which would be inefficient, as each agent only needs to know some of the data; and without perfect knowledge each agent would have to be individually requested for information about the facts, which must be integrated and then agents individually instructed as to their “price-taking” response – all of which is automatically done by the market. In short, a planned economy could work – if it were a planned economy in name only. And then there are incentives.
Also, regarding the centralization of firms, see Coase. Or get in the habit of reading Arnold Kling, he has great posts on firms and calculation (he also sees that much of the real problem is about “gaming the system”, which comes back to incentives…)
Although I like Hayek and his knowledge arguments, I think he overstates his case. For Hayek a planned economy is synonymous with socialism. And yet socialism only requires collective ownership of firms (the means of production) which in principle could trade on a de facto free market, with inputs being allocated “as if” individual firms had private control (order the firms to do exactly what they would have done anyway). He needed to emphasise his points against the socialists of the day who carried on the irrational anti-market trend of socialism, explaining to them the market process. He also had good points against Lernerian “deadweight loss elimination”. But the real problems are with the incentives engendered by collective ownership of firms and the dictatorial power of the governing system implementing the regime. Strictly speaking you could have “communism” without socialism (or is that socialism without communism?) – keep markets, private property and capital income, but redistribute income as much as incentives allow. But that kind of thinking is just construing the incentives problem too narrowly…
19. June 2012 at 11:00
Cedric, do smart lawyers like you still believe that “the rule of law is greater than the rule of any man”? Whatever that means?
19. June 2012 at 11:09
MF, and note that Hayek was in favor of significant levels of redistribution – so there’s no arguing that socialism-as-maximal-redistribution is a-priori impossible.
19. June 2012 at 11:36
Saturos:
MF, and note that Hayek was in favor of significant levels of redistribution
Yes, Hayek was in favor of legalized theft, unfortunately. He was hoodwinked by social democratic ideology.
– so there’s no arguing that socialism-as-maximal-redistribution is a-priori impossible.
I don’t get it. You’re saying because Hayek liked something, it is possible?
Ignoring that false inference, I will ask you what do you mean by socialism as maximal wealth redistribution is possible? That there can exist socialism as maximal wealth redistribution? What does maximal wealth redistribution look like?
To me maximal wealth distribution would be akin to a slave society, where people are born by slave masters, then enslaved, and their entire productivity over their life, save that which is needed to keep them alive, is taken from them.
That is what MAXIMAL wealth redistribution would mean to me. Is that possible? I guess in principle it is, but many contingent facts have to be present.
What does maximal wealth redistribution mean to you? What we have now? A little more? How much more? Why stop there?
19. June 2012 at 11:50
Cedric:
MF:
“Indeed it does. A hierarchical organizational structure IMPLIES a hierarchy of knowledge and control.”
This is just plain wrong, but I don’t know how to prove it to you, so we might just have to disagree.
It is not just plain wrong. It is right. Yes, I guess we will just have to disagree.
In my work, I am continually amazed at exactly how little knowledge and control of large corporations is centralized.
So you admit they are centralized then? Little centralization means there is centralization. Maybe you are just not aware of everything going on?
As I said before, successful executives articulate general principles and missions and hire good people to problem solve.
What you call general, I call hierarchical in knowledge structure.
It’s the same way your mind works. You conceive of existence, the most general thought possible. That general understanding is then broken down into more detail. You and physical reality. Then, within physical reality, it is broken down even more. Matter and energy. Within matter, atoms and molecules. Within energy, photons and gravity. And so on.
The structure of human knowledge is hierarchical, and that is exactly why single companies with a single purpose (a single purpose can be composed of many sub-purposes) are hierarchical in knowledge structure as well. They mimic the human mind in a way.
Yes, there is plenty of decentralized knowledge, the same way your mind is somewhat decentralized as well (your desires vis a vis your conscience, etc). But your mind is hierarchical. Knowledge in single companies is hierarchical for the same reason.
I think quite honestly that you just have the mentality of wanting to minimize the incredibly importance of company executives such as CEOs. You think they’re more like figureheads, for the sake of appearances, who just say “Go make me money producing cars”, and that’s it.
You need to learn about the vital economic function of the entrepreneur, whose knowledge sets the standard for individual projects, and employees, in the division of labor.
Arrogant executives who falsely believe that they have more knowledge than they do tend to lose control very quickly.
You see that? I know you’re motivated more by emotion and ideology, rather than economics.
Successful big corporations are extremely flat and organic.
It’s the exact opposite. Look at the largest companies in the world. They are extremely hierarchically organized. Consider Wal-Mart for example. The employees are given very little if any “leeway” in how they conduct their labor. Virtually their entire day is planned by store managers, who are planned by the district managers, who are planned by the VPs, and so on.
Or, if you want an even better set of examples, if you ever visit China, just ask for a tour of a mid to large sized manufacturing facility. You’ll think you’ve walked into a factory full of robots, but they’re humans. China is becoming an industrial powerhouse.
The freedom and organic benefits you’re talking about reside at the private property level, the owners, for it there that market testing takes place.
19. June 2012 at 12:11
Saturos,
“But moralizing over the cost of having a state, or the cost of having our current states in the transition from these ones to better ones, is as useless and misguided as complaining about selfishness under communism.”
I think what Epstein is getting at — and he says so explicitly in another video I can’t find — is that it is extremely difficult to do public policy well if you do not understand the Roman natural law roots regarding appropriate social behavior. For a quick aside on this, check out Epstein’s most recent writing, where he gives a brief overview of the three near-universal behaviors exhibited by people in groups (reciprocity, no harm, disgust).
I don’t know much about McClosky’s politics (and I’m ashamed to admit this, but I haven’t read her books yet). Still, I love that blog post because it’s one of the first things I’ve read that recognizes that (1) narratives matter; (2) especially for liberal/progressives, because they are more likely than conservatives to embrace the Nietzschean truth/power construct; and (3) the liberal narrative is deeply flawed. Conservatives and libertarians (and I’m generalizing here) tend to focus on narrow, finite issues and are logic and reason oriented.
“Also, regarding the centralization of firms, see Coase.”
Ha! We both cited Coase at the same time.
“Cedric, do smart lawyers like you still believe that “the rule of law is greater than the rule of any man”? Whatever that means?”
I’m a practitioner, not an academic — every day lawyers wouldn’t really deal with abstract concepts like this on a daily basis.
When I reach back to my law school days, it was my professors with solid law & econ backgrounds like Mario Rizzo and Richard Epstein that best understood how clear rules — however imperfect — were usually preferable to complicated balancing tests that attempted to always reach a just result. Clear rules are better than discretionary rules because people can easily recognize clear rules and plan their lives around them; discretionary rules recognize the reality that justice is complicated, but the resulting lack of clarity drastically increases the transaction costs associated with every legal aspect of your life, including planning your behavior, pricing risk, and settling disputes. (Speaking of Coase, his chief contribution to law & economics was that the law should focus on reducing transaction costs — http://en.wikipedia.org/wiki/Coase_theorem).
In law school, conservatives and libertarians argued for clear rules that are easily applied, and liberals argued for complicated rules that vested a great deal of discretion in judges. Probably the greatest living legal philosopher, Dworkin, can be summarized as advocating for the rule of really really smart liberal judges over any other abiding principle.
So, to answer your question: do lawyers “believe that the rule of law is greater than the rule of any man?” Right-leaning lawyers: yes. Liberals: no.
19. June 2012 at 12:28
MF,
I think we’ve been over everything in your most recent post, so I won’t respond to it here. As I said before, I have no way of quantifying or proving that the more “Hayekian” a large corporation behaves, the better it functions — but that’s always been my takeaway. I just want to respond to one thing you said that was new:
“I think quite honestly that you just have the mentality of wanting to minimize the incredibly importance of company executives such as CEOs. You think they’re more like figureheads, for the sake of appearances, who just say “Go make me money producing cars”, and that’s it.”
Not at all, and I apologize for the misunderstanding if I made it seem like I thought executives were unimportant. Again, I view their chief purpose as setting direction and systems and hiring good problem solvers. All of that is incredibly important, and none of it is easy. My Hayek point in all this is that being a good executive isn’t about controlling everything and being BIG BOSS MAN GRRR — it’s about recognizing the limits of your ability to know everything about your organization and control everything in your organization. When executives make that jump to recognizing their limitations, they tend to task themselves with things they an do well, like vesting discretion with good people and developing systems that tend to correct employee behavior without a lot of top-down control.
19. June 2012 at 12:58
Cedric:
I think we’ve been over everything in your most recent post, so I won’t respond to it here. As I said before, I have no way of quantifying or proving that the more “Hayekian” a large corporation behaves, the better it functions “” but that’s always been my takeaway.
When you phrase it like that, I find myself agreeing in some respects. There is probably a point at which further centralization in the same company will incur the owners losses. It is entirely possible that a company might perform better if it became less centralized, and another company might perform better if it became more centralized. But this is contingent upon the given state of technology and productivity.
Would you agree that it principle, decentralization promotes gains when the technology needed to enable gains through more centralization is absent, and that if the technology is there, centralization is capable of making gains?
Then there is the whole concept of gains and losses themselves. How can you know a company can make gains or not, through decentralization or centralization, without recourse to the price system for the means of production, so that company owners and investors know the value of what they are using up, to compare it to the value that they are producing?
This is why I say property rights are more fundamental that knowledge. Knowledge changes, technology can turn a decentralized company into a more profitable one through centralization. But these questions of gains and losses themselves depend on the existence of a price system in the capital markets, and a price system in the capital markets requires private property in the capital markets.
19. June 2012 at 13:02
MF,
“Would you agree that it principle, decentralization promotes gains when the technology needed to enable gains through more centralization is absent, and that if the technology is there, centralization is capable of making gains?”
I don’t know. Probably yes, but there’s a lot of contingencies.
19. June 2012 at 16:13
Cedric:
Would you agree that the answer to this question ultimately depends on one being able to economically calculate, of comparing input prices with output prices, to see if whatever one did, centralize or decentralize, is generating gains or losses?
19. June 2012 at 16:56
Technology cannot overcome the knowledge problem.
I say this a full blooded tech geek. There are many things in tech that I know quite a bit about. Web tech, particularly video I am a functional expert on. I get paid to do due diligence, and start newcos doing new not done before things routinely.
The reality is that timing is far more important than vision. Meaning, just because you have 20/30 vision on what the future holds, the real trick to guessing the exact moment to bring the idea to market, and then after timing, there is another design element that is even more elusive, not always as important, but again another layer.
And then there is policy based on the knowledge problem.
Meaning, since we are technocrats, we recognize the knowledge problem is real, so we adopt my Guaranteed Income plan to Auction the Unemployed.
And that is the technocrat technology solution.
I have an arm load of GOV2.0 “there’s an app for that” solutions that I’m sure happen sometime in the future.
The real trick isn’t figuring that shit out, it is figuring out how to speed up adoption first, and second being prepared when that moment happens.
Finally, the public sector is comprised of half-wits. And I mean all of them.
There’s not anyone who’s truly the kind of person who would be running a technocratic central system in govt. today – IF it was possible.
Think of it this way: as soon as the private sector figures out how to take over government, you’ll be seeing the next chapter of:
“Being a technocrat REQUIRES accepting the knowledge problem as true”
And none of the current DC class will have anything to do with it.
19. June 2012 at 17:24
Morgan, I didn’t mean “overcome” in the sense of “eliminate.” Maybe just “lessen.” Let’s take two hypothetical centrally planned states. Let’s say in State A knowledge transmits easier from peon to king either because of smallness of the society or because of technology. In State B, knowledge transmits slowly and inefficiently from peon to king because there aren’t reliable ways to transmit the knowledge, and/or there are just too many people and too much information flowing about. Which one would you rather live in? To ask it another way, would you rather live in Beijing today or Moscow in the 50s? Central planning is always a disaster, but it’s MORE disastrous when the knowledge problem is more pronounced.
19. June 2012 at 17:32
MF,
“Would you agree that the answer to this question ultimately depends on one being able to economically calculate, of comparing input prices with output prices, to see if whatever one did, centralize or decentralize, is generating gains or losses?”
I think I answer that in my post to the Fanatic. It’s difficult to answer these questions in the abstract, but all things being equal a centrally planned society will be better if it has more efficient ways of communicating. About everything, including scarcity. I agree with you and that private property is key, along with knowledge decentralization. You take the position that private property is more central to the argument — I don’t have a position on that right now.
19. June 2012 at 21:50
Cedric, you said:
“Still, I love that blog post because it’s one of the first things I’ve read that recognizes that (1) narratives matter; (2) especially for liberal/progressives, because they are more likely than conservatives to embrace the Nietzschean truth/power construct; and (3) the liberal narrative is deeply flawed. “
Man, you should read EconLog. You’re gonna love Arnold Kling…
(Though I am a little skeptical of the claim that liberals are more Nietzchean than conservatives. Perhaps in American academia, but elsewhere… ?)
“So, to answer your question: do lawyers “believe that the rule of law is greater than the rule of any man?” Right-leaning lawyers: yes. Liberals: no.”
Why am I not at all surprised by that…
MF, maximal redistrubtion would narrow the variance of after-transfer incomes about the mean as far as possible. Suppose the benevolent utilitarian planner we hypothesize believes that it is justified to watch total income fall by half to cut the variance tenfold. Then a first world country would still be about twenty times over subsistence. Of course, I don’t think that kind of thing would be sustainable, for a number of reasons.
But actually, my moral intuitions on this are similar to yours. See this: http://econfaculty.gmu.edu/bcaplan/service
Although I’m not precisely a Caplanian – he’s too Randian for my taste – I’m more of a Friedmanite (both of them).
19. June 2012 at 22:06
Saturos,
“Man, you should read EconLog. You’re gonna love Arnold Kling…”
I do, of course. What kind of wannabe poseur amateur economist do you think I am?
“Why am I not at all surprised by that…”
Nor should you be. I bet if you polled 1000 lawyers and asked them whether it’s more important for judges (1) to be constrained by clear rules in their decision-making; or (2) to have discretion to craft just and effective outcomes — the right leaning lawyers would huddle around 1 and the left lawyers would huddle around 2. And it isn’t like the left doesn’t have smart advocates or good arguments — Justice Breyer’s “Active Liberty” is a great book, and Dworkin’s body of work is incredibly formidable. If you want a quick primer, read Justice Scalia’s “A Matter of Interpretation,” where he lays out his basic philosophy; then the book has three chapters from scholars critiquing his views; and then he responds to the critiques. The discretion v. clarity debate is big in the legal world (of course, as I noted above, it doesn’t play into the day-to-day stuff practitioners do. We just say whatever is good for our clients).
19. June 2012 at 22:27
Which is why I don’t like to say that the rule of law is about “preventing negative sum transactions” – too legalistic. It’s really fundamentally about shifting society from a prisoner’s dilemma to the invisible hand. See the work of Daron Acemoglu or Hernando de Soto. The point is to defuse the competition for the power to coerce. But people disagree, and need an outlet for their righteous/manipulative tendencies. Even me – I think my philosophy is right, but it’s just me who says so. (The anarchists don’t see that they’re just as authoritarian as everyone else). Even if people were all fully programmed for non-aggression, there would still be endless disputes between individuals without necessarily a “right answer”. The legal system is not so much an intellectual quest for the truth of the matter as a stable space to constrain, manage, and defuse situations, with the judges mere humans who are as “situated” as everyone else.
20. June 2012 at 03:36
Regarding knowledge, Hayek was mostly wrong. Morgan is closer.
It’s not a knowledge problem. I can tell you exactly where every planet is right now and there is not an astronomer in the world who can tell me where they will be in 12 months.
Resource allocation problems are infinitely more complex than planetary motion. In the best of cases, the problems are not solvable, and in most cases, they are not even linear.
The only way resource allocation problems can be addressed is through estimation and trial and error. Decentralization works in part because you have better knowledge and can make better estimates (Hayek was right about this bit), but it mostly works because you can do more trials.
20. June 2012 at 04:40
Saturos,
de Soto was an early influence for me, in terms of dynamic use of both physical assets and knowledge. Cedric, I’m glad to see that Breyer conceives of law in similar terms.
20. June 2012 at 05:07
MF, This blog is aimed at people who have some sort of basic minimum knowledge of economic facts of the world around them. If you think Australian NGDP is rising at 22% or 25%, you aren’t really qualified to be here.
20. June 2012 at 05:43
MF, This blog is aimed at people who have some sort of basic minimum knowledge of economic facts of the world around them. If you think Australian NGDP is rising at 22% or 25%, you aren’t really qualified to be here.
The data doesn’t lie, does it? I cited data that it was 22% and 25% converted to US dollars, and I cited data that it was 7.45% and 7.6% in local currency. Take your pick. You still are faced with having to explain why 100,000 were lost in 2011.
20. June 2012 at 06:27
Saturos – Really good comment.
“The legal system is not so much an intellectual quest for the truth of the matter as a stable space to constrain, manage, and defuse situations, with the judges mere humans who are as “situated” as everyone else.”
The Rule of Law is best thought of as a non-utopian way of us living together and settling disputes mostly peacefully, so people can have some stability and get on with their lives. It will never be perfect, but there’s no perfection this side of the grave. Anarchists, communists, and other assorted utopians simply don’t understand that. They also fail to understand human nature. That’s why their plans and dreams have always failed and always will.
I like the phrase “shifting society from a prisoner’s dilemma to the invisible hand” – excellent.
20. June 2012 at 07:08
Major Freedom, total employment rose by 0.2% in 2011 (0.3% seasonally adjusted). And the percentage change in NGDP is the same in US and Australian dollars (unless you use two different spot rates, which would be wrong, and doesn’t make much difference anyway). Scott is entirely right in his description of the Australian economy. I should know, I live here. You are officially an idiot.
20. June 2012 at 07:12
Major your claim is that NGDP rose by 25% while there were 100,000 lost jobs?
20. June 2012 at 07:14
How can it be a different percentage in US and Aussie dollars?
20. June 2012 at 07:22
“still think the best Austrian explanation of Say’s Law is in Reisman’s “Capitalism.” His explanation that uses potatoes is I think “the” best explanation”
On the other hand Major I was reading Delong’s piece on Say’s Law that claims that Say later in life-in 1828 revised his position that a general glut can’t happen.
http://delong.typepad.com/sdj/2010/06/is-macroeconomics-hard.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BradDelongsSemi-dailyJournal+%28Brad+DeLong%27s+Semi-Daily+Journal%2
As Delong tells it Says Law is more Ricardo’s with Say latter following Malthus and John Stuart Mill more
20. June 2012 at 07:22
Mike, let it go, if you value your sanity…
20. June 2012 at 07:23
General gluts can happen, but *only* because of money. Nick Rowe is the master at explaining this.
20. June 2012 at 07:28
Saturos-point taken
20. June 2012 at 08:26
Saturos:
“Which is why I don’t like to say that the rule of law is about “preventing negative sum transactions” – too legalistic. It’s really fundamentally about shifting society from a prisoner’s dilemma to the invisible hand. See the work of Daron Acemoglu or Hernando de Soto. The point is to defuse the competition for the power to coerce. But people disagree, and need an outlet for their righteous/manipulative tendencies. Even me – I think my philosophy is right, but it’s just me who says so.”
I think you caught me off guard here. My comments regarding discretion v. clarity were aimed solely at the work that judges do, but my natural law stuff was aimed at the work that legislatures do. I don’t think that the “rule of law” (an interpretive framework for judges) is synonymous with “preventing negative sum transactions” (a general principle for crafting legislation).
20. June 2012 at 08:35
Saturos,
You mean Domingo de Soto, the legal philosopher — not Hernando de Soto, the conquistador, right?
Come to think of it, leftist economic legislation probably has a lot more in common with Hernando than Domingo . . .
Becky,
I don’t think Breyer’s Active Liberty is channeling de Soto. de Soto worked within the natural law tradition, where Breyer is hostile to the notion of natural law.
20. June 2012 at 08:49
Cedric,
I could be wrong but I think Saturos was referencing Hernando de Soto who wrote The Mystery of Capital in 2000 and has written since then at least one book I don’t have.
My framework for law was in the context of active ownership principles, which prevent the use of capital from becoming too rigid and consequently of little use to anyone.
20. June 2012 at 08:53
Well then, he should change his name to make it less confusing for me.
20. June 2012 at 08:56
Yes, I meant Hernando de Soto, the economist: http://www.ild.org.pe/index.php?option=com_content&view=article&id=220&Itemid
http://www.cato.org/special/friedman/desoto/index.html
Cedric, I don’t disagree. But surely the latter is why you would want to live in a country with the former (amongst other reasons).
20. June 2012 at 08:57
There’s also Jesus Huerto De Soto, who wrote “Money, Bank Credit, and Economic Cycles”, a book on Austrian Business Cycle theory from a historical-legal perspective.
20. June 2012 at 09:04
Mike Sax:
On the other hand Major I was reading Delong’s piece on Say’s Law that claims that Say later in life-in 1828 revised his position that a general glut can’t happen.
That’s OK. Keynes revised his position on his deathbed. He said he found himself more and more relying on invisible hand, laissez-faire concepts that he initially dismissed.
As for Say, he wasn’t even the originator of the idea anyway. It was James Mill. James Mill didn’t revise his conviction in it.
At any rate, I don’t see how an idea loses its validity on the basis of its originator abandoning it. I only reject ideas when better ideas are put in their place.
Saturos:
Mike, let it go, if you value your sanity…
When the world contains physical laws that cause a man to go insane from inferiority and helplessness, he might consider himself in need of forcing his will on impressionable humans who are more easily manipulated, but when he finds a man who refuses to bend unless he is compelled to bend with superiority, he has memories of his insanity and fears it, and thus fears the man, and asks that others be safe in not approaching him either.
20. June 2012 at 09:17
“Yes, I meant Hernando de Soto, the economist:”
Ridiculous. If you don’t own the first three items when you google yourself, you are NOBODY.
20. June 2012 at 09:21
Interesting, he comes up as my second Google result for “Hernando de Soto” (as Hernando de Soto Polar on Wikipedia).
20. June 2012 at 09:21
Cedric:
I think you’re a somebody, despite this.
20. June 2012 at 09:23
Honestly, I wouldn’t mind if Robert Pattinson came up when people Googled me… or at any rate people of the female persuasion…
20. June 2012 at 09:29
MF,
Give it time. I’m only 29.
20. June 2012 at 09:44
I think Google results must be skewed by country. Hernando de Soto does not seem to be as popular in the U.S. as he is in other parts of the world.
20. June 2012 at 10:04
Cedric:
You could change your name to something so unique that you’re the only person with that name.
It’s harder to get to the top when you have a common name.
Might I suggest “Cedric the Unconquerable“?
It looks available.
20. June 2012 at 10:36
AWESOME.
23. October 2012 at 18:26
[…] 1. Expansionary austerity would have worked if the BOE had kept NGDP growing at a brisk rate. I blame the BOE for the slow recovery, and I blame Cameron and Osborne for not asking the BOE to adopt a more robust NGDP target, as their Business Minister Vince Cable recommended (partly due to the influence of us market monetarists.) […]