I thought fellow Austrians would be interested in an excerpt from Krugman’s 1997 paper in Foreign Affairs, “Is Capitalism Too Productive,”

Heterodox doctrines, in economics and elsewhere, often fail to get adequately discussed in their formative stages. Both the intellectual and the political establishment tend to regard them as unworthy of notice. Meanwhile, those doctrines can seem compelling to large numbers of people, some of whom may have considerable political clout, financial resources, or both. By the time it becomes apparent that such influential ideas — say, supply-side economics — demand serious attention after all, reasoned argument has become very difficult. People have become invested emotionally, politically, and financially in the doctrine, careers and even institutions have been built on it, and its proponents can no longer allow themselves to contemplate the possibility that they have taken a wrong turn.

Some people might be wondering why Krugman spends so much time (relatively speaking) on criticizing Austrian doctrines (even though his perception of Austrian economic theory is deeply flawed by his own misunderstandings).  Krugman believes in squashing upstart economists at birth.  In case of the Austrians, though, it seems as if Krugman’s strategy has backfired.  If anything, all the attention on Austrian ideas has driven more people to research what they actually are, instead of taking Krugman’s word for it.

All the same, someone could probably level the same accusations against the economics of Krugman: namely, “[p]eople have become invested emotionally, politically, and financially in the doctrine, careers and even institutions have been built on it, and its proponents can no longer allow themselves to contemplate the possibility that they have taken a wrong turn.”

(Cross-posted at Economic Thought)

One of John Maynard Keynes’ alleged contributions to economic science is a focus on “expectations.”  What is meant by expectations is how individuals predict the uncertain future to be; expectations will influence what actions individuals will undertake in the present (since all action is intertemporal).  Keynes, of course, considered these expectations to be one of the facets of the instability of capitalism.  It was an emphasis on expectations that led Ludwig Lachmann to consider Keynes a radical subjectivist; Lachmann, in fact, lamented that Austrians had not spoken of expectations (at least, more overtly) during the debates of the 1930s (Lachmann, The Market as an Economic Process [Oxford, United Kingdom: Basil Blackwell Ltd., 1986], p. 24).

In my reading of John Hicks’ chapter on Ralph Hawtrey (in Economic Perspectives [Oxford, United Kingdom: Clarendon Press, 1977]), I found an interesting tidbit on Keynes’ supposed “radical subjectivism.”  Writes Hicks,

When I reviewed the General Theory, the explicit introduction of expectations was one of the things which I praised; but I have since come to feel that what Keynes gave with one hand, he took away with the other.  Expectations do appear in the General Theory, but (in the main) they appear as data; as autonomous influences that come in from outside, not as elements that are moulded in the course of the process that is being analysed.

This seems to me as a remnant of the Neoclassical theory Keynes had set out to refute.  To Walras and the Neoclassical School that he and (more directly) Alfred Marshall bred,  prices are data exogenously provided to the market.  This is an important difference between Neoclassical and Austrian price theory, where the latter focuses on price formation as a result of the actions of individuals.  In other words, to Austrians, prices are an endogenous phenomena; expectations, likewise, are also an endogenous phenomena.  It is the Austrian approach (methodological individualism) that gives the school a distinct advantage in understanding economic phenomena, since markets (and the phenomena which characterize it) are constructs designed by individuals partaking in the division of labor.

It seems that the primacy of the individual was even beyond Keynes.

(Cross-posted over at Economic Thought.)

The Ludwig von Mises Institute of Canada re-publishes my review of Jeffrey Friedman’s and Wladimir Kraus’ Engineering the Financial Crisis.  I call the book “undoubtedly one of the best books written yet on the causes of the Great Recession” — simply stated, there are few scholars who have done the amount of historical research Friedman and Kraus committed themselves to (that being said, much of the book’s thesis, admittedly, is based on a number of journal articles published in a special 2009 issue on the financial crisis in the Critical Review journal).

The authors may not consider themselves “Austrian,” or at least may not necessarily sympathize with the entire corpus of Austrian theory, but Engineering the Financial Crisis is extremely compatible with the broader Austrian theory of intertemporal discoordination (malinvestment).  The authors also borrow from and develop a particularly Austrian insight: radical uncertainty. Both Friedman and Kraus vehemently believe that, generally speaking, bankers had no idea that their assets would collapse, and thus discard the possibility that the financial crisis was caused by malintentioned financiers.

The authors blame regulation. They bring to the table evidence which suggests that regulations — specifically, capital minima regulations set by the recourse rule — provided bankers an incentive to overconcentrate their investments into the mortgage market. The method of risk pooling adopted by the recourse rule (and the Basel II accords agreed upon by foreign governments) created an artificial preference for mortgage-backed securities over other types of investments, including business loans, since it lowered the capital reserve minima banks were required to maintain (i.e. these types of loans came with a lower cost).

The one major flaw, as I point out in my review, is what I perceive to be an inadequate reasoning for why these assets were so poorly rated. Here, I think, Friedman and Kraus drop the “radical uncertainty” thesis, and instead suggest that it was a product of a lack of competition.  They do bring up that there is a broad industry of private investment firms who were coming out with their own ratings, but can only give one example of such a firm that sold its investments in mortgage-backed securities before the crisis.  If Friedman’s and Kraus’ thesis was incorporated into the Austrian story of a distorted pricing process (i.e. price signals which falsely convey consumer preferences and cause discoordination) it would be a much stronger and more comprehensive one.

Engineering the Financial Crisis is primarily a history book — it deals with empirical data relating to the pattern of investments which characterized the boom period.  As a piece of historical research, it is an invaluable contribution to economic history.  It can be easily incorporated into the Austrian narrative (and even, in some ways, bolster the Austrian story), and I think that anybody interested in the topic would be deeply rewarded by reading the book.

I am a bit late (Peter Boettke, “McCloskey’s Transition to Austrian Economics“; Don Boudreaux, “Quotation of the Day…“), but I would like to reiterate the suggestions to read Deidre McCloskey’s recently published piece, “A Kirznerian Economic History of the Modern World” (The Annual Proceedings of the Wealth and Well-Being of Nations, vol. 3).

McCloskey’s “Austrianism” may come under dispute, but my purpose here is not to fuel this debate.  Rather, I ask of you to put aside your differences with McCloskey and instead focus on absorbing the better arguments of her essay.  McCloskey’s recent contributions to economic history, most notably her book Bourgeois Dignity: Why Economics Can’t Explain the Modern World, are tinged with a crucial taste of Austrianism which manages to bring out of obscurity Austrian contributions on the role of the entrepreneur.  Her method of integrating the entrepreneur into her story of how Western society propelled itself into modernity is fascinating, because you realize that it necessarily contributes to the Austrian vision of the entrepreneur’s role.

What I would take away from her piece is that economic theory has the unfortunate quality of tending to mechanize the reality it is trying to explain.  Different theories mechanize to different degrees, and Austrians hold the distinction of being blessed with a theoretical corpus that has been elaborated in such a way that it has managed to remain attached to reality.  This does not mean that Austrians are completely innocent of mechanization.  The relevant example here is the simplified Austrian “model” — more accurately, explanation — of economic growth: capital accumulation → investment →  production.  No Austrian would ever leave out the entrepreneur, but the simplified approach to explaining growth seems to leave out the human element.

The entrepreneurial action of investment of accumulated capital is not an automated function, and this is what McCloskey reminds us to consider.  Entrepreneurship is a story of innovation and creativity.  One may disagree with the exact terminology (i.e. “discovery”), but the essential point to take away is that entrepreneurship is not a given.  It is an act of creation; production is a function of both the physical input of accumulated producers’ goods and human creativity, which is unique to the individual.  In Hayekian terms, if we imagine wealth as it exists today as a mass of “known” knowledge, it is the entrepreneur’s role to essentially jump into the sphere of the “unknown.”  It is not just about “discovering” what has been as of yet undiscovered, but about adding to the body of knowledge (whether known or unknown).

Her understanding of “radical subjectivism”, as applied to the entrepreneur, alone make McCloskey’s work worth reading and understanding.  McCloskey’s integration of the entrepreneur — differences between the “Kirznerian entrepreneur” and the “Rothbardian entrepreneur” aside — into what a widely recognized book also has the positive side effect of feeding dosages of Austrianism to a world that sorely needs them.

Brad DeLong comments on Ron Paul’s (and Mises’) views on monetary expansion, inflation, and the business cycles, showing (once again) a complete lack of understand of Mises’ argument.  I am bit hesitant to comment on the Mises blog, given that few readers here probably even care about what DeLong has to say.  But, to me it is amazing that an academic of DeLong’s stature (he is, believe it or not, a respected scholar) is so incapable of actually putting forth the required energy to actually understand what he is criticizing before making the comment.  Instead, DeLong decides to make himself look like an idiot to everyone but those who already worship him.

I usually try to restrain myself from personal attacks and this kind of language, but to me it is obvious that there is just no other way to characterize DeLong (and it does not help that DeLong categorizes Mises’ monetary theory as a “mental disorder”).

DeLong writes,

The point of view underlying von Mises’s–and von Hayek, and Marx, and Ron Paul–complaint against fiat money in general and monetary management of the business cycle in particular is this: that value comes from human sweat and toil, not from being clever. Thus it is fine for money to have value if it is 100% backed by gold dug from the earth by sweat and machines and muscles (even if there is no state of the possible future world in which people actually want to exchange their pieces of paper for the gold that supposedly backs it). But it is not fine for money to have value simply because it is useful for buying things.

To anybody with a modicum of knowledge on Misesian economic theory, it is readily obvious that DeLong has never read any of Mises’ work (which is quite unfortunate, since the scholars which give bases to DeLong’s economic beliefs did give Mises the respect deserved — including economists such as Don Patinkin [even if Patinkin did not agree with Mises]).

For Mises, wholly in the Mengerian tradition, all value is subjective.  It has nothing to do whether something was produced through “human sweat and toil”.  Indeed, it was probably the rise in the popularity of Marxist theory that inspired the marginal revolution (of which, as we all know, Menger was a leader)  Moreover, the value of money is generally how DeLong describes it himself — money is a general medium of exchange; it is demanded, precisely because it can be used for indirect exchange.  Mises would never deny that paper money has some sort of value.  If it did not have value, then it would not be demanded.

But, the question of why money has value is not at the source of Mises’ arguments on inflation and the business cycle.  Mises and Paul prefer gold, because gold is more resistant to inflation.  It is more difficult to produce.  This element of scarcity is one of many factors which made gold popular before the broad, global introduction of fiat monies.  It is this element of scarcity which gives some limited long-term guarantee of stability of value of the monetary unit.  (Neither does DeLong discuss Mises’ views on money substitutes and the necessity of fiduciary media [even if for Mises the role of fiduciary media is many times more limited than the role applied to it by some modern Austrians, such as Selgin and White].  Perhaps it does not behoove DeLong to actually accurately report Mises’ ideas, because then he might be forced to revise his own way of thinking.)

DeLong shows himself completely ignorant as to the real argument behind Mises’ support of gold and his opposition to fiat currency (or any government intervention in money, for that matter).  For Mises, economic theory deals with explaining the market process — the processes of coordination and discoordination (see my articles: “The Foremost Austrian Contribution to Economic Science” and “Government Spending is Bad Economics“).  Monetary inflation disrupts the process of economic coordination.  More specifically, it disrupts intertemporal discoordination — that is, the investment of saved resources.

I am not arguing that Mises is necessarily right (although, I firmly believe that he is).  I am arguing that DeLong should attack the actual argument.

Instead, DeLong has only relegated himself to the status of a second or third-rate academic scholar.  I, myself, do not mind much.  DeLong is doing our work for us; he is discrediting himself as a serious thinker.  If DeLong wishes to prove me wrong, I suggest starting by reading Mises’ The Theory of Money and Credit.

It might be in DeLong’s interest to clear up this mess, though, because if word spreads that he is actually a poor scholar of the history of economic thought then I am not sure who is going to take his upcoming book on the history of economic thought very seriously.

(And by football, I mean soccer.  Bare with me.)

I am sure that not everyone will be as excited as me, but it is always nice to see something that relates to economics in news relating to your favorite sport.  And, it does not hurt when the news has to do with central banking and government intervention.

Marca, a Madrid-based sports newspaper, published a story (in Spanish) on Neymar, a Brazilian football player who had been tied to Real Madrid (a Spanish club, and at times the wealthiest football club in the world) for quite some time.  The piece goes into quite a bit of detail concerning why exactly Neymar never trasferred, and why Real Madrid has lost interest in signing this prodigy (considered by some to be the future Pelé).  In Spain, this is a big deal, since it was long expected that Neymar would transfer as soon as January 2012 to the Spanish club — Marca nicknames the entire ordeal the “Neymar soap opera”.

It turns out that the major incentive to move to Real Madrid would have been the much higher wages the Spanish club were offering Neymar.  Because Santos, the relatively poorer football club that Neymar currently plays for, could not afford to match these wages, his transfer was seen as a real possibility.  The threat of his movement to Spain is not just Santos’ problem, apparently.  It is also a Brazialian social issue — or, one would think, given how the Brazilian government has responded.  Neymar is a celebrity and an icon.  He represents the future of Brazil, including the future of Brazil’s national football team at the 2014 World Cup (which will be hosted in Brazil).  Thus, the maintenance of his Brazilian identity has been deemed a priority.

It is such a priority that Dilma Rousseff, current president of Brazil, personally intervened in the transfer by securing Santos a €40 million loan from the Bank of Brazil.  This loan will help the Brazilian football club raise Neymar’s wages to €7.2 million per year.  In terms of gross income, this is still 15% lower than Real Madrid’s offer.  But, considering differences in the tax codes, it allows Santos to offer Neymar a roughly equal wage in terms of net income earned.

To me, this is incredible.  The president of Brazil decided to guarantee a €40 million loan to a football team, rather than allowing a major international football club pay Santos millions of euros (not just Neymar’s wages, but also the millions which would have been paid to Santos directly to buy out Neymar’s contract), just to maintain a single player.  The irony is that this decision will most likely handicap Neymar’s growth as a player, since it will keep him in an inferior and relatively less competitive football team, meaning that when the time comes to represent Brazil at the World Cup he will most likely be less talented than he could have been had he transferred to Real Madrid.  But, this is humorous irony.

The worst of it is that Brazil is a country that suffers from serious poverty.  It is saddening that a government is more interested in wasting its time extending loans to poor football clubs to maintain what is basically a piece of propaganda (because that is what it is using Neymar as) than actually pursuing policies that could raise the standard of living (and by policies I mean, of course, steps towards reducing the burden of government on Brazilian industry).

About two weeks ago, I spoke at the Mises Circle in Toronto, organized by the Ludwig von Mises Institute of Canada.  My lecture was on “Monetary Policy and the Great Recession”, but I focused on monetary equilibrium theory.  I criticized any attempt to “stabilize spending” (like NGDP targeting) during deflationary spirals caused by previous fiduciary overexpansion — a similar criticism was published on Cobden Centre in late August.

The lecture was been put on video.  It was my first lecture of any kind.  I was nervous, and I wasn’t well enough prepared for it.  I decided to write out the entire lecture and print it, but then I realized that the font was not big enough.  Judge it as you will.  My only request is for you to be nice!

Enough self-hate, though.  I thought I’d share the video of the lecture with you all,

Monetary Policy and the Great Recession from Mises Institute of Canada on Vimeo.

My article, “In Defense of the Gold Standard“, is published today over at Mises.ca.

It is ironic that the reasons people give for disliking the gold standard (and I quasi-erroneously use “gold standard” as a shorter term for “gold money”) are exactly the same characteristics that these same people see as flaws in fiat currency (I am referring here to people who complain against price inflation).  I argue that these are not reasons to dislike gold; these are the reasons why the gold standard is preferable to fiat paper money.

I have been hoping for something like this for quite some time now, and finally there is a Spanish-speaker Ludwig von Mises Institute website!  This is great!  Officially: Instituto Mises Hispano.

The Economist publishes a chart of what country’s companies are more likely to bribe [third world] government officials for special privileges:

I would like to see a charge that charts the propensity for a company to bribe their own government (i.e. what we call ‘corporate lobbying’) to gain special priviliges.  Bribery is not a black and white issue (for example, should we look down on a company bribing the government for the sake of protecting their property rights?), but I think it is safe to make the claim that the majority of public/private collusion is bad and gives certain companies advantages that they would not have had in a free market.  Anyways, for some reason I expect the U.S. to be as charted highly in that hypothetical graph as it is in the one above.

The Economist piece tries to emphasize the role of government in being the partner in crime.  I think the effort is commendable, but at the same time we can all agree that perhaps we here would place most of the blame on government.  If there was no government, there would be no bureaucrats to bribe.  We should remember that corruption does not stem from money, but from holding power.

I spent much of the weekend in Toronto, Canada, to speak at a Mises Circle held on Saturday.  I spoke along with GMU Professor Larry White, Professor George Bragues, and Chris Horlacher (Maple Leaf Metals).  The lectures, apart from mine (but, in my defense, it was my first time speaking at this type of event), were great.  White spoke on the history of free banking, focusing on Scotland and Canada; I spoke on monetary policy and the Great Recession; Bragues gave a lecture on the ethics of central banking; finally, Horlacher gave a step by step process by which Canada could return to a fully gold backed currency.  These lectures will be available online at some point near in the future.  I am not sure how many people attended, but there were at least fifty people present, including a good number of students (presumably from the University of Toronto and other surrounding universities).

I am not much of a traveler.  I frequently fly between Madrid and San Diego, but that is because I have family in both countries and have lived in both countries — it is not exactly “tourism”.  This was my first time in Canada, and my expectations were not deceived.  Toronto is a beautiful city, and the University of Toronto is a beautiful campus.

Canada probably has a formidable libertarian community, but from what I understand it is pretty scattered throughout the country.  There is no major, central think-tank — such as the Mises Institute in Auburn, Alabama — to rein in all the attention.  The Ludwig von Mises Institute, Canada, is attempting to fill the gap.  While its current influence is limited, it is institutions like LvMI Canada that give a very promising future to the international libertarian movement.  Hopefully, through the use of the Mises Canada website and their speaking events, Canadian libertarians can use this resource as a means of spreading knowledge (libertarian knowledge).

I particularly like the fact that the event was hosted on campus, at the University of Toronto.  The hall was difficult to find, as I understand, and perhaps the event not well enough advertised amongst the student body (Mises Canada is young and this is only the second or third event, if I recall correctly), but it is the young minds that have to be opened to libertarian thought the most (since they are the most likely to change) and Mises Canada has the right idea.  Even if only a few students attend out of thousands, it is these few students who then spread what they learn to their classrooms and classmates.  The idea is to plant seeds, which then sprout and grow.  Mises Canada, in a sense, is seeding a growing grassroots movement.

The greatest thing, though, is meeting people from other countries who are also interested in libertarianism and Misesian economics.  At this event in particular I met a couple who live in China.  When I attended Cato University in 2009 I remember meeting students from countries like Venezuela, Guatemala and Italy.  There is a growing libertarian movement worldwide and it is very inspiring.  Some people might see the libertarian population as small and (politically) insignificant, but compared to how it was forty years ago the libertarian movement is very significant.

While I may have not done as good of a job as I should have, I am very grateful to Redmond Weissenberger (director of LvMI Canada) for having me out there and offering me the opportunity.  I had fun, especially listening to the other speakers, and it makes me appreciate the growing libertarian world presence that much more.

If there are Canadian libertarians as of yet unaware of LvMI Canada, I very much suggest bookmarking the website and keeping an eye open on upcoming events.  LvMI Canada is worth supporting and has a very promising future.  I see it as a keystone to the organization of the Canadian libertarian movement.

A friend of mine on Facebook alerted me to this political cartoon dealing with the 1912 Aldrich Plan to bring central banking to the United States,

H/T: Plasmaquatic Technolithic Mist blog

Daniel Kuehn writes a short criticism of what he deems a poorly reasoned article (and, I am in complete agreement with this assessment) by Timothy Noah, at the New Republic (“Steve Jobs, Jobs-Creator“).  But, he tries to link job creation by part of Steve Jobs (which was both direct and indirect) to that of the Obama administration and the stimulus program.  This inspires me to emphasize a tangential point.  You cannot judge the two on the same metric, because while Jobs preformed wealth creation Obama is pursuing capital consumption.

In the case of Obama, it is not about jobs created versus jobs saved.  It is about opportunity cost.  And, neither is it about whether or not Obama can create a short-run positive increase in employment.  For the sake of simplicity, less us assume that private investment is zero for a period of six months.  If government redistributes this capital from entrepreneurs to the public sector and then invests it in some form of public work there will likely be net job creation during that period of time.  But, if we were to judge this in terms of benefit to the economy as a whole we would be mistaken to correlate job creation with economic growth.

The point I try to make in my article “Government Spending is Bad Economics” (that government cannot economize) is lost here.  It is not about job creation.  It is whether or not the job creation that comes from government spending, if any, is worth the loss which is represented by what could have been had that capital not be redistributed towards less preferred ends.

The calculation debate is not just about socialism, it is about calculation in a capitalist economy.  Steve Jobs was not just a job creator.  He positively contributed to adding to the world’s stock of wealth.  Obama may be a job creator in the short-run, but he is negatively contributing to the world’s stock of wealth.

For those who have not read these pieces, but are interested in the topic of calculation, I suggest these two articles in this order: “The Foremost Austrian Contribution to Economic Science” & “Government Spending is Bad Economics“.

I come from a family of liberals (well, for the most part), and so when we come together for family dinners or whatnot we tend to get into debates.  Today I had a short conversation with my father over my future and what my intentions were.  I also commented on how I was scared that through a culture of re-affirmation (that is, if I decided to continue my education at institutions which already agreed with my point of view) I would close my mind to alternative points of view.  This led him, for some reason, to suggest that one of the major problems I face is my lack of sympathy for the “less fortunate.”

I immediately corrected him.  As a “quasi”-consequentialist I tend to judge libertarianism by the outcomes of certain policies (or, better said, lack of policies).  I honestly believe that the free market could better provide for the “less fortunate” than an interventionist economy, and that an interventionist economy will lead to the further impoverishment of the “less fortunate” over the long run.  He disagreed and I gave the example of the food industry.  In more capitalistic countries, where regulation on food production and distribution is relatively minor, food is plentiful — there is a surplus that can be exported.  There are some who are “malnourished”, but malnourishment in the United States is not the same as malnourishment in Sudan, for the most part.  Yet, in countries where food is rationed there is widespread malnourishment and famine.

This isn’t to say that capitalism is “perfect”, but perfection is impossible — as long as people act there is also further satisfactions to be attained.  A capitalist market simply provides the freedom for people to allocate between means and ends, providing a proverbial “process” in which services and goods can be better provided for.  Like the food industry, I honestly believe that a free market in healthcare will better provide for the “less fortunate.”

Last weekend I attended a conference in San Antonio, Texas, with Jeffrey Friedman, of Critical Review.  I have never been more intellectually stimulated in my life, and for the most part I sympathized and agreed with everything Friedman had to say (it’s hard to disagree with him, because if the man isn’t a genius he’s definitely close to one).  He made the point that I think many of us can agree with (although, this is probably something that can lead to heated debate): the consequentialist argument for libertarianism is much stronger than the moral argument, because the moral argument can be debated (as someone who believes in the subjectivity of morality, I think persuasion on moral grounds will be extremely difficult, because there’s no way to objectively prove what is right or wrong — as bad as it sounds, my libertarianism doesn’t operate on a moral compass, for example).

But, my conversation with my father made it obvious to me that the consequentialist argument is equally as difficult.  Like libertarianism, the liberal argument for redistribution is a mixture of consequentialism and morality.  Redistribution is good because the less fortunate should be provided for, and the more production we are on average the more productive society is (as if a redistribution of wealth is not a redistribution of productivity and a handicap on productivity).  Furthermore, many of the economic arguments for libertarianism are very complex and difficult to grasp — oftentimes, they require a “broad scope” picture that many people can’t envision.

Does this make spreading libertarianism a hopeless endeavor?  I don’t think so (although, I have a strange and maybe unique vision of how a more libertarian society will be achieved — one that doesn’t require a change in ethics).  I think it just means that we can’t discard one method of persuasion for another.  There is a sort of division of labor amongst the libertarian community, and I think that’s a good thing.  A two-prong approach tackles the issue from two separate perspectives, either of which may persuade the target individual.

My subtle point is that this really puts into perspective the fight we’re facing.  The question is: how are we going to approach educating people and winning the wider debate?  How do we plan to diffuse our ideas throughout the population?   These are questions we’re going to have to answer if we plan to have a greater impact on the common worldview.  Ron Paul’s activism and work by others up to now has made a great difference, but the libertarian community is still relatively very small compared to others (I think it’s size is oftentimes magnified beyond its real volume by the internet).

What do you think?

Mary Theroux shows us how Krugman has decided to ignore the evidence (including the widely-respected academic work of Robert Higgs).

Justin Ptak already embedded the Paul Krugman video in a previous post.  Krugman makes a similar argument in a recent blog post.  Basically, Krugman echoes the notion that any spending is positive.  This isn’t particularly new; DeLong explicitly made the point almost two years ago, “At this point, anything that boosts the government’s deficit over the next two years passes the benefit-cost test–anything at all.”  It is, after all, what Keynes basically argues in The General Theory; even digging ditches and re-filling them would be beneficial.

An Austrian would tell you that no government spending passes the “benefit-cost test”.  I argue as much in my article “Government Spending is Bad Economics“.

Some might think that we are wasting our time.  Krugman, et. al., have basically fallen victim to the accusation they laid against us; as Krugman writes, “Nothing shakes the faith of a true believer.”  I don’t think we’re wasting our time, though.  The point shouldn’t be debunking “alien economics” for the sake of Krugman, rather for the sake of the students who run the risk of adopting an economic ideology which makes absolutely no sense.   Our intellectual fight is not just for the present, but more so for the future.

Tyler Cowen’s recent blog post (“How are nominal wages sticky for the unemployed“) has stirred up quite a discussion on the blogosphere.  I thought it proper for an “Austrian” to intervene and offer an opinion from what I think is a fairly unique perspective.  This is written on the spot, so I apologize for any confusions or minor mistakes; I hope my general point is understood.

The point of Cowen’s post is difficult to distill.  But, I think he is trying to point out a weakness in the “standard Keynesian theory”, in that the unemployed are not really the workers who contribute to any form of wage stickiness.  That is, the unemployed are oftentimes willing to work for whatever wage they are offered.  The workers who contribute to wage stickiness are the employed, since these are the ones actually earning what Cowen refers to as the “total wage bill” — that is, total aggregate nominal (money) demand is being distributed only to the employed.  This may go in conjunction with his hypothesis that the unemployed have a zero marginal product — this is Paul Krugman’s accusation, at least (he wrongly attributes it to the Austrians).

The responses to Cowen have been mixed.  Brad DeLong argues that wage inflexibility indeed does play a major role in the creation of mass unemployment, also criticizing what he calls the “Hayekian view” of blaming government institutions on wage inflexibility (and, as a result, largely missing Cowen’s actual point).  I feel that Arnold Kling also misses the point, as he agrees that wage inflexibility does not play a major role in the current recession, when I don’t think that’s what Cowen was arguing at all.  Scott Sumner is probably more on target than either DeLong or Kling, although he (as I) finds it strange that, if we accept the premise of wage inflexibility, wages are taking so long to adjust.  He suggests it has to do with lack of adjustments to more recent macroeconomic problems (whatever those may be).

Cowen’s actual point is fair (although, I am not entirely sure anybody ever disputed it).  Those who, in the Keynesian paradigm, affect wages are those who earn them, not those who do not.  I think, though, that the problems with any theory of unemployment that rests with natural sticky wages (that is, natural to the market and not a market pervaded by government protectionism) is explaining how the workers have any say.  For the most part, I have seen references to labor contracts, but labor contracts — like any contract — can be broken.  Today, what disallows firms the flexibility of breaking contracts are the added costs to breaking them by government.  This includes the red tape, the added costs of reparations to the worker, and the increased costs of hiring new workers.  Oftentimes, it makes more sense to keep an old worker at the same wage than hire a new one, because the costs of doing all of this exceed what money could be earned by paying a lower wage.

This also serves as a response to DeLong.  It’s not just a problem with unions, cartelized agreements to prop up wages, or minimum wage.  There are various institutional factors which make wage adjustments very inflexible.  This should almost be taken for granted, since the modern market is highly regulated — especially the labor market.

I think, though, that Krugman is right in rejecting Cowen’s suggestion that the unemployed suffer from zero marginal product (excepting the role of diminishing marginal returns and the limit to firm expansion in times of depression, any amount of workers can be employed at any level of productivity if wages are low enough).  His own rationale, however, is flawed.  I think the picture could be made much more accurate by looking at the issue from an Austrian angle.  Specifically, I mean if we considered the labor market in conjunction with the structure of production in general, as I suggest in my recent article “Rethinking Depression Economics“.

I am not assuming away wage inflexibility, by the way.  I just don’t think that the worker has much say in his wage, except if he empowered by the government.  Otherwise, the worker is largely dependent on the employer honoring the contract (and, we should also consider that labor contracts would probably look substantially different if there were a free market in labor).  I think there is a degree of “price stickiness”, and I think it is inherent in the theory of price formation.  The fact is that the employer will have to weigh the causes of a loss in profitability, and then will have to decide what actions to take to return profitability.  This includes lowering wages, but it would be naïve to assume that the employer exercises perfect information.  This suggests some short-term wage inflexibility.

This leads me to my greater point.  The recession is a period of price and good restructuring.  The structure of production is changing in accordance with consumer demands during a period of great chaos and uncertainty.  Many investments are being liquidated, and some are being partially liquidated.  This will create unemployment, and wages will have to adjust accordingly.  Short-term price inflexibility plays a role, but so does the fact that the labor market is tied in with the general market, especially the capital goods market.  The productive employment of individuals also relies on the productive employment of capital goods.

What do I blame continued unemployment on?  Institutionally-caused inflexibility on wage prices and sub-par productivity caused by continued government intervention in the economy.  Without government’s artificial obstacles, I think the labor market would have cleared relatively soon after the initial collapse and the economy would be well on its way towards full recovery (if not already there).

Most will probably disagree with me here, but I think that most economists subtlety agree with my thesis here.  I think, though, that most of them simply ignore it in favor of focusing on aggregates.  The problem, for instance, is wage stickiness and aggregate demand.  Some call the former a “microfoundation”, but there really has been little attention as to why prices are sticky and what this really means.  Aggregate demand also assumes the necessity for restructuring, but those who think in terms of AD pay little attention to the way the restructuring takes place (economization of resources by individuals), and thus do not realize the implications of what are really counter-productive fiscal and monetary policies.  Besides, few people are willing to openly admit that the problem is not aggregate nominal (money) demand, but the employment of capital goods (which is why biggest criticism of those who support nominal income targeting [since the problem is not nominal income]).

I thought this was clever (H/T: ‘TXRoadkill’ on the Mises IRC channel).  From the Salt Lake Tribune, by Bagley,

Here is the full length video of the debate between Skidelsky/Weldon and Selgin/Whyte.  I’m not sure how to embed videos on this blog, so for now I will link to YouTube.

Some time ago I wrote a short review of free banking theory, which is now lost.  While I expressed agreement with the microeconomic theory of free banking as presented in George Selgin’s The Theory of Free Banking, I disagreed with the macroeconomic integration of monetary disequilibrium theory.  I recently expanded this part of my argument into a short paper (5-6 pages; ~2,400 words),

Here is the abstract,

This paper is a short argument as to why the macroeconomic theory of monetary disequilibrium is untenable and why free bankers should shed it from their theoretical arsenal. Monetary equilibrium cannot achieve price stabilization, nor is deflation resulting from an excess demand for money harmful. These should not be considered macroeconomic goals or advantages of a free banking system.

If interested, you can download the paper off SSRN.

David Glasner attempts to defend central bankers from the accusation of being central planners.  He does so from a distinctively Misesian perspective — or, at least, that is his intention.  But, he mistakes Mises’ definition of socialism as a definition of central planning, where the former suggests the collectivization of the means of production and their rationing by means of a planning board (or something similar).  Yes, socialism requires central planning, and yes socialism is untenable, but this does not mean that central planning can only occur in a socialist economy.

Mises, fortunately, defines ‘planning’ for us in “Small and Big Business”, in Economic Freedom and Interventionism (pp. 234–252).  Contrary to Glasner’s claims, Mises’ definition presupposes the existence of a capitalist economy.  Writes Mises,

The characteristic feature of this system of social control or planning is to be seen in the fact that it preserves to some extent a sphere in which the initiative of the entrepreneurial spirit can benefit the consumers. (p. 244)

It is best to approach the topic of central planning by first exploring the organization of society free from intervention.  It is this form of organization that Hayek dubs “spontaneous order”, and it basis itself on human action — the fact that individuals act purposefully, economizing between means and ends.  As George Reisman, in Capitalism, carefully puts it, there is planning in the free market, but it is a planning by part of the individual market agents for themselves.  It is a plan to accomplish a chosen end and allotting means towards the achievement of that end.

Central planning refers to planning as a means of social engineering.  In other words, the central planner intervenes in the economy to manipulate the outcome.  Why does the government fund healthcare?  Because it is believed that if they do not then the market will inadequately supply health services.  Why do Keynesians support fiscal stimulus?  Because there is insufficient aggregate demand.  These are all forms of interventionism, and as such they are also all forms of central planning.  They represent the intent to manipulate an outcome away from what it would have otherwise been had it been left to “spontaneous order”.

Of course, interventionism is not the same thing as socialism — socialism is a very specific economic system, where the means of production are collectively owned.  But, central planning is not the same thing as socialism; it is merely a facet of socialism.  Planning boards can exist in a capitalist economy (government) and a socialist economy.

Is central banking a form of central planning?  Absolutely.  The role of central banks is to help avoid certain outcomes which are expected to produce themselves in a free market.  This includes price stabilization, unemployment targeting, and the guarantee of financial stability.  Central bankers look at the data and decide whether or not an intervention is necessary.  By the very definition of their actions they are centrally planning.

So, in the interest of “clear thinking” (as Glasner puts it), let us all admit that if we are in favor of certain forms of interventionism then we are in favor of central planning in those cases.