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Roger McKinney
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I have read that Marxists thought that getting rid of capitalism would free human nature to return to its state of innocence. But by the time of the Russian revolution, Marxists had begun to realize that human nature was stuck and just ending capitalism wasn't enough. They would have to re-educate people and those on whom education didn't work would have to be removed from society. That's when the terror began. Anyone have similar ideas? Also, some socialists I have blogged with lately deny that Marx was a true socialist, and especially vehemently deny that Lenin, Stalin and Mao were socialists. Of course, as Hayek pointed out in Road to Serfdom most socialists were disgusted by what those leaders did. They seem to be market socialists but are unaware that they cannot achieve their goals without force.
I think Boettke is right, and I would add that very important aspects of sports is deception and being able to anticipate what other players do in response to what you do. I was the neural net expert for a small software company years ago and was disappointed in what they could do. They no where come close to the hype of the industry. I would guess that a lot of the computer models used to forecast weather are NN type and look at how bad they are. I would think predicting weather would be a lot simpler than playing soccer.
There is a great difference between intelligence and wisdom. One can be highly intelligent and have no wisdom. To paraphrase Hayke, intelligent people think too highly of intelligence, believing it gives them control over things they can't control. The best argument against Stiglitz is the Great Depression. No depression in US history lasted as long or went as deep in spite of massive government intervention. The Great Depression is a second example of the failure of intervention. Of course, mainstream economists would say those are examples of market failure, but they need to explain why markets worked so much better the century before the Great D. The only unique aspect was government and Fed intervention. And they have said that both would have been worse without state intervention, but it's not likely that the Great D could have been worse, and they don't know that the Great Recession could have been worse. It could have been better without the intervention. Economic history contradicts mainstream theory, but they don't know economic history.
I don't know. McCloskey writes in "Bourgeois Dignity" that institutions are necessary but not sufficient. What's necessary is adoption of the bourgeois values. "Culture Matters: How Values Shape Human Progress" by Lawrence E. Harrison and Samuel P. Huntington argues that culture determines institutions and religion determines culture. Helmut Schoeck argues in "Envy: A Theory of Social Behavior" that growth can't happen until envy is restrained and that required Christianity.
No comments yet? Here are some on Kuehn's article off the top of my head. I refuse to put too much into critiques of Hayek when it's obvious the critics have put so little effort into understanding Hayek. Hayek’s critics tried to understand his theory through the lense of equilibrium analysis. Clearly that is not possible. I have read a great deal of criticism of Hayek and for the most part my impression is that the critics may have “read” Hayek but never understood him. Kuehn: “Hayek’s macroeconomic dynamics are evocative of a Rube Goldberg contraption…” Milton Friedman called Hayek’s “Pure Theory of Capital” incomprehensible. I thought it was brilliant. I have often said the ABCT is too difficult for most PhD economists. I have to agree with Mises who said Friedman was a good statistician but he was not an economist. Tullock: “I cannot recall the interest rate even being mentioned in any of our discussions of production matters.” Hayek makes clear in “Profits, Interest and Investment” that businessmen do not pay attention to interest rates. I’m surprised Kuehn never sees that after citing the book. Businessmen follow profits. Hayek shows that reducing interest rates increases profits to be made in longer term investments, such as fixed equipment. However, one of Hayek’s main points in PII was that the Ricardo Effect would happen even if the banks or central bank did not raise interest rates. Consumer price inflation would make labor cheaper relative to the sales of the company that employed them, not to other consumer goods as Hayek’s critics wrote. The cheaper labor would make investment in short term, labor intensive projects far more profitable. Businessmen would put off buying capital equipment in favor of labor intensive methods. The Ricardo Effect is little more than the capital/labor production possibility frontier taught in standard micro. Kuehn: “So why are they fooled into building an unsustainable, distorted capital structure in the first place?” Very few are fooled. Hayek’s point is that the profits available because of low interest rates are too tempting. Some cannot resist the temptation and will assume they can dodge the bullet. If none succumb to temptation, banks will keep reducing rates until someone takes the bait. Several papers have been done on the fact that low interest rates encourage greater risk taking. And Hayek’s theory does not require every last businessman to do the same thing. Most businessmen weather recessions very well. But it only takes a few, and only in a few industries to cause a recession. “Cowen notes that since the economy is operating at capacity any increase in capital goods production has to come at the expense of consumer goods production.” Cowen just demonstrates his ignorance of Hayek. Hayek and all Austrian economists insist that even at full employment greater consumption and investment take place at the same time. That becomes possible because of capital consumption, a well established phenomenon during the boom. However, in PII Hayek shows how the theory works with high unemployment as well. “Recall that the upper turning point occurred precisely because of this tension between consumption and investment.” No, not at all. The upper turning point happens because of the Ricardo Effect, the trade off between capital and labor investment, not because of the “tension between consumption and investment.” “A correlation between the depth of a recession and the height of the subsequent boom would strongly imply that recessions are the consequence of a shock that had nothing to do with the preceding growth period, and that the recovery was just a reversion of the economy back to its stable growth path.” Keynes assumed that recessions are random events and all his followers have done the same with no evidence to back it up. Friedman’s little regression trick may imply what he suggests, or it may imply a lot of other things. He just lacked imagination. “Friedman’s simple empirical exercise offers the greatest blow to Hayek of all the criticisms discussed here.” As I pointed out above, Friedman admitted that he could not understand Hayek’s theory. I fail to see why Friedman’s regression is so devastating. If I remember correctly, Hayek proposed proportionality between the boom and bust based on the size of the expansion of the money supply during the boom, but ceteris paribus. Since ceteris paribus never holds, many things can distort that proportionality in the data. And I wonder if Friedman was a victim of what McCloskey calls the tyranny of statistical significance? As for the empirical research, the work of Borio at the BIS provides empirical confirmation of Hayek’s work and the ABCT in general. Borio was among a list of prominent, non-Austrian economists provided by Boettke on his blog who offer empirical support for the ABCT. I’m surprised Kuehn didn’t consider them at all. The interesting thing about the ABCT is that it began with the observations of Cantillon about money, investment and business cycles. The Manchester school and other classical economists noticed the same things. When credit expands, businesses in the capital goods sector invest more than those in consumer goods. Unemployment and business losses are higher among capital goods industries in recessions than in consumer goods. As Hayek wrote, the data may not be available, but some things are too obvious to require data as support. I would like to see a similar treatment of the empirical evidence for Keynesian econ. I have seen a lot of studies that assume their conclusion, but no real test of the empirical data. “Although a large recession did occur in 1980, it is widely acknowledged that this downturn was deliberately (i.e., exogenously) caused by Paul Volcker at the Federal Reserve, and that it was not the result of any endogenous tendencies in the economy.” This is clear evidence of Kuehn’s lack of understanding of the ABCT. Hayek wrote in “Monetary Theory and the Trade Cycle” that the boom may end because banks fear rising inflation and raise their rates. Austrians have always insisted that this is a frequent cause of the turning point. But if the Fed doesn’t raise rates the recession will happen anyway because of the shift in profits to the consumer goods industries. “Determining the real value of federal funds rate is trivial…” No it isn’t. Of course one can subtract the cpi from the nominal rate. That is trivial. But the cpi tells us very little. Rapid increases in productivity can prevent cpi increases in the face of rapid monetary expansion. Hayek et al mentioned that as a feature of the roaring 20’s. That makes the calculations of real rates meaningless unless one wants to adjust for productivity increases as well. “…who use data on inflation and output to determine the interest rate consistent with stable prices and the economy operating at its full potential.” I doubt seriously that Hayek or Mises would accept that as a proxy for the natural rate of interest. In Hayek’s mind the natural rate had no connection to price inflation. In fact, many Austrians and critics are guilty of taking the quantity theory of money too literally, as Mises wrote. “Low interest rates do not always indicate loose monetary policy if they are consistent with time preferences.” I’m not sure where Kuehn gets this obsession with comparing monetary policy with time preference. I haven’t seen it in Hayek and Mises. Time preference is nothing but an explanation for the origins of interest. It is only a component of market rates and the natural rate. Other components include risk, profit and productivity.
Toggle Commented Jan 23, 2014 on How Do People Read Hayek? at Coordination Problem
The plus.google post above is me. Another problem with predicting price inflation is the fact that the structure of production is fragmented across nations. Raw material production from mining is spread all over the world. The US excels in capital equipment and consumer durable production, but imports most consumer goods from overseas, especially China. Money loosens the joints between the levels of production, but international trade does so even more. So investment in higher order production via credit expansion may not stimulate price increases for consumer goods since those goods come from another country with different fiscal and monetary policies. Someone younger and smarter than me will have to figure out how to adopt the Austrian structure of production to an international one. Also, if the new money created by the Fed goes into buying consumer goods, for the most part that means buying imports; the money goes overseas. Of course, that should cause the dollar to fall in value and the price of imports rise, but it won’t if the exporting country has a loose monetary policy, too. Much of the new money went overseas as investment and much went into assets such as stocks and bonds.
Rafe, the McKinsey Institute has a good paper on the value of education to development that says only on-the-job training works. General education such as what people get in K-12 and college is almost useless. Other than OJT, education does not cause development; it is a result of development as people with more money want better education.
Rodrik wrote, "What enabled reform was not a reconfiguration of political power, but the emergence of new strategies. Economic change often happens not when vested interests are defeated, but when different strategies are used to pursue those interests."at http://www.project-syndicate.org/commentary/how-economists-killed-policy-analysis-by-dani-rodrik#v3Z1r4zCXxuVFvxW.99 But what caused the Chinese communists to choose freer markets? After all, the idea had been around for a while. The crisis of the 1960's persuaded Deng and a few other leaders of the Communist party to consider an alternative that might keep so many people from starving to death. The same goes for the USSR. See Yegor Gaidar's book on the collapse of the USSR. There are no new ideas. The debate about freedom vs state control is at least as old as Plato (communist) and Aristotle (free market). Actually, it goes back to Moses (free market) vs pharaoh (state control). Yet the most robust form of government today and in the history of mankind has been the pharaoh/Plato government controlled economy. Free market economies have been rare and short-lived. Freedom in the US lasted only until about WWI, and didn't exist for Blacks until the 1960's. Crisis often forces a switch to the idea that is not in power at the time of a crisis, the dominant idea being seen as the cause of the crisis. But I think the best explanation of which of the old ideas wins at a particular time is found in human nature, especially Schoeck's depiction of human envy (Envy: a Theory of Social Behavior). The elite has always used envy to control the masses. And as Schoeck points out the West developed because Christianity found a way to subdue envy. Socialism (Plato) elevates envy to a virtue and appeals to most people, even many ignorant Christians. Most political/economic theories can be classified as 1) appeasing/promoting envy and tending toward state control or 2) subduing envy and leading to freedom.
On the other hand,too much education is dangerous. The "Arab Spring" happened to a large degree because of thousands of unemployed college grads. The Arab world has offered free college education for decades, but their socialist economies failed to create jobs to absorb them. The guy in Tunisia who set himself on fire and launched the Arab revolutions was an unemployed college grad. Education does not create economic development. My state, Oklahoma, is a perfect example. For 40 years the state has tried to grow its economy by educating everyone. Growth has been very slow. Unemployment has remained low because the unemployed leave the state. Our biggest export is college grads.
This is largely a debate between macro and micro. Krugman see micro as irrelevant and monetary policy as impotent. Of course, he has been right about monetary policy. In a recent column he blamed Germany for the problems of all of Europe because Germany runs a current account surplus. He called on Germany to quit harming its neighbors and to ruin its economy as the others have by saving less and being less productive. He totally ignores the micro problems that the Big EZ South has created for itself.
Barkley, Seems like what you say is that since everyone has moved so far to the left of Keynes, what's the point of labels? And that's a good point. There doesn't seem to be anyone who would even consider something like following a rule. Labels are a way of putting the policies of current economists in historical perspective. Are there any members of the committee you would consider Hayekian or Friedmanlike (rules following)? Probably not. And since you can't put those labels on them it says a lot about their policies. No one thinks Janet Yellen is not smart, knowledgeable, etc. The fact that she has a PhD and is on the committee allows us to take those for granted. But to paraphrase Hayek, intelligence is overrated, especially by intelligent people. They think because they're intelligent they can control things they have no control over. And the rest of us suffer for it.
Daniel, you seem to be trying to draw out a Venn diagram of the overlapping of positive and negative attitudes toward the market. Some of Yellen's decisions may run contrary to her philosophy, but it's the preponderance of evidence that should decide on which side of the Venn diagram she falls. Besides, opposing inflation occasionally doesn't make one an Austrian. Even Keynes opposed it at times. Do you think Yellen is predominantly Keynesian, or are you saying she has no predominant philosophy and follows a cafeteria style of economics?
Barkley, I work in health insurance and believe me there is nothing even remotely free market about it. The only decision insurers are allowed to make is whether to load the costs on the premium, the copays or the deductibles. Everything else is determined by legislation.
Part of the reason government projects fail is the left's disdain for management. They think anyone can do the job of CEO, so they never bother to study management or successful managers. They don't try to gain experience as managers. As a result the stumble from one disaster to another.
Barkley, I think you missed the part of Pete's post in which he wrote that calling someone a Keynesian was not a personal attack but merely identifying her economics. Do you think she is not philosophically Keynesian? At least New Keynesian? If not, are you saying she is she eclectic? What would you call her economics. BTW, even Keynes opposed some inflationary policies. Recall that when Hayek challenged Keynes on the policies of some of his students, Keynes told Hayek he would straighten them out. Then he died.
Barkley, maybe Samuelson only read the Reader's Digest version.
I think the problem goes very deep. People see the state as the only power that can transform human nature and save us from ourselves, as Richard Pipes wrote in Property and Freedom: “Philosophic socialism was a pure intellectual movement led by ‘those men who,’ in Trollope’s words, ‘if they had hitherto established little, had at any rate achieved the doubting of much.’ In their thinking, the materialistic conception of man played a central part. Locke’s theory of knowledge, expound in The Essay on Human Understanding (1690), which claimed that human beings have no ‘innate’ ideas but form ideas exclusively from sensory perceptions, remained in England an abstruse epistemological doctrine, devoid of political significance. In France, however, it was applied to politics, providing a theoretical basis for the conviction that by properly shaping the human environment – the exclusive source of all ideas – it was possible so to mold human behavior as to create an ideal society. And the ideal society, much as Plato had envisioned it, was characterized by equality.” 39-40. The biggest enemy of freedom is the idea that people are born innocent and are basically good. rdmckinney.blogspot.com
Some might recall the paper the Minneapolis Fed put out before TARP titled "Where is the Crisis?" The paper argued there was no systemic crisis, just some big investment banks, like Goldman Sachs, in trouble. They implied that the GS buddies at treasury and the Fed wanted to bail out their golfing partners. Also, Higgs has a good article on sluggish investment over at the Independent Institute. rdmckinney.blogspot.com
If the US has become a connection society as the previous post suggests, then stagnation is the future. rdmckinney.blogspot.com
I have mentioned before that I think the ABCT provides the skeletal structure for the business cycle while the other theories flesh out the details. In other words, the other theories are not causes of crises but descriptions of them. BTW, check out Hayek's review of contemporary theories in his "Monetary Theory and the Trade Cycle." It was written in the 20's but seems very modern. Not much has changed. rdmckinney.blogspot.com
Important questions! Smith held to the traditional Christian view of original sin: people are born with a tendency toward evil. Individual choices determine one's character and individual character determines society. Marx held to the enlightenment, atheistic view that people are born innocent and turn evil only because of oppression. Private property is the greatest oppressor. Society can restore mankind to a state of innocence by removing oppression. Society determines individual character. The USSR and China under Mao were experiments in changing human nature.
D, I guess it depends on the monetarist you read. The ones I have read assume that the recession begins when people suddenly demand more cash and they're not willing to consider why people might do that.
The paper is very interesting in the way it tries to bridge the gulf between equilibrium analysis and Austrian dynamic analysis. I have one quibble: he refers to the bank runs as random shocks or accidents: “Actually, there may be penetration phases that do not end up in crisis because investors stop well before the probability of a liquidity crunch becomes critical or the "run" random shock does not materialize….These are accidents that can happen in the context of perfectly well‐run financial machinery under imperfect financial regulation.” P17. The run on investment banks happened because the value of the MBSs collapsed according to Gorton. It wasn’t an accident. The value of MBSs collapsed because the real estate that provided the collateral for the home loans that made up the MBSs collapsed. The value of real estate collapsed because of overbuilding in the industry due to low interest rates set by the Fed. It’s the old ABCT. Had the Fed raised rates earlier, fewer people would have borrowed to buy houses. Fewer houses sold would have caused fewer mortgages to be transformed into MBSs. There is nothing accidental about it. But the Fed was obsessed with price inflation and that was pretty low before the crisis. As Calvo wrote, the financial machinery seemed to be working well. Of course, the Great D occurred after a period of low inflation, too. Hayek shows in “Prices, Interest and Investment” how the crisis will happen even if the Fed never raises interest rates and even if price inflation is low. It’s all about profits.
I can't remember where I read it, but somewhere Mises addressed the issue of why economists abandoned the monetary theory of business cycles. He wrote something to the effect that most economists were enamored with socialism and the monetary theory ruled out socialist solutions to crises. Marx fabricated that idea that crises were a natural part of capitalism. Economists wanted to maintain Marx's theme. They wanted to find the problem within the system (endogenous). The monetary theory ruined it for them for the saw money as outside the system (exogenous). If crises happen because businessmen act irrationally (Keynes) or consumers irrationally hold more cash (monetarism), then we have a rationale for the intellectuals to step in and rescue the irrational masses from themselves. BTW, I have started a blog that applies the ABCT to investing over at http://rdmckinney.blogspot.com/
To most Americans democracy is a sacred and holy thing and they will tolerate absolutely no criticism of it or the actions of a democratic government. Somehow, the voice of the majority has become the voice of God. Anyone who criticizes the results of democracy is by definition evil. They employ the logical fallacies against their opponents because they work very well to stir up their base and destroy those on the fence and those who can’t think for themselves well. Anyone who loves liberty would prefer a liberal dictator to an illiberal democracy, but we should keep in mind that in the long run a liberal dictator will not last if the majority doesn’t want freedom. Dictators can ignore the will of the people for only a limited time. Hayek’s mistake was making his pronouncements sound like absolute laws of physics by using words like “always.” He employed hyperbole to make a point and he probably expected interpreters of his words to be honest and take them in that sense. I have no doubt that Hayek understood that “always” was hyperbole. But by not making that very clear, he opened himself up to the dishonest interpreter who would convince people he meant them literally. The cases in which crises have been used to advance liberty rather than destroy it are so few as to not even be worth considering.