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Topic: Economics (Read 51538 times)
Mises: Milton Friedman is not an Ecnomist; The debt to pleasure
Reply #250 on:
May 14, 2013, 04:49:25 PM »
Mises: ďFriedman Is Not an EconomistĒ
By Joseph Salerno
May 13th, 2013
Economist Harry Veryser of the University of Detroit-Mercy and author of It Didnít Have to Be This Way shared the following recollection:
I remember being in a conference with Ludwig von Mises in the sixties at FEE [the Foundation for Economic Education]. And I asked him about Friedman and economics. And he waved his hand in the typical Austrian way and he said: ďFriedman is not an economist. Heís a statistician.Ē
Now in describing Friedman in these terms, Mises was not name calling but had a very specific meaning in mind.For Mises (pp. 247-48) a ďstatisticianĒ was someone ďwho aim
at discovering economic laws from the study of economic experience.Ē But Mises maintained that statistics is not a method useful for research in economic theory because it deals with historical facts. According to Mises:
Statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories. The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. All economic quantities we know about are data of economic history.
Indeed in his magnum opus, A Monetary History of the United States, co-authored with Anna Schwartz, Friedman confirmed the accuracy of Misesís characterization. In their Preface (p. xxii), Friedman and Schwartz stated that their aim in writing the book was ďto provide a prologue and a background for a statistical analysis of the secular and cyclical behavior of money in the United States and to exclude any material not relevant to that purpose.Ē In the final chapter, entitled ďA Summing Up,Ē the authors (Friedman and Schwartz, p. 676) listed three propositions regarding money that they discovered to be ďcommonĒ to U.S. monetary history and concluded, ďThese common elements of monetary experience can be expected to characterize our future as they have our past.Ē It would be difficult to find a better expression of the statisticianís view of the social world.
The debt to pleasure
A Nobel prizewinner argues for an overhaul of the theory of consumer choice
Apr 27th 2013 |From the print edition
ďSOVEREIGN in tastes, steely-eyed and point-on in perception of risk, and relentless in maximisation of happiness.Ē This was Daniel McFaddenís memorable summation, in 2006, of the idea of Everyman held by economists. That this description is unlike any real person was Mr McFaddenís point. The Nobel prizewinning economist at the University of California, Berkeley, wryly termed homo economicus ďa rare speciesĒ. In his latest paper* he outlines a ďnew science of pleasureĒ, in which he argues that economics should draw much more heavily on fields such as psychology, neuroscience and anthropology. He wants economists to accept that evidence from other disciplines does not just explain those bits of Behaviour that do not fit the standard models. Rather, what economists consider anomalous is the norm. Homo economicus, not his fallible counterpart, is the oddity.
To take one example, the ďpeopleĒ in economic models have fixed preferences, which are taken as given. Yet a large body of research from cognitive psychology shows that preferences are in fact rather fluid. People value mundane things much more highly when they think of them as somehow ďtheir ownĒ: they insist on a much higher price for a coffee cup they think of as theirs, for instance, than for an identical one that isnít. This ďendowment effectĒ means that people hold on to shares well past the point where it makes sense to sell them. Cognitive scientists have also found that people dislike losing something much more than they like gaining the same amount. Such ďloss aversionĒ can explain why people often pick insurance policies with lower deductible charges even when they are more expensive. At the moment of an accident a deductible feels like a loss, whereas all those premium payments are part of the status quo.
Another area where orthodox economics finds itself at sea is the role of memory and experience in determining choices. Recollection of a painful or pleasurable experience is dominated by how people felt at the peak and the end of the episode. In a 1996 experiment Donald Redelmeier and Daniel Kahneman, two psychologists, showed that deliberately adding a burst of pain at the end of a colonoscopy that was of lower intensity than the peak made patients think back on the experience more favourably. Unlike homo economicus, real people are strongly influenced by such things as the order in which they see options and what happened right before they made a choice. Incorporating these findings into models of consumer Behaviour should improve their power to predict everything from which loans people choose to which colleges they apply for.
Trust is something economists already incorporate into their models. But trust turns out to be not just a function of history and interactions, as dismal scientists tend to think, but also a product of brain chemistry. Pumping people with oxytocin, the so-called ďlove hormoneĒ, has been found to make them much more generous in games where they have to decide how much of their money to entrust to another person who has no real incentive to return any of it. Sovereign, indeed.
Much of this may be alien to modern-day economists, but it is in line with the conception that other disciplines have of human decision-making. Psychologists have long known that peopleís choices and preferences are influenced by others. Biologists have a much clearer understanding of altruism and kindness, whether to kin or strangers, than economists, who typically emphasise the dogged pursuit of self-interest. This way of thinking would also have been recognisable to their intellectual forefathers. Adam Smith wrote extensively about the central role of altruism and regard for others as motivators of human Behaviour. The idea of loss aversion would have made sense to Jeremy Bentham, the founder of utilitarianism: he spoke of increased pleasure and reduced pain as two distinct sources of happiness.
Mr McFadden believes that economists need to do things differently if they are truly to understand how people make decisions. Manipulating brain activity is one way of delving into where economic choices really come from. Analysing the information people get through social networks would help them understand the role of influence and identity in decision-making.
Such tools have implications for policy. Plenty of poor people in America are wary of programmes like the Earned Income Tax Credit (EITC) because the idea of getting a handout from the government reinforces a sense of helplessness. Dignity is not something mainstream economics has much truck with. But creating a sense of dignity turns out to be a powerful way of affecting decisions. One study by Crystal Hall, Jiaying Zhao and Eldar Shafir, a trio of psychologists, found that getting poor people in a soup kitchen to recall a time when they felt ďsuccessful and proudĒ made them almost twice as likely to accept leaflets that told them how to get an EITC refund than members of another group who were merely asked about the last meal they had eaten.
A nudge and a think
Taking the path Mr McFadden urges might also lead economists to reassess some articles of faith. Economists tend to think that more choice is good. Yet people with many options sometimes fail to make any choice at all: think of workers who prefer their employers to put them by ďdefaultĒ into pension plans at preset contribution rates. Explicitly modelling the process of making a choice might prompt economists to take a more ambiguous view of an abundance of choices. It might also make them more sceptical of ďrevealed preferenceĒ, the idea that a personís valuation of different options can be deduced from his actions. This is undoubtedly messier than standard economics. So is real life.
* ďThe New Science of PleasureĒ, NBER Working Paper No. 18687, February 2013
Nietsche's Marginal Children: On Hayek
Reply #251 on:
May 15, 2013, 12:05:47 PM »
I'm not really sure WTF this guy is talking about, but it seems really learned. Can someone break it down for me?
Nietzsche‚Äôs Marginal Children: On Friedrich Hayek
How did the conservative ideas of Friedrich Hayek and the Austrian school become our economic reality? By turning the market into the realm of great politics and morals.
In the last half-century of American politics, conservatism has hardened around the defense of economic privilege and rule. Whether it‚Äôs the libertarianism of the GOP or the neoliberalism of the Democrats, that defense has enabled an upward redistribution of rights and a downward redistribution of duties. The 1 percent possesses more than wealth and political influence; it wields direct and personal power over men and women. Capital governs labor, telling workers what to say, how to vote and when to pee. It has all the substance of noblesse and none of the style of oblige. That many of its most vocal defenders believe Barack Obama to be their mortal enemy‚ÄĒa socialist, no less‚ÄĒis a testament less to the reality about which they speak than to the resonance of the vocabulary they deploy.
The Nobel Prize‚Äďwinning economist Friedrich Hayek is the leading theoretician of this movement, formulating the most genuinely political theory of capitalism on the right we‚Äôve ever seen. The theory does not imagine a shift from government to the individual, as is often claimed by conservatives; nor does it imagine a simple shift from the state to the market or from society to the atomized self, as is sometimes claimed by the left. Rather, it recasts our understanding of politics and where it might be found. This may explain why the University of Chicago chose to reissue Hayek‚Äôs The Constitution of Liberty two years ago after the fiftieth anniversary of its publication. Like The Road to Serfdom (1944), which a swooning Glenn Beck catapulted to the bestseller list in 2010, The Constitution of Liberty is a text, as its publisher says, of ‚Äúour present moment.‚ÄĚ
But to understand that text and its influence, it‚Äôs necessary to turn away from contemporary America to fin de si√®cle Vienna. The seedbed of Hayek‚Äôs arguments is the half-century between the ‚Äúmarginal revolution,‚ÄĚ which changed the field of economics in the late nineteenth century, and the collapse of the Habsburg monarchy in 1918. It is by now a commonplace of European cultural history that a dying Austro-Hungarian Empire gave birth to modernism, psychoanalysis and fascism. Yet from the vortex of Vienna came not only Wittgenstein, Freud and Hitler but also Hayek, who was born and educated in the city, and the Austrian school of economics.¬
Friedrich Nietzsche figures critically in this story, less as an influence than a diagnostician. This will strike some as an improbable claim: Wasn‚Äôt Nietzsche contemptuous of capitalists, capitalism and economics? Yes, he was, and for all his reading in political economy, he never wrote a treatise on politics or economics. And despite the long shadow he cast over the Viennese avant-garde, he is hardly ever cited by the economists of the Austrian school.
Yet no one understood better than Nietzsche the social and cultural forces that would shape the Austrians: the demise of an ancient ruling class; the raising of the labor question by trade unions and socialist parties; the inability of an ascendant bourgeoisie to crush or contain democracy in the streets; the need for a new ruling class in an age of mass politics. The relationship between Nietzsche and the free-market right‚ÄĒwhich has been seeking to put labor back in its box since the nineteenth century, and now, with the help of the neoliberal left, has succeeded‚ÄĒis thus one of elective affinity rather than direct influence, at the level of idiom rather than policy.
‚ÄúOne day,‚ÄĚ Nietzsche wrote in Ecce Homo, ‚Äúmy name will be associated with the memory of something tremendous, a crisis without equal on earth, the most profound collision of conscience.‚ÄĚ It is one of the ironies of intellectual history that the terms of the collision can best be seen in the rise of a discourse that Nietzsche, in all likelihood, would have despised.
* * *
In 1869, Nietzsche was appointed professor of classical philology at Basel University. Like most junior faculty, he was bedeviled by meager wages and bore major responsibilities, such as teaching fourteen hours a week, Monday through Friday, beginning at 7 am. He also sat on multiple committees and covered for senior colleagues who couldn‚Äôt make their classes. He lectured to the public on behalf of the university. He dragged himself to dinner parties. Yet within three years he managed to complete The Birth of Tragedy, a minor masterwork of modern literature, which he dedicated to his close friend and ‚Äúsublime predecessor‚ÄĚ Richard Wagner.¬
One chapter, however, he withheld from publication. In 1872, Nietzsche was invited to spend the Christmas holidays with Wagner and his wife Cosima, but sensing a potential rift with the composer, he begged off and sent a gift instead. He bundled ‚ÄúThe Greek State‚ÄĚ with four other essays, slapped a title onto a cover page (Five Prefaces to Five Unwritten Books), and mailed the leather-bound text to Cosima as a birthday present. Richard was offended; Cosima, unimpressed. ‚ÄúProf. Nietzsche‚Äôs manuscript does not restore our spirits,‚ÄĚ she sniffed in her diary.¬
Though presented as a sop to a fraying friendship, ‚ÄúThe Greek State‚ÄĚ reflects the larger European crisis of war and revolution that had begun in 1789 and would come to an end only in 1945. More immediately, it bears the stamp of the Franco-Prussian War, which had broken out in 1870, and the Paris Commune, which was declared the following year.¬
Initially ambivalent about the war, Nietzsche quickly became a partisan of the German cause. ‚ÄúIt‚Äôs about our culture!‚ÄĚ he wrote to his mother. ‚ÄúAnd for that no sacrifice is too great! This damned French tiger.‚ÄĚ He signed up to serve as a medical orderly; Cosima tried to persuade him to stay put in Basel, recommending that he send cigarettes to the front instead. But Nietzsche was adamant. In August 1870, he left for Bavaria with his sister Elisabeth, riding the rails and singing songs. He got his training, headed to the battlefield, and in no time contracted dysentery and diphtheria. He lasted a month.¬
The war lasted for six. A half-million soldiers were killed or wounded, as were countless civilians. The preliminary peace treaty, signed in February 1871, favored the Germans and punished the French, particularly the citizens of Paris, who were forced to shoulder the burden of heavy indemnities to the Prussians. Enraged by its impositions‚ÄĒand a quarter-century of simmering discontent and broken promises‚ÄĒworkers and radicals in Paris rose up and took over the city in March. Nietzsche was scandalized, his horror at the revolt inversely proportional to his exaltation over the war. Fearing that the Communards had destroyed the Louvre (they hadn‚Äôt), he wrote:
The reports of the past few days have been so awful that my state of mind is altogether intolerable. What does it mean to be a scholar in the face of such earthquakes of culture!‚Ä¶ It is the worst day of my life.¬
In the quicksilver transmutation of a conventional war between states into a civil war between classes, Nietzsche saw a terrible alchemy of the future: ‚ÄúOver and above the struggle between nations the object of our terror was that international hydra-head, suddenly and so terrifyingly appearing as a sign of quite different struggles to come.‚ÄĚ¬
By May, the Commune had been ruthlessly put down at the cost of tens of thousands of lives‚ÄĒmuch to the delight of the Parisian aesthete-aristocrat Edmond Goncourt:¬
All is well. There has been neither compromise nor conciliation. The solution has been brutal, imposed by sheer force of arms. The solution has saved everyone from the dangers of cowardly compromise. The solution has restored its self-confidence to the Army, which has learnt in the blood of the Communards that it was still capable of fighting‚Ä¶a bleeding like that, by killing the rebellious part of a population, postpones the next revolution by a whole conscription.¬
Of the man who wrote these words and the literary milieu of which he was a part, Nietzsche would later say: ‚ÄúI know these gentlemen inside out, so well that I have really had enough of them already. One has to be more radical: fundamentally they all lack the main thing‚ÄĒ‚Äėla force.‚Äô‚ÄČ‚ÄĚ
* * *
The clash of these competing worlds of war and work echoes throughout ‚ÄúThe Greek State.‚ÄĚ Nietzsche begins by announcing that the modern era is dedicated to the ‚Äúdignity of work.‚ÄĚ Committed to ‚Äúequal rights for all,‚ÄĚ democracy elevates the worker and the slave. Their demands for justice threaten to ‚Äúswamp all other ideas,‚ÄĚ to tear ‚Äúdown the walls of culture.‚ÄĚ Modernity has made a monster in the working class: a created creator (shades of Marx and Mary Shelley), it has the temerity to see itself and its labor as a work of art. Even worse, it seeks to be recognized and publicly acknowledged as such.¬
The Greeks, by contrast, saw work as a ‚Äúdisgrace,‚ÄĚ because the existence it serves‚ÄĒthe finite life that each of us lives‚ÄĒ‚Äúhas no inherent value.‚ÄĚ Existence can be redeemed only by art, but art too is premised on work. It is made, and its maker depends on the labor of others; they take care of him and his household, freeing him from the burdens of everyday life. Inevitably, his art bears the taint of their necessity. No matter how beautiful, art cannot escape the pall of its creation. It arouses shame, for in shame ‚Äúthere lurks the unconscious recognition that these conditions‚ÄĚ of work ‚Äúare required for the actual goal‚ÄĚ of art to be achieved. For that reason, the Greeks properly kept labor and the laborer hidden from view.¬
Throughout his writing life, Nietzsche was plagued by the vision of workers massing on the public stage‚ÄĒwhether in trade unions, socialist parties or communist leagues. Almost immediately upon his arrival in Basel, the First International descended on the city to hold its fourth congress. Nietzsche was petrified. ‚ÄúThere is nothing more terrible,‚ÄĚ he wrote in The Birth of Tragedy, ‚Äúthan a class of barbaric slaves who have learned to regard their existence as an injustice, and now prepare to avenge, not only themselves, but all generations.‚ÄĚ Several years after the International had left Basel, Nietzsche convinced himself that it was slouching toward Bayreuth in order to ruin Wagner‚Äôs festival there. And just weeks before he went mad in 1888 and disappeared forever into his own head, he wrote, ‚ÄúThe cause of every stupidity today‚Ä¶lies in the existence of a labour question at all. About certain things one does not ask questions.‚ÄĚ
One can hear in the opening passages of ‚ÄúThe Greek State‚ÄĚ the pounding march not only of European workers on the move but also of black slaves in revolt. Hegel was brooding on Haiti while he worked out the master-slave dialectic in The Phenomenology of Spirit. Though generations of scholars have told us otherwise, perhaps Nietzsche had a similar engagement in mind when he wrote, ‚ÄúEven if it were true that the Greeks were ruined because they kept slaves, the opposite is even more certain, that we will be destroyed because we fail to keep slaves.‚ÄĚ What theorist, after all, has ever pressed so urgently‚ÄĒnot just in this essay but in later works as well‚ÄĒthe claim that ‚Äúslavery belongs to the essence of a culture‚ÄĚ? What theorist ever had to? Before the eighteenth century, bonded labor was an accepted fact. Now it was the subject of a roiling debate, provoking revolutions and emancipations throughout the world. Serfdom had been eliminated in Russia only a decade before‚ÄĒand in some German states, only a generation before Nietzsche‚Äôs birth in 1844‚ÄĒwhile Brazil would soon become the last state in the Americas to abolish slavery. An edifice of the ages had been brought down by a mere century‚Äôs vibrations; is it so implausible that Nietzsche, attuned to the vectors and velocity of decay as he was, would pause to record the earthquake and insist on taking the full measure of its effects?¬
If slavery was one condition of great art, Nietzsche continued in ‚ÄúThe Greek State,‚ÄĚ war and high politics were another. ‚ÄúPolitical men par excellence,‚ÄĚ the Greeks channeled their agonistic urges into bloody conflicts between cities and less bloody conflicts within them: healthy states were built on the repression and release of these impulses. The arena for conflict created by that regimen gave ‚Äúsociety time to germinate and turn green everywhere‚ÄĚ and allowed ‚Äúblossoms of genius‚ÄĚ periodically to ‚Äúsprout forth.‚ÄĚ Those blossoms were not only artistic but also political. Warfare sorted society into lower and higher ranks, and from that hierarchy rose ‚Äúthe military genius,‚ÄĚ whose artistry was the state itself. The real dignity of man, Nietzsche insisted, lay not in his lowly self but in the artistic and political genius his life was meant to serve and on whose behalf it was to be expended.¬
Instead of the Greek state, however, Europe had the bourgeois state; instead of aspiring to a work of art, states let markets do their work. Politics, Nietzsche complained, had become ‚Äúan instrument of the stock exchange‚ÄĚ rather than the terrain of heroism and glory. With the ‚Äúspecifically political impulses‚ÄĚ of Europe so weakened‚ÄĒeven his beloved Franco-Prussian War had not revived the spirit in the way that he had hoped‚ÄĒNietzsche could only ‚Äúdetect dangerous signs of atrophy in the political sphere, equally worrying for art and society.‚ÄĚ The age of aristocratic culture and high politics was at an end. All that remained was the detritus of the lower orders: the disgrace of the laborer, the paper chase of the bourgeoisie, the barreling threat of socialism. ‚ÄúThe Paris commune,‚ÄĚ Nietzsche would later write in his notebooks, ‚Äúwas perhaps no more than minor indigestion compared to what is coming.‚ÄĚ
Nietzsche had little, concretely, to offer as a counter-volley to democracy, whether bourgeois or socialist. Despite his appreciation of the political impulse and his studious attention to political events in Germany‚ÄĒfrom the Schleswig-Holstein crisis of the early 1860s to the imperial push of the late 1880s‚ÄĒhe remained leery of programs, movements and platforms. The best he could muster was a vague principle: that society is ‚Äúthe continuing, painful birth of those exalted men of culture in whose service everything else has to consume itself,‚ÄĚ and the state a ‚Äúmeans of setting [that] process of society in motion and guaranteeing its unobstructed continuation.‚ÄĚ It was left to later generations to figure out what that could mean in practice‚ÄĒand where it might lead. Down one path might lay fascism; down another, the free market.
* * *
Around the time‚ÄĒalmost to the year‚ÄĒthat Nietzsche was launching his revolution of metaphysics and morals, a trio of economists, working separately across three countries, were starting their own. It began with the publication in 1871 of Carl Menger‚Äôs Principles of Economics and William Stanley Jevons‚Äôs The Theory of Political Economy. Along with L√©on Walras‚Äôs Elements of Pure Economics, which appeared three years later, these were the European faces‚ÄĒAustrian, English and French-Swiss‚ÄĒof what would come to be called the marginal revolution.
The marginalists focused less on supply and production than on the pulsing demand of consumption. The protagonist was not the landowner or the laborer, working his way through the farm, the factory or the firm; it was the universal man in the market whose signature act was to consume things. That‚Äôs how market man increased his utility: by consuming something until he reached the point where consuming one more increment of it gave him so little additional utility that he was better off consuming something else. Of such microscopic calculations at the periphery of our estate was the economy made.
Though the early marginalists helped transform economics from a humanistic branch of the moral sciences into a technical discipline of the social sciences, they were still able to command an audience and an influence all too rare in contemporary economics. Jevons spent his career as an independent scholar and professor in Manchester and London worrying about his lack of readers, but William Gladstone invited him over to discuss his work, and John Stuart Mill praised it on the floor of Parliament. Keynes tells us that ‚Äúfor a period of half a century, practically all elementary students both of Logic and of Political Economy in Great Britain and also in India and the Dominions were brought up on Jevons.‚ÄĚ¬
According to Hayek, the ‚Äúimmediate reception‚ÄĚ of Menger‚Äôs Principles ‚Äúcan hardly be called encouraging.‚ÄĚ Reviewers seemed not to understand it. Two students at the University of Vienna, however, did. One was Friedrich von Wieser, the other Eugen von B√∂hm-Bawerk, and both became legendary educators and theoreticians. Their students included Hayek; Ludwig von Mises, who attracted a small but devoted following in the United States and elsewhere; and Joseph Schumpeter, dark poet of capitalism‚Äôs forces of ‚Äúcreative destruction.‚ÄĚ Through B√∂hm-Bawerk and Wieser, Menger‚Äôs text became the groundwork of the Austrian school, whose reach, due in part to the efforts of Mises and Hayek, now extends across the globe.
The contributions of Jevons and Menger were multiple, yet each of them took aim at a central postulate of economics shared by everyone from Adam Smith to the socialist left: the notion that labor is a‚ÄĒif not the‚ÄĒsource of value. Though adumbrated in the idiom of prices and exchange, the labor theory of value evinced an almost primitive faith in the metaphysical objectivity of the economic sphere‚ÄĒa faith made all the more surprising by the fact that the objectivity of the rest of the social world (politics, religion and morals) had been subject to increasing scrutiny since the Renaissance. Commodities may have come wrapped in the pretty paper of the market, but inside, many believed, were the brute facts of nature: raw materials from the earth and the physical labor that turned those materials into goods. Because those materials were made useful, hence valuable, only by labor, labor was the source of value. That, and the fact that labor could be measured in some way (usually time), lent the world of work a kind of ontological status‚ÄĒand political authority‚ÄĒthat had been increasingly denied to the world of courts and kings, lands and lords, parishes and priests. As the rest of the world melted into air, labor was crystallizing as the one true solid.
By the time the marginalists came on the scene, the most politically threatening version of the labor theory of value was associated with the left. Though Marx would significantly revise and recast it in his mature writings, the simple notion that labor produces value remained associated with his name‚ÄĒand even more so with that of his competitor Ferdinand Lasalle, about whom Nietzsche read a fair amount‚ÄĒas well as with the larger socialist and trade union movements of which he was a part. That association helped set the stage for the marginalists‚Äô critique.
Admittedly, the relationship between marginalism and anti-socialism is complex. On the one hand, there is little evidence to suggest that the first-generation marginalists had heard of, much less read, Marx, at least not at this early stage of their careers. Much more than the threat of socialism underpinned the emergence of marginalist economics, which was as opposed to traditional defenses of the market as it was to the market‚Äôs critics. By the twentieth century, moreover, many marginalists were on the left and used their ideas to help construct the institutions of social democracy; even Walras and Alfred Marshall, another early marginalist, were sympathetic to the claims of the left. And on some readings, the mature Marx shares more with the constructivist thrusts of marginalism than he does with the objectivism of the labor theory of value.
On the other hand, Jevons was a tireless polemicist against trade unions, which he identified as ‚Äúthe best example‚Ä¶of the evils and disasters‚ÄĚ attending the democratic age. Jevons saw marginalism as a critical antidote to the labor movement and insisted that its teachings be widely transmitted to the working classes. ‚ÄúTo avoid such a disaster,‚ÄĚ he argued, ‚Äúwe must diffuse knowledge‚ÄĚ to the workers‚ÄĒempowered as they were by the vote and the strike‚ÄĒ‚Äúand the kind of knowledge required is mainly that comprehended in the science of political economy.‚ÄĚ¬
Menger interrupted his abstract reflections on value to make the point that while it may ‚Äúappear deplorable to a lover of mankind that possession of capital or a piece of land often provides the owner a higher income‚Ä¶than the income received by a laborer,‚ÄĚ the ‚Äúcause of this is not immoral.‚ÄĚ It was ‚Äúsimply that the satisfaction of more important human needs depends upon the services of the given amount of capital or piece of land than upon the services of the laborer.‚ÄĚ Any attempt to get around that truth, he warned, ‚Äúwould undoubtedly require a complete transformation of our social order.‚ÄĚ¬
Finally, there is no doubt that the marginalists of the Austrian school, who would later prove so influential on the American right, saw their project as primarily anti-Marxist and anti-socialist. ‚ÄúThe most momentous consequence of the theory,‚ÄĚ declared Wieser in 1891, ‚Äúis, I take it, that it is false, with the socialists, to impute to labor alone the entire productive return.‚ÄĚ¬
* * *
With its division of intellectual labor, the modern academy often separates economics from ethics and philosophy. Earlier economists and philosophers did not make that separation. Even Nietzsche recognized that economics rested on genuine moral and philosophical premises, many of which he found dubious, and that it had tremendous moral and political effects, all of which he detested. In The Wanderer and His Shadow, Nietzsche criticized ‚Äúour economists‚ÄĚ for having ‚Äúnot yet wearied of scenting a similar unity in the word ‚Äėvalue‚Äô and of searching after the original root-concept of the word.‚ÄĚ In his preliminary outline for the summa he hoped to publish on ‚Äúthe will to power,‚ÄĚ he scored the ‚Äúnihilistic consequences of the ways of thinking in politics and economics.‚ÄĚ¬
For that reason, Nietzsche saw in labor‚Äôs appearance more than an economic theory of goods: he saw a terrible diminution of the good. Morals must be ‚Äúunderstood as the doctrine of the relations of supremacy,‚ÄĚ he wrote in Beyond Good and Evil; every morality ‚Äúmust be forced to bow‚Ä¶before the order of rank.‚ÄĚ But like so many before them, including the Christian slave and the English utilitarian, the economist and the socialist promoted an inferior human type‚ÄĒand an inferior set of values‚ÄĒas the driving agent of the world. Nietzsche saw in this elevation not only a transformation of values but also a loss of value and, potentially, the elimination of value altogether. Conservatives from Edmund Burke to Robert Bork have conflated the transformation of values with the end of value. Nietzsche, on occasion, did too: ‚ÄúWhat does nihilism mean?‚ÄĚ he asked himself in 1887. ‚ÄúThat the highest values devaluate themselves.‚ÄĚ The nihilism consuming Europe was best understood as a democratic ‚Äúhatred against the order of rank.‚ÄĚ¬
Part of Nietzsche‚Äôs worry was philosophical: How was it possible in a godless world, naturalistically conceived, to deem anything of value? But his concern was also cultural and political. Because of democracy, which was ‚ÄúChristianity made natural,‚ÄĚ the aristocracy had lost ‚Äúits naturalness‚ÄĚ‚ÄĒthat is, the traditional vindication of its power. How then might a hierarchy of excellence, aesthetic and political, re-establish itself, defend itself against the mass‚ÄĒparticularly a mass of workers‚ÄĒand dominate that mass? As Nietzsche wrote in the late 1880s:
A reverse movement is needed‚ÄĒthe production of a synthetic, summarizing, justifying man for whose existence this transformation of mankind into a machine is a precondition, as a base on which he can invent his higher form of being.
‚ÄÉ‚ÄÉ‚ÄÉHe needs the opposition of the masses, of the ‚Äúleveled,‚ÄĚ a feeling of distance from them. [He] stands on them, he lives off them. This higher form of aristocracy is that of the future.‚ÄĒMorally speaking, this overall machinery, this solidarity of all gears, represents a maximum of exploitation of man; but it presupposes those on whose account this exploitation has meaning.
Nietzsche‚Äôs response to that challenge was not to revert or resort to a more objective notion of value: that was neither possible nor desirable. Instead, he embraced one part of the modern understanding of value‚ÄĒits fabricated nature‚ÄĒand turned it against its democratic and Smithian premises. Value was indeed a human creation, Nietzsche acknowledged, and as such could just as easily be conceived as a gift, an honorific bestowed by one man upon another. ‚ÄúThrough esteeming alone is there value,‚ÄĚ Nietzsche has Zarathustra declare; ‚Äúto esteem is to create.‚ÄĚ Value was not made with coarse and clumsy hands; it was enacted with an appraising gaze, a nod of the head signifying a matchless abundance of taste. It was, in short, aristocratic. ¬
While slaves had once created value in the form of Christianity, they had achieved that feat not through their labor but through their censure and praise. They had also done it unwittingly, acting upon a deep and unconscious compulsion: a sense of inferiority, a rage against their powerlessness, and a desire for revenge against their betters. That combination of overt impotence and covert drive made them ill-suited to creating values of excellence. Nietzsche explained in Beyond Good and Evil that the self-conscious exercise and enjoyment of power made the noble type a better candidate for the creation of values in the modern world, for these were values that would have to break with the slave morality that had dominated for millennia. Only insofar as ‚Äúit knows itself to be that which first accords honor to things‚ÄĚ can the noble type truly be ‚Äúvalue-creating.‚ÄĚ¬
Labor belonged to nature, which is not capable of generating value. Only the man who arrayed himself against nature‚ÄĒthe artist, the general, the statesman‚ÄĒcould claim that role. He alone had the necessary refinements, wrought by ‚Äúthat pathos of distance which grows out of ingrained difference between strata,‚ÄĚ to appreciate and bestow value: upon men, practices and beliefs. Value was not a product of the prole; it was an imposition of peerless taste. In the words of The Gay Science:¬
Whatever has value in our world now does not have value in itself, according to its nature‚ÄĒnature is always value-less, but has been given value at some time, as a present‚ÄĒand it was we who gave and bestowed it.¬
That was in 1882. Just a decade earlier, Menger had written: ‚ÄúValue is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being.‚ÄĚ Jevons‚Äôs position was identical, and like Nietzsche, both Menger and Jevons thought value was instead a high or low estimation put by a man upon the things of life. But lest that desiring self be reduced to a simple creature of tabulated needs, Menger and Jevons took care to distinguish their positions from traditional theories of utility.¬
Jevons, for example, was prepared to follow Jeremy Bentham in his definition of utility as ‚Äúthat property in an object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness.‚ÄĚ He thought this ‚Äúperfectly expresses the meaning of the word Economy.‚ÄĚ But he also insisted on a critical rider: ‚Äúprovided that the will or inclination of the person concerned is taken as the sole criterion, for the time, of what is good and desirable.‚ÄĚ Our expressed desires and aversions are not measures of our objective or underlying good; there is no such thing. Nor can we be assured that those desires or aversions will bring us pleasure or pain. What we want or don‚Äôt want is merely a representation, a snapshot of the motions of our will‚ÄĒthat black box of preference and partiality that so fascinated Nietzsche precisely because it seemed so groundless and yet so generative. Every mind is inscrutable to itself: we lack, said Jevons, ‚Äúthe means of measuring directly the feelings of the human heart.‚ÄĚ The inner life is inaccessible to our inspections; all we can know are its effects, the will it powers and the actions it propels. ‚ÄúThe will is our pendulum,‚ÄĚ declared Jevons, a representation of forces that cannot be seen but whose effects are nevertheless felt, ‚Äúand its oscillations are minutely registered in all the price lists of the markets.‚ÄĚ¬
Menger thought the value of any good was connected to our needs, but he was extraordinarily attuned to the complexity‚ÄĒand contingency‚ÄĒof that relationship. Needs, wrote Menger, ‚Äúat least as concerns their origin, depend upon our wills or on our habits.‚ÄĚ Needs are more than the givens of our biology or psyche; they are the desideratum of our volitions and practices, which are idiosyncratic and arbitrary. Only when our needs finally ‚Äúcome into existence‚ÄĚ‚ÄĒthat is, only when we become aware of them‚ÄĒcan we truly say that ‚Äúthere is no further arbitrary element‚ÄĚ in the process of value formation.¬
Even then, needs must pass through a series of checkpoints before they can enter the land of value. Awareness of a need, says Menger, entails a comprehensive knowledge of how the need might be fulfilled by a particular good, how that good might contribute to our lives, and how (and whether) command of that good is necessary for the satisfaction of that need. That last bit of knowledge requires us to look at the external world: to ask how much of that good is available to us, to consider how many sacrifices we must bear‚ÄĒhow many satisfactions we are willing to forgo‚ÄĒin order to secure it. Only when we have answered these questions are we ready to speak of value, which Menger reminds us is ‚Äúthe importance we attribute to the satisfaction of our needs.‚ÄĚ Value is thus ‚Äúa judgment‚ÄĚ that ‚Äúeconomizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being.‚ÄĚ It ‚Äúdoes not exist outside the consciousness of men.‚ÄĚ Even though previous economists had insisted on the ‚Äúobjectification of the value of goods,‚ÄĚ Menger, like Jevons and Nietzsche, concludes that value ‚Äúis entirely subjective in nature.‚ÄĚ¬
* * *
In their war against socialism, the philosophers of capital faced two challenges. The first was that by the early twentieth century, socialism had cornered the market on morality. As Mises complained in his 1932 preface to the second edition of Socialism, ‚ÄúAny advocate of socialistic measures is looked upon as the friend of the Good, the Noble, and the Moral, as a disinterested pioneer of necessary reforms, in short, as a man who unselfishly serves his own people and all humanity.‚ÄĚ Indeed, with the help of kindred notions such as ‚Äúsocial justice,‚ÄĚ socialism seemed to be the very definition of morality. Nietzsche had long been wise to this insinuation; one source of his discontent with religion was his sense that it had bequeathed to modernity an understanding of what morality entailed (selflessness, universality, equality) such that only socialism and democracy could be said to fulfill it. But where Nietzsche‚Äôs response to the equation of socialism and morality was to question the value of morality, at least as it had been customarily understood, economists like Mises and Hayek pursued a different path, one Nietzsche would never have dared to take: they made the market the very expression of morality.
Moralists traditionally viewed the pursuit of money and goods as negative or neutral; the Austrians claimed it embodies our deepest values and commitments. ‚ÄúThe provision of material goods,‚ÄĚ declared Mises, ‚Äúserves not only those ends which are usually termed economic, but also many other ends.‚ÄĚ All of us have ends or ultimate purposes in life: the cultivation of friendship, the contemplation of beauty, a lover‚Äôs companionship. We enter the market for the sake of those ends. Economic action thus ‚Äúconsists firstly in valuation of ends, and then in the valuation of the means leading to these ends. All economic activity depends, therefore, upon the existence of ends. Ends dominate economy and alone give it meaning.‚ÄĚ We simply cannot speak, writes Hayek in The Road to Serfdom, of ‚Äúpurely economic ends separate from the other ends of life.‚ÄĚ
This claim, however, could just as easily be enlisted as an argument for socialism. In providing men and women with the means of life‚ÄĒhousing, food, healthcare‚ÄĒthe socialist state frees them to pursue the ends of life: beauty, knowledge, wisdom. The Austrians went further, insisting that the very decision about what constitutes means and ends was itself a judgment of value. Any economic situation confronts us with the necessity of choice, of having to deploy our limited resources‚ÄĒwhether time, money or effort‚ÄĒon behalf of some end. In making that choice, we reveal which of our ends matters most to us: which is higher, which is lower. ‚ÄúEvery man who, in the course of economic activity, chooses between the satisfaction of two needs, only one of which can be satisfied, makes judgments of value,‚ÄĚ says Mises.¬
For those choices to reveal our ends, our resources must be finite‚ÄĒunlimited time, for example, would obviate the need for choice‚ÄĒand our choice of ends unconstrained by external interference. The best, indeed only, method for guaranteeing such a situation is if money (or its equivalent in material goods) is the currency of choice‚ÄĒand not just of economic choice, but of all of our choices. As Hayek writes in The Road to Serfdom:
So long as we can freely dispose over our income and all our possessions, economic loss will always deprive us only of what we regard as the least important of the desires we were able to satisfy. A ‚Äúmerely‚ÄĚ economic loss is thus one whose effect we can still make fall on our less important needs‚Ä¶. Economic changes, in other words, usually affect only the fringe, the ‚Äúmargin,‚ÄĚ of our needs. There are many things which are more important than anything which economic gains or losses are likely to affect, which for us stand high above the amenities and even above many of the necessities of life which are affected by the economic ups and downs.¬
Should the government decide which of our needs are ‚Äúmerely economic,‚ÄĚ we would be deprived of the opportunity to decide whether these are higher or lower goods, the marginal or mandatory items of our flourishing. So vast is the gulf between each soul, so separate and unequal are we, that it is impossible to assume anything universal about the sources and conditions of human happiness, a point Nietzsche and Jevons would have found congenial. The judgment of what constitutes a means, what an end, must be left to the individual self. Hayek again:
Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower‚ÄĒin short what men should believe and strive for.¬
While the economic is, in one sense readily acknowledged by Hayek, the sphere of our lower needs, it is in another and altogether more important sense the anvil upon which we forge our notion of what is lower and higher in this world, our morality. ‚ÄúEconomic values,‚ÄĚ he writes, ‚Äúare less important to us than many things precisely because in economic matters we are free to decide what to us is more, and what less, important.‚ÄĚ But we can be free to make those choices only if they are left to us to make‚ÄĒand, paradoxically, if we are forced to make them. If we didn‚Äôt have to choose, we‚Äôd never have to value anything.¬
* * *
By imposing this drama of choice, the economy becomes a theater of self-disclosure, the stage upon which we discover and reveal our ultimate ends. It is not in the casual chatter of a seminar or the cloistered pews of a church that we determine our values; it is in the duress‚ÄĒthe ordeal‚ÄĒof our lived lives, those moments when we are not only free to choose but forced to choose. ‚ÄúFreedom to order our own conduct in the sphere where material circumstances force a choice upon us,‚ÄĚ Hayek wrote, ‚Äúis the air in which alone moral sense grows and in which moral values are daily re-created.‚ÄĚ
While progressives often view this discourse of choice as either dime-store morality or fabricated scarcity, the Austrians saw the economy as the disciplining agent of all ethical action, a moment of‚ÄĒand opportunity for‚ÄĒmoral artistry. Freud thought the compressions of the dream world made every man an artist; these other Austrians thought the compulsions of the economy made every man a moralist. It is only when we are navigating its narrow channels‚ÄĒwhere every decision to expend some quantum of energy requires us to make a calculation about the desirability of its posited end‚ÄĒthat we are brought face to face with ourselves and compelled to answer the questions: What do I believe? What do I want in this world? From this life?¬
While there are precedents for this argument in Menger‚Äôs theory of value (the fewer opportunities there are for the satisfaction of our needs, Menger says, the more our choices will reveal which needs we value most), its true and full dimensions can best be understood in relation to Nietzsche. As much as Nietzsche railed against the repressive effect of laws and morals on the highest types, he also appreciated how much ‚Äúon earth of freedom, subtlety, boldness, dance, and masterly sureness‚ÄĚ was owed to these constraints. Confronted with a set of social strictures, the diverse and driving energies of the self were forced to draw upon unknown and untapped reserves of ingenuity‚ÄĒeither to overcome these obstacles or to adapt to them with the minimum of sacrifice. The results were novel, value-creating.¬
Nietzsche‚Äôs point was primarily aesthetic. Contrary to the romantic notion of art being produced by a process of ‚Äúletting go,‚ÄĚ Nietzsche insisted that the artist ‚Äústrictly and subtly‚Ä¶obeys thousandfold laws.‚ÄĚ The language of invention‚ÄĒwhether poetry, music or speech itself‚ÄĒis bound by ‚Äúthe metrical compulsion of rhyme and rhythm.‚ÄĚ Such laws are capricious in their origin and tyrannical in their effect. That is the point: from that unforgiving soil of power and whimsy rises the most miraculous increase. Not just in the arts‚ÄĒGoethe, say, or Beethoven‚ÄĒbut in politics and ethics as well: Napoleon, Caesar, Nietzsche himself (‚ÄúGenuine philosophers‚Ä¶are commanders and legislators: they say, ‚Äėthus it shall be!‚Äô‚ÄĚ).
One school would find expression for these ideas in fascism. Writers like Ernst J√ľnger and Carl Schmitt imagined political artists of great novelty and originality forcing their way through or past the filtering constraints of everyday life. The leading legal theorist of the Third Reich, Schmitt looked to those extraordinary instances in politics‚ÄĒwar, the ‚Äúdecision,‚ÄĚ the ‚Äúexception‚ÄĚ‚ÄĒwhen ‚Äúthe power of real life,‚ÄĚ as he put it in Political Theology, ‚Äúbreaks through the crust of a mechanism that has become torpid by repetition.‚ÄĚ In that confrontation between mechanism and real life, the man of exception would find or make his moment: by taking an unauthorized decision, ordaining a new regime of law, or founding a political order. In each case, something was ‚Äúcreated out of nothingness.‚ÄĚ¬
It was the peculiar‚ÄĒand, in the long run, more significant‚ÄĒgenius of the Austrian school to look for these moments and experiences not in the political realm but in the marketplace. Money in a capitalist economy, Hayek came to realize, could best be understood and defended in Nietzschean terms: as ‚Äúthe medium through which a force‚ÄĚ‚ÄĒthe self‚Äôs ‚Äúdesire for power to achieve unspecified ends‚ÄĚ‚ÄĒ‚Äúmakes itself felt.‚ÄĚ
* * *
The second challenge confronting the philosophers of capital was more daunting. While Nietzsche‚Äôs transvaluation of values gave pride of place to the highest types of humanity‚ÄĒvalues were a gift, the philosopher their greatest source‚ÄĒthe political implications of marginalism were more ambidextrous. If on one reading it was the capitalist who gave value to the worker, on another it was the worker‚ÄĒin his capacity as consumer‚ÄĒwho gave value to capital. Social democrats pursued the latter argument with great zeal. The result was the welfare state, with its emphasis on high wages and good benefits‚ÄĒas well as unionization‚ÄĒas the driving agent of mass demand and economic prosperity. More than a macroeconomic policy, social democracy (or liberalism, as it was called in America) reflected an ethos of the citizen-worker-consumer as the creator and center of the economy. Long after economists had retired the labor theory of value, the welfare state remained lit by its afterglow. The political economy of the welfare state may have been marginalist, but its moral economy was workerist.
The midcentury right was in desperate need of a response that, squaring Nietzsche‚Äôs circle, would clear a path for aristocratic action in the capitalist marketplace. It needed not simply an alternative economics but an answering vision of society. Schumpeter provided one, Hayek another.¬
Schumpeter‚Äôs entrepreneur is one of the more enigmatic characters of modern social theory. He is not inventive, heroic or charismatic. ‚ÄúThere is surely no trace of any mystic glamour about him,‚ÄĚ Schumpeter writes in Capitalism, Socialism and Democracy. His instincts and impulses are confined to the office and the counting table. Outside those environs, he cannot ‚Äúsay boo to a goose.‚ÄĚ Yet it is this nothing, this great inscrutable blank, that will ‚Äúbend a nation to his will‚ÄĚ‚ÄĒnot unlike the father figures of a Mann or Musil novel.¬
What the entrepreneur has‚ÄĒor, better, is‚ÄĒare force and will. As Schumpeter explains in a 1927 essay, the entrepreneur possesses ‚Äúextraordinary physical and nervous energy.‚ÄĚ That energy gives him focus (the maniacal, almost brutal, ability to shut out what is inessential) and stamina. In those late hours when lesser beings have ‚Äúgiven way to a state of exhaustion,‚ÄĚ he retains his ‚Äúfull force and originality.‚ÄĚ By ‚Äúoriginality,‚ÄĚ Schumpeter means something peculiar: ‚Äúreceptivity to new facts.‚ÄĚ It is the entrepreneur‚Äôs ability to recognize that sweet spot of novelty and occasion (an untried technology, a new method of production, a different way to market or distribute a product) that enables him to revolutionize the way business gets done. Part opportunist, part fanatic, he is ‚Äúa leading man,‚ÄĚ Schumpeter suggests in Capitalism, Socialism and Democracy, overcoming all resistance in order to create the new modes and orders of everyday life.¬
Schumpeter is careful to distinguish entrepreneurialism from politics as it is conventionally understood: the entrepreneur‚Äôs power ‚Äúdoes not readily expand‚Ä¶into the leadership of nations‚ÄĚ; ‚Äúhe wants to be left alone and to leave politics alone.‚ÄĚ Even so, the entrepreneur is best understood as neither an escape from nor an evasion of politics but as its sublimation, the relocation of politics in the economic sphere.¬
Rejecting the static models of other economists‚ÄĒequilibrium is death, he says‚ÄĒSchumpeter depicts the economy as a dramatic confrontation between rising and falling empires (firms). Like Machiavelli in The Prince, whose vision Nietzsche described as ‚Äúperfection in politics,‚ÄĚ Schumpeter identifies two types of agents struggling for position and permanence amid great flux: one is dynastic and lawful, the other upstart and intelligent. Both are engaged in a death dance, with the former in the potentially weaker position unless it can innovate and break with routine.¬
Schumpeter often resorts to political and military metaphors to describe this dance. Production is ‚Äúa history of revolutions.‚ÄĚ Competitors ‚Äúcommand‚ÄĚ and wield ‚ÄĚpieces of armor.‚ÄĚ Competition ‚Äústrikes‚ÄĚ at the ‚Äúfoundations‚ÄĚ and ‚Äúvery lives‚ÄĚ of firms; entrepreneurs in equilibrium ‚Äúfind themselves in much the same situations as generals would in a society perfectly sure of permanent peace.‚ÄĚ In the same way that Schmitt imagines peace as the end of politics, Schumpeter sees equilibrium as the end of economics.¬
Against this backdrop of dramatic, even lethal, contest, the entrepreneur emerges as a legislator of values and new ways of being. The entrepreneur demonstrates a penchant for breaking with ‚Äúthe routine tasks which everybody understands.‚ÄĚ He overcomes the multiple resistances of his world‚ÄĒ‚Äúfrom simple refusal either to finance or to buy a new thing, to physical attack on the man who tries to produce it.‚ÄĚ¬
To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that define the entrepreneurial type.
The entrepreneur, in other words, is a founder. As Schumpeter describes him in The Theory of Economic Development:
There is the dream and the will to found a private kingdom, usually, though not necessarily, also a dynasty. The modern world really does not know any such positions, but what may be attained by industrial and commercial success is still the nearest approach to medieval lordship possible to modern man.¬
That may be why his inner life is so reminiscent of the Machiavellian prince, that other virtuoso of novelty. All of his energy and will, the entirety of his force and being, is focused outward, on the enterprise of creating a new order.
And yet even as he sketched the broad outline of this legislator of value, Schumpeter sensed that his days were numbered. Innovation was increasingly the work of departments, committees and specialists. The modern corporation ‚Äúsocializes the bourgeois mind.‚ÄĚ In the same way that modern regiments had destroyed the ‚Äúvery personal affair‚ÄĚ of medieval battle, so did the corporation eliminate the need for ‚Äúindividual leadership acting by virtue of personal force and personal responsibility for success.‚ÄĚ The ‚Äúromance of earlier commercial adventure‚ÄĚ was ‚Äúrapidly wearing away.‚ÄĚ With the entrepreneurial function in terminal decline, Schumpeter‚Äôs experiment in economics as great politics seemed to be approaching an end.
* * *
Hayek offered an alternative account of the market as the proving ground of aristocratic action. Schumpeter had already hinted at it in a stray passage in Capitalism, Socialism and Democracy. Taking aim at the notion of a rational chooser who knows what he wants, wants what is best (for him, at any rate) and works efficiently to get it, Schumpeter invoked a half-century of social thought‚ÄĒLe Bon, Pareto and Freud‚ÄĒto emphasize not only ‚Äúthe importance of the extra-rational and irrational element in our behavior,‚ÄĚ but also the power of capital to shape the preferences of the consumer.
Consumers do not quite live up to the idea that the economic textbooks used to convey. On the one hand, their wants are nothing like as definite, and their actions upon those wants nothing like as rational and prompt. On the other hand, they are so amenable to the influence of advertising and other methods of persuasion that producers often seem to dictate to them instead of being directed by them.¬
In The Constitution of Liberty, Hayek developed this notion into a full-blown theory of the wealthy and the well-born as an avant-garde of taste, as makers of new horizons of value from which the rest of humanity took its bearings. Instead of the market of consumers dictating the actions of capital, it would be capital that would determine the market of consumption‚ÄĒand beyond that, the deepest beliefs and aspirations of a people.¬
The distinction that Hayek draws between mass and elite has not received much attention from his critics or his defenders, bewildered or beguiled as they are by his repeated invocations of liberty. Yet a careful reading of Hayek‚Äôs argument reveals that liberty for him is neither the highest good nor an intrinsic good. It is a contingent and instrumental good (a consequence of our ignorance and the condition of our progress), the purpose of which is to make possible the emergence of a heroic legislator of value.
Civilization and progress, Hayek argues, depend upon each of us deploying knowledge that is available for our use yet inaccessible to our reason. The computer on which I am typing is a repository of centuries of mathematics, science and engineering. I know how to use it, but I don‚Äôt understand it. Most of our knowledge is like that: we know the ‚Äúhow‚ÄĚ of things‚ÄĒhow to turn on the computer, how to call up our word-processing program and type‚ÄĒwithout knowing the ‚Äúthat‚ÄĚ of things: that electricity is the flow of electrons, that circuits operate through binary choices and so on. Others possess the latter kind of knowledge; not us. That combination of our know-how and their knowledge advances the cause of civilization. Because they have thought through how a computer can be optimally designed, we are free to ignore its transistors and microchips; instead, we can order clothes online, keep up with old friends as if they lived next door, and dive into previously inaccessible libraries and archives in order to produce a novel account of the Crimean War.¬
We can never know what serendipity of knowledge and know-how will produce the best results, which union of genius and basic ignorance will yield the greatest advance. For that reason, individuals‚ÄĒall individuals‚ÄĒmust be free to pursue their ends, to exploit the wisdom of others for their own purposes. Allowing for the uncertainties of progress is the greatest guarantor of progress. Hayek‚Äôs argument for freedom rests less on what we know or want to know than on what we don‚Äôt know, less on what we are morally entitled to as individuals than on the beneficial consequences of individual freedom for society as a whole.¬
In fact, Hayek continues, it is not really my freedom that I should be concerned about; nor is it the freedom of my friends and neighbors. It is the freedom of that unknown and untapped figure of invention to whose imagination and ingenuity my friends and I will later owe our greater happiness and flourishing: ‚ÄúWhat is important is not what freedom I personally would like to exercise but what freedom some person may need in order to do things beneficial to society. This freedom we can assure to the unknown person only by giving it to all.‚ÄĚ
Deep inside Hayek‚Äôs understanding of freedom, then, is the notion that the freedom of some is worth more than the freedom of others: ‚ÄúThe freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use.‚ÄĚ Hayek cites approvingly this statement of a nineteenth-century philosopher: ‚ÄúIt may be of extreme importance that some should enjoy liberty‚Ä¶although such liberty may be neither possible nor desirable for the great majority.‚ÄĚ That we don‚Äôt grant freedom only to that individual is due solely to the happenstance of our ignorance: we cannot know in advance who he might be. ‚ÄúIf there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty.‚ÄĚ¬
* * *
As this reference to ‚Äúfuture wants and desires‚ÄĚ suggests, Hayek has much more in mind than producers responding to a pre-existing market of demand; he‚Äôs talking about men who create new markets‚ÄĒand not just of wants or desires, but of basic tastes and beliefs. The freedom Hayek cares most about is the freedom of those legislators of value who shape and determine our ends.
The overwhelming majority of men and women, Hayek says, are simply not capable of breaking with settled patterns of thought and practice; given a choice, they would never opt for anything new, never do anything better than what they do now.¬
Action by collective agreement is limited to instances where previous efforts have already created a common view, where opinion about what is desirable has become settled, and where the problem is that of choosing between possibilities already generally recognized, not that of discovering new possibilities.¬
While some might claim that Hayek‚Äôs argument here is driven less by a dim view of ordinary men and women than his dyspepsia about politics, he explicitly excludes ‚Äúthe decision of some governing elite‚ÄĚ from the acid baths of his skepticism. Nor does he hide his misgivings about the individual abilities of wage laborers who comprise the great majority. The working stiff is a being of limited horizons. Unlike the employer or the ‚Äúindependent,‚ÄĚ both of whom are dedicated to ‚Äúshaping and reshaping a plan of life,‚ÄĚ the worker‚Äôs orientation is ‚Äúlargely a matter of fitting himself into a given framework.‚ÄĚ He lacks responsibility, initiative, curiosity and ambition. Though some of this is by necessity‚ÄĒthe workplace does not countenance ‚Äúactions which cannot be prescribed or which are not conventional‚ÄĚ‚ÄĒHayek insists that this is ‚Äúnot only the actual but the preferred position of the majority of the population.‚ÄĚ The great majority enjoy submitting to the workplace regime because it ‚Äúgives them what they mainly want: an assured fixed income available for current expenditure, more or less automatic raises, and provision for old age. They are thus relieved of some of the responsibilities of economic life.‚ÄĚ Simply put, these are people for whom taking orders from a superior is not only a welcome relief but a prerequisite of their fulfillment: ‚ÄúTo do the bidding of others is for the employed the condition of achieving his purpose.‚ÄĚ¬
It thus should come as no surprise that Hayek believes in an avant-garde of tastemakers, whose power and position give them a vantage from which they can not only see beyond the existing horizon but also catch a glimpse of new ones:¬
Only from an advanced position does the next range of desires and possibilities become visible, so that the selection of new goals and the effort toward their achievement will begin long before the majority can strive for them.
These horizons include everything from ‚Äúwhat we regard as good or beautiful,‚ÄĚ to the ambitions, goals and ends we pursue in our everyday lives, to ‚Äúthe propagation of new ideas in politics, morals, and religion.‚ÄĚ On all of these fronts, it is the avant-garde that leads the way and sets our parameters.
More interesting is how explicit and insistent Hayek is about linking the legislation of new values to the possession of vast amounts of wealth and capital, even‚ÄĒor especially‚ÄĒwealth that has been inherited. Often, says Hayek, it is only the very rich who can afford new products or tastes. Lavishing money on these boutique items, they give producers the opportunity to experiment with better designs and more efficient methods of production. Thanks to their patronage, producers will find cheaper ways of making and delivering these products‚ÄĒcheap enough, that is, for the majority to enjoy them. What was before a luxury of the idle rich‚ÄĒstockings, automobiles, piano lessons, the university‚ÄĒis now an item of mass consumption.
The most important contribution of great wealth, however, is that it frees its possessor from the pursuit of money so that he can pursue nonmaterial goals. Liberated from the workplace and the rat race, the ‚Äúidle rich‚ÄĚ‚ÄĒa phrase Hayek seeks to reclaim as a positive good‚ÄĒcan devote themselves to patronizing the arts, subsidizing worthy causes like abolition or penal reform, founding new philanthropies and cultural institutions. Those born to wealth are especially important: not only are they the beneficiaries of the higher culture and nobler values that have been transmitted across the generations‚ÄĒHayek insists that we will get a better elite if we allow parents to pass their fortunes on to their children; requiring a ruling class to start fresh with every generation is a recipe for stagnation, for having to reinvent the wheel‚ÄĒbut they are immune to the petty lure of money. ‚ÄúThe grosser pleasures in which the newly rich often indulge have usually no attraction for those who have inherited wealth.‚ÄĚ (How Hayek reconciles this position with the agnosticism about value he expresses in The Road to Serfdom remains unclear.)
The men of capital, in other words, are best understood not as economic magnates but as cultural legislators: ‚ÄúHowever important the independent owner of property may be for the economic order of a free society, his importance is perhaps even greater in the fields of thought and opinion, of tastes and beliefs.‚ÄĚ While this seems to be a universal truth for Hayek, it is especially true in societies where wage labor is the rule. The dominance of paid employment has terrible consequences for the imagination, which are most acutely felt by the producers of that imagination: ‚ÄúThere is something seriously lacking in a society in which all the intellectual, moral, and artistic leaders belong to the employed classes‚Ä¶. Yet we are moving everywhere toward such a position.‚ÄĚ
When labor becomes the norm, in both senses of the term, culture doesn‚Äôt stand a chance.
* * *
In a virtuoso analysis of what he calls ‚ÄúThe Intransigent Right,‚ÄĚ the British historian Perry Anderson identifies four figures of the twentieth-century conservative canon: Schmitt, Hayek, Michael Oakeshott and Leo Strauss. Strauss and Schmitt come off best (the sharpest, most profound and far-seeing), Oakeshott the worst, and Hayek somewhere in between. This hierarchy of judgment is not completely surprising. Anderson has never taken seriously the political theory produced by a nation of shopkeepers, so the receptivity of the English to Oakeshott and Hayek, who became a British subject in 1938, renders them almost irresistible targets for his critique. Anderson‚Äôs cosmopolitan indifference to the indiscreet charms of the Anglo bourgeoisie usually makes him the most sure-footed of guides, but in Hayek‚Äôs case it has led him astray. Like many on the left, Anderson is so taken with the bravura and brutality of Strauss‚Äôs and Schmitt‚Äôs self-styled realism that he can‚Äôt grasp the far greater daring and profundity of Hayek‚Äôs political theory of shopkeeping‚ÄĒhis effort to locate great politics in the economic relations of capitalism.
What distinguishes the theoretical men of the right from their counterparts on the left, Anderson writes, is that their voices were ‚Äúheard in the chancelleries.‚ÄĚ Yet whose voice has been more listened to, across decades and continents, than Hayek‚Äôs? Schmitt and Strauss have attracted readers from all points of the political spectrum as writers of dazzling if disturbing genius, but the two projects with which they are most associated‚ÄĒEuropean fascism and American neoconservatism‚ÄĒhave never generated the global traction or gathering energy that neoliberalism has now sustained for more than four decades.¬
It would be a mistake to draw too sharp a line between the marginal children of Nietzsche‚ÄĒwith political man on one branch of the family tree, economic man on the other. Hayek, at times, could sound the most Schmittian notes. At the height of Augusto Pinochet‚Äôs power in Chile, Hayek told a Chilean interviewer that when any ‚Äúgovernment is in a situation of rupture, and there are no recognized rules, rules have to be created.‚ÄĚ The sort of situation he had in mind was not anarchy or civil war but Allende-style social democracy, where the government pursues ‚Äúthe mirage of social justice‚ÄĚ through administrative and increasingly discretionary means. Even in The Constitution of Liberty, an extended paean to the notion of a ‚Äúspontaneous order‚ÄĚ that slowly evolves over time, we get a brief glimpse of ‚Äúthe lawgiver‚ÄĚ whose ‚Äútask‚ÄĚ it is ‚Äúto create conditions in which an orderly arrangement can establish and ever renew itself.‚ÄĚ (‚ÄúOf the modern German writings‚ÄĚ on the rule of law, Hayek also says, Schmitt‚Äôs ‚Äúare still among the most learned and perceptive.‚ÄĚ) Current events seemed to supply Hayek with an endless parade of candidates. Two years after its publication in 1960, he sent The Constitution of Liberty to Portuguese strongman Ant√≥nio Salazar, with a cover note professing his hope that it might assist the dictator ‚Äúin his endeavour to design a constitution which is proof against the abuses of democracy.‚ÄĚ Pinochet‚Äôs Constitution of 1980 is named after the 1960 text.¬
Still, it‚Äôs difficult to escape the conclusion that though Nietzschean politics may have fought the battles, Nietzschean economics won the war. Is there any better reminder of that victory than the Detlev-Rohwedder-Haus in Berlin? Built to house the Luftwaffe during World War II, it is now the headquarters of the German Ministry of Finance.
Reply #252 on:
June 03, 2013, 10:24:47 AM »
s Krugman right? shocked This is not my field. I don't know enough to agree or disagree. I wonder if anyone on the board or if Scott Grannis would care to comment. An article from a recent Economist edition:
*****The austerity debate
Mudslinging between economists is a distraction from the real issues
Jun 1st 2013 |From the print edition
THE brawl featuring two economists, Carmen Reinhart and Kenneth Rogoff, and a Keynesian militia led by Paul Krugman, a Nobel prize winner, refuses to die down. It makes entertaining academic theatre. Sadly, it also distracts from an emerging consensus on how countries should best cope with debt.
In 2010 Ms Reinhart and Mr Rogoff initiated an influential line of research with a paper that purported to show that growth slowed dramatically when public borrowing rose above 90% of GDP. The work quickly became beloved of austerity-minded politicians in Europe and America. Then in April three economists from the University of Massachusetts, Amherst, said that unorthodox statistical choices and a spreadsheet blunder had led Ms Reinhart and Mr Rogoff to exaggerate the drop-off in growth at high debt levels.
Keynesian academics pounced, declaring the intellectual foundation of austerity destroyed. The most damning salvos came from Mr Krugman in an essay saying the 2010 paper had ďmore immediate influence on public debate than any previous paper in the history of economicsĒ, yet its conclusion and methodology should have been suspect from the start. Ms Reinhart and Mr Rogoff struck back on May 25th in an open letter to Mr Krugman, decrying his ďuncivil behaviourĒ and his own misstatement (Mr Krugman accused the authors of failing to make public their data; they had. It was their spreadsheet calculations that were not publicly available).
The heat has risen, but the meat of the debate has changed little; if anything, differences may be narrowing. Ms Reinhart and Mr Rogoff now emphasise their less sexy results, that as debt rises growth merely slows, rather than collapses, a point on which many agree. In their letter to Mr Krugman they acknowledge that research is mixed on whether higher debt leads to slow growth or vice versa, long the key criticism of their work. They continue to argue for cautious, proactive debt-reduction. But they say they favour writing down bank debt, slightly higher inflation and ďfinancial repressionĒ (imposing lower real returns on creditors) over immediate austerity.
Those policies are much more to Mr Krugmanís liking. Yet their letter pointedly does not aim to mend fences (it is doubtful Mr Krugman would be interested). And the rhetorical battle obscures important areas of agreement. Austerity that undermines growth does not help; writing down private debt and boosting growth through monetary stimulus and supply-side reform do. That would be a useful message for politicians, but they may struggle to hear it above the din.****
ę Last Edit: June 02, 2013, 08:50:57 PM by ccp Ľ
Re: Economics - What Austerity?
Reply #253 on:
June 03, 2013, 10:27:37 AM »
"Austerity" is when government spending in stagnant economies goes up 6% per year instead of 7%.
CCP/ Crafty, Thanks for 'The Economist' austerity post.
Keynes' work spanned 4 decades and gets interpreted all kinds of ways. The heart of what we call Keynesiansim is the idea that we need government to correct for the failures of the free market, to smooth out the business cycle so to speak. Quite obvious today is that government is preventing the successes of formerly free markets. The issue at hand is whether austerity retards growth. Conversely, would expanding these phony, crony stimuli be the solution to our growth deficit? If Krugman or the other adherents have a valid point to make, I haven't seen it.
Krugman and those following him believe austerity is killing the weaker economies of Europe and will kill us next with our under-spoending (what a joke). But where is the austerity? (See the following article.) The fiscal stimulus in the U.S. botched recovery has been over a trillion a year for at least 4 years. The amount of proven improvement bought at this enormous cost is zilch. And the generational theft it entails is obscene. The monetary stimulus, aka quantitative expansion is also well into the multiple trillions and still continuing. The result of the two enormous artificial forces combined is becoming history's worst recovery. So let's do more of it! (in their view)
The cause of the current malaise is government caused distortions in the markets including taxes, regulations, uncertainty and perverse incentives. These artificial stimuli address none of what is wrong. We have four flat tires and the rear brakes stuck partway on while Krugman and his followers in the White House and at the Fed are trying to pouring more gas into the carburetor. What could go wrong with that? Pretty much everything, but the worst part is that the things that are wrong still aren't being addressed.
The general austerity argument aims first at the failing countries in Europe, the so-called PIIGS countries where austerity allegedly isn't working. But take a closer look at what they are wrongly calling austerity:
'Austerity' To Blame? But Where's The Austerity?
Die-hard Keynesians bemoan that, with a few exceptions, the worldís economies are drowning in the quicksand of austerity. They preach we need more government spending and stimulus, not less. Northern Europe should bail out its less-fortunate neighbors to the South so they can pay their teachers, public employees and continue generous transfers to the poor and unemployed. If not, Europeís South will remain mired in recession. In America, Keynesians entreat the skinflint Republicans to loosen the purse strings so we can escape sub par growth. They advise Japan to spend itself out of permanent stagnation and welcome recent steps in this direction.
The stimulationists complain that they have been overwhelmed by the defeatist austerity crowd, lead by the un-neighborly Germans and the obstructionist Republicans. If only Germany would shift its economy into high gear while transferring its tax revenues to ailing Southern Europe, and the rascally Republicans drop the sequester cuts, we would be sailing along to a healthy worldwide recovery. We donít need spending restraint. Instead, we need stimulus, stimulus, and more stimulus to revive economic growth. Weíll deal with the growing deficits later, the stimulation crowd tells us, but we must first get our economies growing again.
The Keynesian stimulus crowd blames austerity for the worldís economic woes without bothering to examine facts. I advise them first to consult my colleague at the German Institute for Economic Research (Georg Erber, I See Austerity Everywhere But in the Statistics), who, unlike them, has actually taken the time to examine the European Unionís statistics as compiled by its statistical agency, Eurostat.
The official Keynesian story is that the PIIGS of Europe (Portugal, Italy, Ireland, Greece and Spain) have been devastated by cutbacks in public spending. Austerity has made things worse rather than better Ė clear proof that Keynesian stimulus is the answer. Keynesians claim the lack of stimulus (of course paid for by someone else) has spawned costly recessions which threaten to spread. In other words, watch out Germany and Scandinavia: If you donít pony up, youíll be next.
Erber finds fault with this Keynesian narrative. The official figures show that PIIGS governments embarked on massive spending sprees between 2000 and 2008. During this period, their combined general government expenditures rose from 775 billion Euros to 1.3 trillion Ė a 75 percent increase. Ireland had the largest percentage increase (130 percent), and Italy the smallest (40 percent). These spending binges gave public sector workers generous salaries and benefits, paid for bridges to nowhere, and financed a gold-plated transfer state. What the state gave has proven hard to take away as the riots in Southern Europe show.
Then in 2008, the financial crisis hit. No one wanted to lend to the insolvent PIIGS, and, according to the Keynesian narrative, the PIIGS were forced into extreme austerity by their miserly neighbors to the north. Instead of the stimulus they desperately needed, the PIIGS economies were wrecked by austerity.
Not so according to the official European statistics. Between the onset of the crisis in 2008 and 2011, PIIGS government spending increased by six percent from an already high plateau. Eurostatís projections (which make the unlikely assumption that the PIIGS will honor the fiscal discipline promised their creditors) still show the PIIGS spending more in 2014 than at the end of their spending binge in 2008.
As Erber wryly notes: ďAusterity is everywhere but in the statistics.Ē
The PIIGS remind me of the patient whose doctor orders him to lose weight by eating less. The patient responds by doubling his calorie intake. He later cuts back by ten percent and wonders why he is not losing weight. The PIIGS went on a spending binge from which they do not want to retreat. They then blame their problems on austerity and the lack of charity of others.
There is another message in these figures: the insolvent PIIGS cannot finance their deficits on their own in credit markets. They can keep on spending only with loans from international organizations and the European Central Bank. That PIIGS have continued to spend unabated means that their ďmiserlyĒ neighbors have continued to bail them out, largely out of public sight.
So much for the scourge of austerity in Southern Europe. The facts show it simply does not exist.
Well, never mind. The Keynesians have new reason to cheer. Japan, under the new government of Shinzo Abe, has embarked on a program of monetary and fiscal stimulus, and, lo and behold, the stagnant Japanese economy actually recorded a whole quarter of decent growth. At last Japan has seen the light. (The latest Economist cover features a superman Abe flying to Japanís rescue). Stimulus cheerleader, New York Times columnist Paul Krugman (Japan the Model), answers his own question ďhow is Abenomics working?Ē with: ďThe safe answer is that itís too soon to tell. But the early signs are goodÖĒ
Krugmanís memory must be incredibly short if he thinks that Japan has just discovered stimulus. Japan has been in a twenty-year-old funk, despite launching a dizzying variety of Keynesian stimulus programs, some of which bordered on the crazy (such as giving Japanese shopping vouchers so they could relearn how to spend). Over the past twenty years, Japan has tried to spend itself to growth and has nothing to show for it.
We need look only at the growth of Japanís public debt to prove the failure of Japanís Keynesian experiments. In 1990, Japanís public debt was 67 percent of GDP (much like the U.S. today). Today it is 212 percent. All that public spending and Japan still could not grow!
At an interest rate of 5 percent, the Japanese would have to devote ten percent of GDP just to paying interest! And Krugman wants to add to that debt. And believe me, Japan did not accumulate that debt due to austerity. It does not work that way.
Japan is an example of what Europe will look like in twenty years if it takes the Krugman advice ó massive and dangerous debt with nothing to show for it. Japan is a perfect real-world experiment with long run, sustained Keynesianism. Europe and the United States, take notice and beware!
Which leads us to the austerity that is supposedly underway in the United States. (Remember that radical sequester that was supposed to ruin the economy?) Our figures tell exactly the same story as the PIIGS Ė a binge of public spending that has not been reversed. Between 2000 and 2008, both federal and state and local spending increased by almost two thirds. Despite budget cliff hangers, sequestration, and Republican intransience (so claim the Democrats), the federal government today is spending 16 percent more than at the peak of its binge spending in 2008. State and local governments, which cannot borrow as freely as the Feds, are spending a modest 11 percent more.
Instead of ďwhereís the beef?Ē we should ask ďwhereís the austerity?Ē Perhaps economist Krugman can find it. But first I would advise him and others like him to consult some facts before they pontificate.
PS In the comments section, I got a priceless gem from a big government fan, who relates that government spending has risen at an annual rate of 7 percent since 1965. Hence, austerity is defined as growth of government spending at a rate less than ďnormal.Ē The 7 percent rate is instructive because, according to the rule of 72, you get a doubling every ten years. If the federal government continues to grow at its ďnormalĒ (non austerity) rate, it will spend $32 trillion in 2043. Maybe then weíll finally have ďenoughĒ government spending to solve all of our problems.
Last Edit: June 03, 2013, 10:30:18 AM by DougMacG
Reply #254 on:
June 03, 2013, 01:48:16 PM »
PIMCO's Bill Gross
Reply #255 on:
June 16, 2013, 12:46:50 PM »
Wesbury: Keynesianism wrong again
Reply #256 on:
June 18, 2013, 10:02:59 AM »
Keynesian Model Blew It Again To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
If thereís one economic conclusion we can make from recent data, itís that the Keynesian model has failed - again.
Remember that ďfiscal cliff clockĒ on cable TV? Well, the year-end deal included an end to the payroll tax cut and then two months later, on March 1, the dreaded federal spending sequester went into effect. In other words, the Keynesian clock struck midnight, the economy was supposed to slow sharply, and a recession was possible.
The theory was Ė still is in some quarters Ė that higher payroll taxes and less federal spending would reduce spendable incomes (especially for government workers and contractors) and hit consumer spending. This drop in spending would set off a multiplier effect that would drag down economic growth.
One widely-followed Keynesian forecasting unit predicted an uptick in the unemployment rate in the second quarter and a decline in nonfarm payroll growth to 100,000 per month. And when March payrolls rose a tepid 88,000, Keynesians blamed it on the fiscal cliff and said ďhere we go, itís started.Ē
But the unemployment rate is lower in Q2 than in Q1 and nonfarm payrolls have risen an average of 155,000 since the sequester went into effect. Payroll growth during the same three months in 2012 was 147,000. Even the tepid March number was revised from 88,000 to 142,000.
The Keynesians, expecting doom and gloom anytime the government cuts spending, have pounced on any signal of soft economic growth. They jumped on the initial report of weakness in retail sales in March and blamed it on the sequester, even though the last three times Easter had been in March, like this year, sales have been unusually weak compared to other indicators (2002, 2005 and 2008).
But we found out this past week that core retail sales Ė which take out the monthly volatility caused by autos, gas, and building materials Ė have been up eleven months in a row and didnít miss a beat after the sequester went into effect. Assuming consumer prices rose 0.1% in May (see our forecast table, below), ďrealĒ (inflation-adjusted) retail sales are up about 3% from a year ago. Total consumption, adjusted for inflation, is up 2.1% during the year-ended April 2013 versus the 1.8% growth during the year-ended April 2012
Meanwhile, equity investments, held by US households, are up about $800 billion in value since March 1. Taken at face value, it seems like the effect of the sequester has been positive, not negative.
Keynesians havenít even been right about the stock market. Weíre not going to call anyone out by name, but weíre thinking of a famous Keynesian economist who is widely known for having made a prescient call about 2008-09, whose name starts with an ďRĒ and sounds a lot like Houdini.
Itís true that he called the collapse in 2008-09, but he originally went bearish in 2005, especially after Hurricane Katrina. Reports say that he recently turned bullish. So what if you sold in mid-2005 and waited until now to buy back in? Since mid-2005, the annualized total return on the S&P 500, including reinvested dividends, has been 6.2%. Thatís nothing compared to the late 1990s Ė but, hey, it ainít shabby either. In other words, completely ignoring the dire Keynesian advice, even when it was right, would have been profitable.
In mid-2005, you could have bought a 10-year Treasury Note that yielded 4%. Less drama for sure, but no clear advantage. Gold, on the other hand, was trading at about $430/oz. back in mid-2005, so that would have been a great buy, but not an option normal Keynesians would have recommended.
The bottom line is that all this focus on government actions through the lens of a Keynesian model has been basically worthless. Investors are better served when they follow free-market economic theories that focus on production, not demand-side models that focus on spending and debt. And this appears true in both the long, and the short, run.
Reply #257 on:
June 18, 2013, 04:02:01 PM »
It isn't whether Keynesians are right or wrong that matters determining economic policy. We know they are wrong. The question in Washington is how does it poll.
That was an excellent Wesbury. Still he predicts good results from bad policies.
Reply #258 on:
July 01, 2013, 02:21:10 PM »
Monday Morning Outlook
Watching Nominal GDP To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
One of the most important foundations of modern macroeconomics is something called the ďequation of exchange.Ē It dates all the way back to John Stuart Mill but, in the past couple of generations, was popularized by free-market icon Milton Friedman.
Itís really quite simple: M*V = P*Q. And what it means is that the amount of money multiplied by the velocity with which it circulates through the economy determines nominal GDP (real GDP multiplied by the price level). For example, if the money supply increases and velocity stays the same (or rises), then nominal GDP will also increase, meaning more real GDP, higher prices, or some combination of the two.
This is true regardless of a countryís monetary system. It even worked under the old gold reserve system before the Federal Reserve was created in 1913. Back then, the government only created more dollars when someone deposited more gold. So, as long as velocity didnít change, nominal GDP would grow at the same rate as the amount of gold. For example, if gold quantities rose, say 1%, per year and real GDP rose 3% per year, prices would fall 2% per year. This would have been ďgoodĒ deflation. But in reality, velocity has tended to rise over time, so harmful deflation rarely occurred.
Frequent readers of our pieces know we often discuss nominal GDP and may wonder why. The simple reason is the ďequation of exchange.Ē Nominal GDP is inextricably linked with monetary policy (and velocity) and knowledge of some parts of the equation let us solve for other parts.
Nominal GDP is up at a nearly 4% annual rate the past two years. As a result, we can say with some certainty that monetary policy must be accommodative. This is confirmed by a near zero federal funds rate and a relatively steep yield curve Ė meaning a wide spread between long- and short-term interest rates. In addition, the ďrealĒ (inflation-adjusted) federal funds rate has been negative for almost four years (average -0.7% for the past decade).
All of this signals monetary policy is loose. As a result, barring some unforeseen drop in velocity, we are forecasting an upward trend in nominal GDP growth over at least the next couple of years. In turn, as nominal GDP accelerates, the current stance of monetary policy will become increasingly inappropriate and the yield curve will steepen further. In other words, tapering and tightening are the right policies.
Some argue that the US is following the path of Japan. Nominal GDP in Japan is the same today as it was in 1991. Literally, zero growth in 22 years. But, the US is not Japan.
Japanís population is shrinking, with more deaths than births and just slight immigration. This reduces output unless offset by productivity growth. As a result, the same level of short-term rates means Japanís monetary policy is not as accommodative as in the US (where population is increasing). Comparing the two countries can lead to mistakes in analysis.
In the end, the point to understand is that fears of declining nominal GDP (or deflation) in the US are misplaced. The US is not Japan and the equation of exchange suggests we wonít be.
Gilder: The Need for a New Economics
Reply #259 on:
September 18, 2013, 10:45:33 PM »
The Need for a New Economics
By George Gilder
Why is it that so many Americans seem to believe that government spending, fueled by debt or taxes, can drive economic growth and wealth creation? Why do they believe that low interest rates, enforced by the Federal Reserve, can somehow spur business and investment? Why do they imagine that money and consumer demand impel the economy forward?
The reasons, I believe, are rooted in an economic confusion between knowledge and power. Many economists believe that growth is impelled by the exercise of power, represented by money creation and by government spending and guarantees. By manipulating the so-called ďlevers of the economic machine,Ē government power can enlarge demand, inducing businesses to invest and consumers to spend. This process is seen to generate the demand that fuels economic growth.
These images of the economy of power are part of the very creation story of economics in an era of new machines and sources of energy. The first economic models were explicitly based on the dynamics of the steam engine then impelling the industrial revolution. Isaac Newtonís physical ďsystem of the worldĒ became Adam Smithís ďgreat machineĒ of the economy, an equilibrium engine transforming coal and steam into economic growth and progress.
Exploring technology investments over recent decades, however, I found myself preoccupied less with sources of power than with webs of knowledge in a field of study called Information Theory. On one level this theory was merely a science of networks and computers. Its implications, however, would change our deepest concepts of the nature of wealth. It would show that wealth is not money or power or demand. It is essentially the accumulation of knowledge.
Information theory effectively began with Kurt Godelís demonstration in 1930 that all logical systems, including mathematics, are intrinsically incomplete and depend on axioms that they cannot prove. This epochal finding is often obscured by elaborate explanations of the intricate mathematics he used to prove it. But as John Von Neumann in his audience was first to recognize, Godelís proof put an end to the idea of the universe, or the economy, as a mechanism. Godelís proof, as he himself understood, implied the existence of autonomous creation.
Godelís proof led directly to the invention by Alan Turing of a universal generic computer, a so-called Turing machine. By this abstract conception, which became the foundation for all computer science, Turing showed that no mechanistic computer system could be complete and consistent. Turing concluded that all logical systems were intrinsically oracular.
Computers could not be Smithian ďgreat machinesĒ or Newtonian ďsystems of the world.Ē They inexorably relied upon human programmers or oracles and could not transcend their creators. As Turing wrote, he could not specify what these oracles would do. All he could say was that ďthey could not be machines.Ē In a computer, they are programmers. In an economy, they are entrepreneurs.
In 1948 a rambunctiously creative engineer, Claude Shannon, from Bell Labs and MIT, translated Godelís and Turingís findings into a set of technical concepts for gauging the capacity of communications channels to bear information.
Shannon resolved that all information is most essentially surprise. Unless messages are unexpected they do not convey new information. An orderly and predictable mechanism, such as a Newtonian system of the world or Smithian great machine, embodies or generates no new information.
Studying information theory for decades in my exploration of technology, I finally found the resolution to the enigmas that currently afflict most economic thought. A capitalist economy is chiefly an information system, not a mechanistic incentive system. Wealth is the accumulation of knowledge. As Thomas Sowell declared in 1971: All economic transactions are exchanges of differential knowledge, which is dispersed in human minds around the globe. Knowledge is processed information, which is gauged by its news or surprise.
Surprise is also a measure of freedom and criterion of creativity. It is gauged by the freedom of choice of the sender of a message, which Shannon termed ďentropy.Ē The more numerous the possible messages that can be sent, the more uncertainty at the other end about what message was sent and thus the more information there is in the actual message when it is received.
In Knowledge and Power, I sum up information theory as the treatment of human communications or creations as transmissions down a channel, whether a wire or the world, in the presence of the power of noise, with the outcome measured by its ďnewsĒ or surprise, defined as entropy and consummated as knowledge.
Since these communications or creations can be business plans or experiments, information theory supplies the foundation for an economics driven not by equilibrium and order but by surprises of enterprise that yield knowledge and wealth.
Information theory requires that such a process be experimental and its results be falsifiable. The businesses conducting entrepreneurial experiments must be allowed to fail or go bankrupt. Otherwise there is no yield of knowledge and thus no production of wealth. Wealth does not consist in material capital that can be appropriated by the greedy or the government but in learning processes and knowledge creations that can only thrive in freedom.
After all, the Neanderthal in his cave had all the material resources and physical appetites that we have today. The difference between our own wealth and Stone Age poverty is not an efflorescence of self-interest but the progress of learning, accomplished by entrepreneurs conducting falsifiable experiments of enterprise.
The enabling theory of telecommunications and the internet, information theory offered me a path to a new economics that could place the surprising creations of entrepreneurs and innovators at the very center of the system rather than patching them in from the outside as ďexogenousĒ inputs. It also showed that knowledge is not merely a source of wealth; it is wealth.
Summing up the new economics of information are ten key insights:
1) The economy is not chiefly an incentive system. It is an information system.
2) Information is the opposite of order or equilibrium. Capitalist economies are not equilibrium systems but dynamic domains of entrepreneurial experiment yielding practical and falsifiable knowledge.
3) Material is conserved, as physics declares. Only knowledge accumulates. All economic wealth and progress is based on the expansion of knowledge.
4) Knowledge is centrifugal, dispersed in peopleís heads. Economic advance depends on a similar dispersal of the power of capital, overcoming the centripetal forces of government.
5) Creativity, the source of new knowledge, always comes as a surprise to us. If it didnít, socialism would work. Mimicking physics, economists seek determinism and thus erroneously banish surprise.
6) Interference between the conduit and the contents of a communications system is called noise. Noise makes it impossible to differentiate the signal from the channel and thus reduces the transmission of information and the growth of knowledge.
7) To bear high entropy (surprising) creations takes a low entropy carrier (no surprises) whether the electromagnetic spectrum, guaranteed by the speed of light, or property rights and the rule of law enforced by constitutional government.
Money should be a low entropy carrier for creative ventures. A volatile market of gyrating currencies and grasping governments shrinks the horizons of the economy and reduces it to high frequency trading and arbitrage in a hypertrophy of finance.
9) Wall Street wants volatility for rapid trading, with the downsides protected by government. Main Street and Silicon Valley want monetary stability so they can make long term commitments with the upsides protected by law.
10) GDP growth is fraudulent when it is mostly government spending valued retrospectively at cost and thus shielded from the knowledgeable judgments of consumers oriented toward the future. Whether fueled by debt or seized by taxation, government spending in economic ďstimulusĒ packages necessarily substitutes state power for knowledge and thus destroys information and slows economic growth.
11) Analogous to average temperature in thermodynamics, the real interest rate represents the average returns expected across an economy. Analogous to entropy, profit or loss represent the surprising or unexpected outcomes. Manipulated interest rates obfuscate the signals of real entrepreneurial opportunity and drive the economy toward meaningless trading and arbitrage.
12) Knowledge is the aim of enterprise and the source of wealth. It transcends the motivations of its own pursuit. Separate the knowledge from the power to apply it and the economy fails.
The information theory of capitalism answers many questions that afflict established economics. No business guaranteed by the government is capitalist. Guarantees destroy knowledge and wealth by eliminating the precondition of falsifiability. Unless entrepreneurial ideas can fail or businesses go bankrupt, they cannot succeed in creating new knowledge and wealth. Epitomized by heavily subsidized and guaranteed leviathans, such as Goldman Sachs, Archer Daniels Midland, Harvard and Fanny Mae, the crisis of economics today is crony statism.
The message of a knowledge economy is optimistic. As Jude Wanniski wrote, ďGrowth comes not from dollars in peopleís pockets but from ideas in their heads.Ē Capitalism is a noosphere, a domain of mind. A capitalist economy can be transformed as rapidly as human minds and knowledge can change.
As experience after World War II when US government spending dropped 61 percent in two years, in Chile in the 1970s when the number of state companies dropped from over 500 to under 25, in Israel and New Zealand in the 1980s when their economies were massively privatized almost over-night, and in Eastern Europe and China in the 1990s, and even in Sweden and Canada in recent years, economic conditions can change overnight when power is dispersed and the surprises of human creativity are released.
Perhaps the most powerful demonstration that wealth is essentially knowledge came in the rapid post world war II revival of the German and Japanese economies. Nearly devoid of material resources, these countries had undergone the nearly complete destruction of their physical plant and equipment. As revealed by decades of experience with unsuccessful ministrations of foreign aid, the mere transfer of financial and political power is impotent to create wealth without the knowledge and creativity of entrepreneurs.
Information Theory is a foundation for revitalizing all the arts and sciences, from physics and biology to mathematics and philosophy. All are transformed by a recognition that information is not order but disorder. The universe is not a great machine that is inexorably grinding down all human pretenses of uniqueness and free will. It is a domain of creativity in the image of a creator.
In the same way, capitalism is not a system of equilibrium; it is an engine of disruption and invention. All economic growth and human civilization stem from the surprises of creativity and the growth of knowledge in a domain of constitutional order.
The great mathematician Gregory Chaitin, inventor of algorithmic information theory, explains that to capture the surprising information in any social, economic, or biological science requires a new mathematics of creativity imported from the world of computers. He writes: ďLife is plastic, creative! How can we build this out of static, eternal, perfect mathematics? We shall use post-modern math, the mathematics that comes after Godel, 1931, and Turing, 1936, open not closed math, the math of creativityÖĒ
Entropy is a measure of surprise, disorder, randomness, noise, disequilibrium, and complexity. It is a measure of freedom of choice. Its economic fruits are creativity and profit. Its opposites are predictability, order, low complexity, determinism, equilibrium, and tyranny.
Predictability and order are not spontaneous and cannot be left to an invisible hand. It takes a low-entropy carrier (no surprises) to bear high-entropy information (full of surprisal). In capitalism, the predictable carriers are the rule of law, the maintenance of order, the defense of property rights, the reliability and restraint of regulation, the transparency of accounts, the stability of money, the discipline and futurity of family life, and a level of taxation commensurate with a modest and predictable role of government. These low entropy carriers bear all our bounties of surprising wealth and progress.
A clever friend comments
Reply #260 on:
September 19, 2013, 01:10:06 AM »
I read Gilder's book that expands on these concepts. He builds these ideas in the book but clearly had difficulty making a book length document as repetition occurs again and again in subsequent chapters. But I think he is spot on in his observation (last paragraph below):
"Predictability and order are not spontaneous and cannot be left to an invisible hand. It takes a low-entropy carrier (no surprises) to bear high-entropy information (full of surprisal). In capitalism, the predictable carriers are the rule of law, the maintenance of order, the defense of property rights, the reliability and restraint of regulation, the transparency of accounts, the stability of money, the discipline and futurity of family life, and a level of taxation commensurate with a modest and predictable role of government. These low entropy carriers bear all our bounties of surprising wealth and progress."
Gilder takes his cue from Shannon's work on information theory which I did not fully appreciate until I read Pierce's text summarizing the key concepts. Without this background I would have been a bit adrift in Guilder's presentation which is at times muddled. Consequently Gilder's presentation, while valuable, ends up unconvincing.
I think Gilder's underlying contribution is to reaffirm what probably many of us instinctively believe: Ultimately growth comes from human imagination, initiative, and drive to create new things (surprises), supported adequately to see these new ideas expand out to large scale which can improve the overall economy. For this process to proceed effectively, it must have a solid, stable foundation which can be taken as predictable and for granted so focus can remain on imagination and implementation.
When the foundations shift, the whole system goes unstable ('becomes noisy" in Gilderese) and growth falters. In this context rule of law, finance, banking, money, regulations and such need to be held stable. Fussing with them (via Wall Street manipulation and false innovation and Fed maneuvering) just make the foundations rumble with continuing earthquakes. Innovators and those with initiative (sources of "unexpected and creative noise" in Gilderese) are forced to hang on instead of do what they do best.
Growth then falters.
Nothing the economists will do using their current theory and practice will fix it. In the end the imaginative and persistent innovators will slug through the problems, and drag the economy along, independent or in spite of "stimulus" and "quantitative easing." These manipulations occur only because the economic/finance part of the foundation went unstable when they should have been somehow restricted from doing so. History suggests we don't yet know how, alas. But human beings adapt, and they are adapting to the current situation, and trying to thrive in spite of it. In many areas they are succeeding as David notes. Corporations which are forced to adapt or die adapt most quickly, and guess what, corporate profits are now thriving. But the mental funk continues.
Just caught the news that Bernanke is keeping his foot on the throttle. Markets up. This is the new normal, it seems. People and companies will adapt, but the foundations continue to rumble and roll creating a lot of FUD (fear, uncertainty, and doubt). It is a far from optimum way to run a railroad.
You need a stable soup pot that just sits there and supports the soup as it is being prepared, and imaginative cooks with a huge library of potential ingredients (information) to make the soup appealing. Bounce the soup pot and nothing but slops occur.
Re: Economics - Gilder and the knowledge economy
Reply #261 on:
September 19, 2013, 09:32:21 AM »
Gilder is right about this. It is interesting to delve deeper into how things work. Unfortunately the way forward to take advantage of this reality is to make these concepts more simple and clear to more people rather than more deep and complicated. Your friend is also right and much easier to follow.
The tragedy today is that the extreme noise in the system is keeping the best and brightest from bothering with making the most valuable innovations that would move us forward.
Reply #262 on:
September 19, 2013, 10:29:46 AM »
Fantastic food for thought. But like his Gilder tech report is so full of concepts I need more time to digest. I have had some initial thoughts. One big concern I have is just letting human entropy take its course. It is totally random and only God knows where this will take us. We need something to balance this. Gilder only trivially speaks of some controls - his piece is long. But he only gives very short drift to this:
"Predictability and order are not spontaneous and cannot be left to an invisible hand. It takes a low-entropy carrier (no surprises) to bear high-entropy information (full of surprises). In capitalism, the predictable carriers are the rule of law, the maintenance of order, the defense of property rights, the reliability and restraint of regulation, the transparency of accounts, the stability of money, the discipline and futurity of family life, and a level of taxation commensurate with a modest and predictable role of government. These low entropy carriers bear all our bounties of surprising wealth and progress."
I also suggest religion in some way also counterbalances the dangers of just letting loose the entropy of capitalism. We need great religious leaders who can update Judeo Christian tenets to apply to the new world.
I would like to take more time to study the post from Gilder. He blends chemistry, math, and information into an applicable theory of capitalism and suggests it is the continuation of human evolution of a species of creationism.
But the crucial question to me is,
what about us as human beings? As socieities? As a civilization? As a species?
National Savings Rate in historical perspective, + Investment Rate
Reply #263 on:
October 16, 2013, 12:34:07 PM »
From savings comes investment. From investment come jobs, growth, opportunity, prosperity.
The net investment rate, a similar graph, is shown with the savings rate in this pdf,
, I just don't know how to pull the chart out to display here.
Reply #264 on:
October 16, 2013, 12:52:40 PM »
From Mea Culpa,
Crafty: "Like many, I anticipated huge inflation due to the Fed printing scandalous amounts of money. Though this may yet happen due to the inherent contradictions of the path upon which we are embarked, I have come to belief that Scott Grannis has been correct on this point-- that bank reserves are not the same thing as printing money."
My view: Bank reserves are more like potential energy while printed money (in circulation) is more like kinetic energy. With energy, one easily converts into the other. Bank reserves in excess will convert and multiply into printed money in circulation in excess if and when economic velocity begins to accelerate, meaning price increases will come later from the monetary expansions that already occurred.
Regarding who is right, we will see.
Reply #265 on:
October 17, 2013, 07:24:44 AM »
I'm not disagreeing that down the road those reserves may convert into money, but at present I'm thinking Scott's analysis here is better than mine was.
Reply #266 on:
October 18, 2013, 07:30:51 AM »
Quote from: Crafty_Dog on October 17, 2013, 07:24:44 AM
I'm not disagreeing that down the road those reserves may convert into money, but at present I'm thinking Scott's analysis here is better than mine was.
I don't think the matter is settled yet.
A. Lewis: Income inequality, opportunity equality
Reply #267 on:
October 28, 2013, 10:58:34 AM »
October 15, 2013
Average Is OveróBut the American Dream Lives On
Who dreams of being average? Americans define personal success in different ways, but certainly no one strives for mediocrity. The children of Lake Wobegon, after all, were ďall above average.Ē
Perhaps this explains why some reviewers have understood the glum predictions of Tyler Cowenís Average Is Overóthat shifts in the labor market will cause the middle class to dwindleóas heralds of the death of the American Dream. This understanding misses the real thrust of Cowenís book.
Everyone has their own notions of what constitutes the American Dream, but when writer and historian James Truslow Adams coined the phrase in the 1930s, he wrote that in America ďlife should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.Ē Cowenís vision of our future actually reinforces this idea.
This claim might seem strange at first glance for a book that delves into the perpetually gloomy subject of economic inequality. But the takeaways from Cowenís work are, at least marginally, more optimistic than most people would expect. While Cowen foresees an America with more polarizing income inequality, the country wonít be entirely in the grip of the forces we have grown used to. In the past, income inequality was largely driven by differences in social status. In the future, Cowen argues, society will become more meritocratic: ability will be to an even greater extent the primary driver of labor market success. For those Americans who currently lack access to elite education or other resources or privileges of status, the book offers many reasons to be optimistic about the future.
Cowenís arguments hinge on the belief that income inequality will persist. In this hypothesis he is far from alone, and backed up by current trends. In the past decade income inequality has worsened by almost every measure. Wealth is more concentrated at the top, and more people depend on government transfers. There are few reasons to expect that these trends will curtail. But rather than deny or look for ways to avoid this fate, the book extends this vision with a series of insights about our economic and social future.
Cowenís Freestyle Future
One of Cowenís most fascinating projections concerns the proliferation of machine intelligence and its effects on labor market conditions. He sees the mechanization of chess as a small-scale version of how many industries will evolve, following this sequence:
1. Human is the expert; computer adds little to current product.
2. Experts continue programming machine, strengthening its ability.
3. Experts supplement computer with minimal input (correcting obvious miscalculations).
4. Machine becomes expert; human adds little.
5. Computers take place of human (middle-wage jobs); only those who can add value to the computer stay on the job.
Cowenís analogizing of the progress of chess programs to broader societal trends is worth delving into with a little more detail. For centuries, chess was a game dominated by human art and skill, with Grandmasters as the foremost artists. In 1990, when a team of IBM programmers (and Carnegie Mellon University graduates) set out to create a machine that could beat these human experts, they were largely scoffed at. But in 1996 the resulting program, Deep Blue, won its first game against the reigning world champion Garry Kasparov (but lost the overall match); in 1997, it defeated Kasparov in a traditional six-game match.
Today, Cowen tells us, an average chess-playing program, running on virtually any piece of consumer hardware, is easily capable of outplaying any human. Many people who compete at the highest levels of chess play what is called freestyle chess, where teams include a computer and a human counterpart. Excelling at freestyle does not require profound skill in chess per se, but rather expertise in working with the computer. The best players are the ones who recognize their limitations and are willing to accept the advice of the computer; those who win most are the ones who design or run the best programs. Cowen predicts that this process will be repeated across many different industries and arenas of human endeavor.
If this process holds, itís not difficult to see why incomes will become increasingly polarized. The top end of the income distributionówhich he envisions as the 15 percent, rather than the 1 percentówill be comprised of those who are truly talented or creative in their ability to work with technology. These folks will ďwinĒ the most in the new system because of their ability to make computers more productive. The rest of the population will fall into lower paying service jobs.
This idea is sobering, but one major benefit of this future would be the reduction of ďopportunity inequalityĒ. These trends will disenfranchise many subpar performers (and their shortcomings, he says, will be increasingly illuminated by an array of public fora for reviews, as well as various automated assessments of value). But they will also reward those who are most deservingóa fact, says Cowen, that ďwill make it easier to ignore those who are left behind.Ē
Thus the advance of machine intelligence will cause a surge inincome inequality, but will also level the playing field foropportunity. In a recent interview with NPR Cowen predicted that ďfor a lot of people upward mobility will be a lot easier.Ē The internet has already provided a new forum for individuals to exhibit their talents on a nearly global stage. Here Cowen returns to chess, where smaller nations like Armenia and Norway, once underrepresented in the chess world, are producing some of the best young players. Before online chess, an Armenian player would have had to move to Moscow to compete at the highest levels. With this barrier now removed, Armenia is a ďperennial competitorĒ for international chess honors.
We have seen this trend accelerate, too, with the growth in online education and massively open online courseware (MOOCs). There are plenty of individuals who have the desire, aptitude and discipline to learn online, and they will do so when classes are affordable and accessible.
Computerization also makes us better at assessing ability, especially among larger, more geographically dispersed populations. As quality education becomes more readily available, more individualsófor whom attending an elite university is not an optionówill have the opportunity to showcase their ability and be rewarded for it. ďMachine intelligence is the friend of the educational parvenu,Ē Cowen says.
And Then What?
The question that logically follows from worsening income inequality is how it will affect Americaís social fabric. Plenty of doomsayers predict that it will lead to a revolutionóthat the left-behinds will conspire against the new high-earners. But if everyone has the same opportunity to succeed, then how will they feel slighted by the system? Cowen calls these theories of the revolutionary consequences of income inequality ďsome of the least thought-out and least well-supported arguments with wide currency.Ē
This is largely consistent with his view on the history of income inequality in the United States. He recognizes that the trend is deeply disconcerting to many Americans but also believes it is not the best measure of social inequality. Access to food, modern medicine, and the internet are just a few measures one could cite to show that the average person is better off now than ever before. In a2011 article for The American Interest, Cowen wrote, ďBy broad historical standards, what I share with Bill Gates is far more significant than what I donít share with him.Ē Indeed, the advancements of modern society have allowed more Americans to enjoy higher standards of living than at any other time in our nationís history.
A report published in 1997 by the Dallas Federal Reserve Bank,Time Well Spent, substantiates this point. While income disparity has grown, the magnitude of the change does not nearly match that of the rising standard of living. The report examines the cost of goods based on the minutes of work needed, on average, to buy them. It finds that in 1919 it took the average American eighty minutes of work in order to buy a dozen eggs. Today it takes him five minutes.
If this is the caseóand by the most advanced methodological standards, it isóthen income inequality might not be as devastating an issue as many believe. Thatís not at all to say that inequality is unimportant, but rather that income inequality is not the best gauge of societal equity. Perhaps opportunity equality should be what we strive for. The book makes a case for this suggestion.
Cowen has another inkling as to why income inequality is not the catalyst of social unrest and outrage that many make it out to be. Envy, he contends, is usually local. ďItís directed at the guy down the street who got a bigger raise. [Ö] Most of us donít compare ourselves to billionaires.Ē He doesnít claim to demonstrate this, of course, but these injections of more personal insights and intuitions add freshness to the book.
Whether or not you agree with its predictions, Average Is Over is worthwhile for any curious reader. Cowen has a rare ability to present fundamental economic questions without all of the complexity and jargon that make many economics books inaccessible to the lay reader. Approachable prose and plainspoken explanations help this cause.
On the whole, the predictions and insights to be found in this book are more exciting than they are dismal. There is virtue to what Cowen says will be a ďhyper-meritocracy.Ē Certainly an important goal of any economic policy should be to ensure that everyone has a fair shot at succeeding in our society. Rewarding individuals for their ability and effort is an idea that rings true with the spirit of James Adamsí vision. The American Dream is alive and well.
Re: Economics - Is Inequality Inefficient?
Reply #268 on:
October 29, 2013, 01:31:04 PM »
Defending the One Percent
by Greg Mankiw, Chairman and Professor of Economics at Harvard University
Journal of Economic Perspectives, Summer 2013, pages 21-34
I am unable to cut and paste an excerpt from the pdf.
Middle class circles the drain in Seattle case
Reply #269 on:
November 15, 2013, 09:06:08 AM »
The case here is paradigmatic of many more. Not that I have a solution, but I feel for the workers getting squeezed here.
By TIMOTHY EGAN
Published: November 14, 2013 53 Comments
SEATTLE ó This is how the middle class dies, not with a bang, but a forced squeeze. After a global corporation posts record profits, it asks the state that has long nurtured its growth for the nationís biggest single tax break, and then tells the people who make its products that their pension plan will be frozen, their benefits slashed, their pay raises meager. Take it or we leave. And everyone caves.
Well, almost everyone. All went according to script as the Boeing Company showed what to expect in a grim future for a diminished class -- the vanishing American factory worker. The threats were issued, the tax giveaways approved, the political leaders warned of the need to buckle to Boeing.
This didnít happen in a broken town with a broken industrial heart. It took place in one of the most prosperous metropolitan areas on the planet -- Seattle -- home to Starbucks, Costco, Microsoft, Nordstrom and Amazon.com, which is on its way to becoming the worldís largest retailer.
But then came the final item, a vote of the people who actually assemble the planes. By a 2-1 margin on Wednesday, the machinists of Puget Sound told Boeing to stuff it. With this act of economic suicide, the state could lose up to 56,000 jobs on the new 777X plane. Cue your metaphor -- the Alamo, Custerís Last Stand, Braveheart.
The events of the last few days show the utter bankruptcy of economic policy prescriptions offered by both political parties. You want tax breaks and deregulation -- the Republican mantra? The $8.7 billion granted Boeing this week is the largest single state-tax giveaway in the nationís history. It wasnít enough. You want government training for schools and highly skilled workers -- the Democratic alternative? There was plenty of that, to Boeingís liking, in the package.
What Boeing wants is very simple: to pay the people who make its airplanes as little money as it can get away with. It needs to do this, weíre told, to stay competitive. It has all the leverage, because enough states -- and countries -- are willing to give it everything it asks for. Who wouldnít want a gleaming factory stuffed with jet assemblers, a payroll guaranteed for a generation?
Boeing is on a roll, its stock at a record high despite the troubled rollout of its 787 Dreamliner, and the pay of its C.E.O. boosted 20 percent to a package totaling $27.5 million last year. It is not impelled, as the auto industry was five years ago, in the midst of bailouts and cutbacks. Boeing could afford to be generous, or at least not onerous. But itís easier to play state against state, the race to the bottom.
What Boeingís riveters, line-assemblers and welders want is a thimble of respect. People have been building flying machines in this region since young Bill Boeing rolled seaplanes out of a barn nearly 100 years ago. The machinists didnít ask for hefty pay raises or new benefits as a condition to keep the much-promoted 777X production in this region. They just wanted to preserve what they had -- jobs that could pay up upward of $80,000 a year, with a guaranteed pension.
Boeing's proposal would have cut workers' compensation but kept assembly of the 777X jet in Washington State.
Dean Rutz/The Seattle Times, via Associated Press
Boeing's proposal would have cut workers' compensation but kept assembly of the 777X jet in Washington State.
ďIím tired of being slapped in the face,Ē said John Gilman, who has worked at Boeing for nearly 40 years. ďBuilding airplanes -- it takes years of training and skill. The people who run this company used to understand that. But now itís run by bean counters and lawyers.Ē
Gilman was among the thousands of factory workers voting on Boeingís take-it-or-we-leave proposal Wednesday. The anger was palpable. The president of the local machinists union had called the proposal ďa piece of crap.Ē Others referred to it as ďthe Walmartization of aerospace.Ē As they voted, vultures circled, among them Gov. Rick Perry of Texas, who tweeted last week that his low-tax, low-wage state was ready to help Boeing.
One of the more tedious laments of our day is the bromide that we donít make things anymore in the United States. In fact, we make plenty of things, including world-class airplanes. But the question is whether we can still pay the people who make them a decent wage.
Perhaps not. In the wake of the machinistsí rebellion, Boeing is likely to move. ďWeíre left with no choice but to open the process competitively and pursue all options for the 777X,Ē said Boeingís commercial airplanes C.E.O., Ray Conner, after the vote.
So, off to Texas, where one in four people have no health care, or South Carolina, where a compliant work force would never think of putting up a fight? And who can blame Boeing? After all, pensions are a thing of the past, arenít they? Wages and household income, across the country, have not risen in nearly 15 years.
This is supposed to be the age of the gig economy -- every worker an entrepreneur. But it hasnít translated to a fix of the greatest economic crisis of our times: how to preserve a declining middle class.
The distilled wisdom on this subject says that education -- elevating minds, skills and critical thinking to match a tomorrow economy -- is the way forward. And everyone in this tomorrow-economy state seems to agree. Except, look at what happened here, a parable for troubled times. The state agreed to subsidize Boeing to the tune of $500 million a year over 16 years. Thatís twice what the state gives to the University of Washington, the regionís flagship college, long an elevator to the middle class. Maybe the university should threaten to leave town.
Re: Economics - Pope Francis expresses economic views
Reply #270 on:
December 02, 2013, 02:27:42 PM »
People who dismiss the importance of the pontiff and his views on other matters such as gay rights, abortion and birth control are suddenly quite exuberant to hear Pope Francis disparage "trickle-down theories". (
) Before I can really comment, I will need to read what is written in its entirety
and learn if there is a question about context and meaning coming through the media reports, such as this one:
Pope Francis denounces Ďtrickle-downí economic theories in critique of inequality
Kevin Williamson at National Review wrote:
"... But there is no reason for Pope Francis to take that view [all power relationships as zero-sum: If somebody else gets a little more power, he has a little less]. If ever the Churchís economic thinkers get over their 19th-century model of the relationship between state and market, they might appreciate that spontaneous orders and distributed economic forces could produce some truly radical outcomes in a world in which a billion or more people shared a vision of justice and mercy. The popeís job in part is to supply that vision; unhappily, the default Catholic position seems to be delegating economic justice to the state, under the mistaken theory that its ministers are somehow less selfish than are the men who build and create and trade for a living rather than expropriate. Strange that a man who labored under the shadow of Perůn has not come to that conclusion on his own."
The Pope is quite right (IMHO) to criticize the worship of money and materialism:
He is out of his realm to think that a lifetime of studying poverty (the lack of wealth creation) leads to very much insight into the creation of wealth, which is the pathway out of poverty.
Most offensive to me is the (media) implication that he supports government programs that emphasize collective taking, not individual giving.
Ed Morrisey of Hot Air took the time to read Evangelii Gaudium and says that this is not a new turn toward socialism or communism.
Reply #271 on:
December 02, 2013, 09:06:26 PM »
The Catholic Church has a long history of such corporatist (fascist) thinking.
Reply #272 on:
December 03, 2013, 09:05:51 AM »
Quote from: Crafty_Dog on December 02, 2013, 09:06:26 PM
The Catholic Church has a long history of such corporatist (fascist) thinking.
This is sad to me. I am only a non-member who sometime attends but a good part of my family is Catholic. I understand that people had failed views of economics centuries ago, but we have quite a bit of new data since then. Economic Freedom and capitalism have lifted billions(?) of people up out of poverty. Big Government, and even charity, has lifted up virtually none.
Robert Bartley, The Seven Fat Years, and how to do it again - Still Relevant!
Reply #273 on:
December 06, 2013, 01:00:49 PM »
My most referenced economics book, I wish I could just post the whole thing. If you are interested in this sort of thing, growing our great country out of plowhorse stagnation, go read it!
December 3, 2013
Robert Bartley's 'The Seven Fat Years' - One of the Greatest Economics Books Ever Written
By John Tamny
Ten years ago in the fall of 2003, I finally read Robert Bartley's The Seven Fat Years. An economic history of the booming Ď80s, along with the slow-growth Ď70s that preceded the alleged ĎDecade of Greed," Bartley's book was a masterpiece. Most already know this, but Bartley was the editorial page editor of the Wall Street Journal, and he sadly died ten years ago today.
I was never lucky enough to know Bartley, but he was always kind enough to return an occasional e-mail, including one about interest rates referenced in his book not long before he passed. Though The Seven Fat Years was published in 1992, it remains one of the most useful books an economically interested reader could ever buy. It explains very entertainingly how extraordinarily easy is economic growth, and to read it once again as I did for this belated review is to also see how very visionary was this revolutionary economic thinker.
What were the seven fat years? As Bartley writes early on, they took place from 1983-1990 when "the United States recovered its pre-1973 growth path." Why did it? That's pretty basic, though hard in practice thanks to the third rate thinkers who generally populate Congress and the White House, not to mention the deluded sorts who populate what is an increasingly fraudulent economics profession.
Bartley thankfully wasn't an economist, and possessing a mind not so polluted by charts, graphs and more than worthless measures of economic activity, he understood intimately that economic growth is as simple as keeping the price of work and investment light (taxes), trade among economic actors around the world free, regulation minimal, and the money used to measure real economic activity stable in value. The Seven Fat Years describes how we forgot basic economics in the malaise-ridden Ď70s, only for Bartley and others to revive Classical economics in the Ď80s; thus the 7-year boom.
The book begins with Bartley's observation that "In the years just before 1982, democratic capitalism was in retreat. Its economic order seemed unhinged, wracked by bewildering inflation, stagnant productivity, and finally a deep recession." He went on to note that "Economic confusions and a sense of futility sapped the morale of the Western people; leaders talked of "malaise" in America and "Europessimism" across the Atlantic."
What's so amazing about Bartley's words, or maybe not, is that they could have been written yesterday. History surely repeats itself, or rhymes, and just as Paul Krugman on the left and Tyler Cowen on the right talk at length about economic growth as something no longer attainable, the popular view among economists then was that "America had become a Ďdebtor nation' and was declining as previous empires had." No, economic growth is once again as simple as getting the policy mix right. Bartley and a group of economic visionaries that included, but was not limited to Robert Mundell, Arthur Laffer, Charles Kadlec, Jude Wanniski, and Rep. Jack Kemp, authored a revolution that led to Ronald Reagan's election, and an eventual revival of economic growth thanks to a return to simple economic ideas that removed barriers to production.
These economic concepts were referred to then, and are now, as "supply-side" economics. Unfortunately a media that couldn't understand the concepts limited its flawed analysis of supply side to the Laffer (more on Laffer's brilliant contributions in a little bit) Curve, but it was really much more than that. Unlike demand-side thinkers who falsely presume growth is a function of stimulating consumption, Bartley and other Classical thinkers knew otherwise. They correctly understood that all demand is a function of supply, so in order to stimulate demand it was necessary for policymakers to stimulate the supply side of the economy; as in remove the tax, regulatory, trade and monetary barriers to production. It worked as the booming Ď80s revealed.
To read The Seven Fat Years is to know with certitude how very much Bartley would understand the problems of today. That is so because today's problems are in many ways a repeat of what happened in the 1970s. If there's disagreement with Bartley, and there's very little of that, it has to do with his assertion early on that "It seems that prosperity may bring discontents, real and imagined, that in turn consume the prosperity." My own view is that prosperity doesn't so much bring discontent as much as one of its negative tradeoffs is that it makes us flabby, and too often uncaring in terms of whom we vote into office.
Conversely, slow growth always and everywhere authored by government focuses the electorate. Reagan's election was the result of the failures of LBJ, Nixon, Ford, and Carter, and he revived economic growth through the implementation of the Bartley policy mix that President Clinton largely maintained such that the Reagan/Clinton era was marked by substantial growth. A booming economy essentially blinded voters to the importance of policy such that they elected second rate thinkers of the George W. Bush and Barack Obama variety; both presidents having revived the failed policy ideas of the 1970s; the unstable, cheap money that each sought the most consequential when it came to policy that's always inimical to economic growth.
Bartley would understand today precisely because he'd seen all of this before. Indeed, while it's popular to this day among the political and economic commentariat to blame OPEC for rising oil prices in the Ď70s, Bartley righted the false history about oil in correctly putting quotes around Ďoil shocks.' As he and the rest of the Michael 1 (the lower Manhattan restaurant where he, Laffer, Mundell and other leading Classical thinkers frequently talked policy) crowd knew well, oil wasn't suddenly expensive as much as the dollar in which it was priced was cheap.
Bartley wrote that "The real shock was that the dollar was depreciating against oil, against gold, against foreign currencies and against nearly everything else." About OPEC's non-role in an energy Ďcrisis' created by U.S. monetary policy, Bartley observed that "In the confusion of the 1970s, no one noticed that OPEC told us plainly what was going to happen after the closing of the gold window." Put more simply, when the Nixon administration delinked the dollar from gold, the dollar's value plummeted on the way to the 1970s commodity boom.
Bartley would understand our present situation well simply because George W. Bush, like Nixon and Carter in the Ď70s, sought a weak dollar. The markets complied owing to the historical truth that presidential administrations always get the dollar they want. It staggers this writer to this day that so many otherwise smart people ascribe nominally expensive oil to OPEC and foreign demand much as smart people felt this way in the Ď70s. It's particularly unsettling that so many on the right who generally believe in free markets buy into this falsehood. Implicit there is that an oil market dating back to the 1860s still hasn't figured out how to match supply with demand. More to the point, when the right incorrectly tie expensive oil to scarcity they are explicitly suggesting Ďmarket failure' on the part of the energy industry. It would be funny if it weren't so sad.
The money illusion that gave us high oil prices in the Ď70s, and that has given us similarly nosebleed oil in the 2000s brings with it economy-sapping investment implications. Not only is oil everywhere such that it's prosaic, it's also easy to tax for it being of the earth, or stationary as it were.
Later in the book Bartley noted that in the Ď70s "Nearly everyone had bet on constantly rising oil prices." When money is cheap, investment flows into the commoditized wealth that already exists over the stock and bond income streams representing wealth that doesn't yet exist. When oil and commodities are booming, the real economy is struggling. Bartley went on to write that "when money turned tight, the oil price couldn't go up and the loans [made to oil companies] couldn't be repaid." When we return to quality money, and eventually we will given the desire of Americans for growth, oil and commodity based economies here and around the world will face a rude awakening. History always repeats itself, and Bartley would not be fooled by today's energy Ďboom' in much the same way that he and the rest of the Michael 1 crew weren't fooled back in the Ď70s. As he put it, "At Michael 1 these events were not seen as an oil problem but a monetary problem."
Moving to the monetary policy that created the Ď70s crack-up that Bartley described, and that tells the story of the present too, the Michael 1 crowd very much decried Nixon's ill-conceived decision to rob the dollar of its gold definition. Better yet, they understood the change in investor preference from future concepts to the hard wealth of the present that similarly weighs on our economy today. Much as housing and commodities soared under Bush, in the Ď70s there was similarly according to Bartley a rush into "real assets such as gold or real estate."
In the Ď70s the prevailing economic view of a political class utterly confused by the slow growth that resulted from a weak dollar was that the economy needed more of the same. A weak dollar would boost exports despite devaluation always and everywhere existing as the economy-wrecking policy lever of the poorest countries. The Michael 1 attendees correctly understood that "Money is a veil, and will not change the relative value of a jug of wine and a loaf of bread." To Bartley et al, money's sole purpose was as a measure of value that would facilitate the exchange of bread and wine, thus the importance of stability.
Instead, and pouring gasoline on the fire, the Nixon and Carter years were defined by regular devaluation of the unit of account (the dollar) such that investment dried up, and chaos reigned. Bartley described this era of floating money as a time when "price signals in the real economy would be subject to repeated disturbances that would detract from efficiency and growth." Yes, floating money that was in freefall gave us the growth-deficient Ď70s, but with the resumption of largely stable money in the Ď80s and Ď90s, the economy took off. Since 2000 we've re-entered an era of limp growth; the latter made predictable by a dollar that was both weak and unstable.
Notable about the Ď70s is that just like today, a sagging economy brought out of the woodwork a great deal of monetary mysticism. Milton Friedman's monetarism was rising in popularity then, and while its modern adherents of the Scott Sumner variety in no way measure up to Friedman (about the Nobel Laureate, Bartley wrote that "On most issues - Say's Law, price controls, energy, efficient markets, deficits, Keynes or whatever - he would be entirely at home at Michael 1), it's sad and happy at the same time that economic distress elevates incorrect thinking (Monetarism) as much as it does Classical thinking of the kind that Bartley was so instrumental in reviving.
It's on the subject of Monetarism in The Seven Fat Years that readers will be reminded of Arthur Laffer's certain genius. Monetarism then and now naively presumes that nirvana can be achieved if allegedly Ďwise men' control "the money supply." But as Bartley so helpfully wrote about Laffer's discredit of this failed idea, "Laffer would draw a tiny black box in the corner of a sheet of paper; Ďthis is M-1,' currency and checking deposits. Still bigger boxes included money-market funds, then various credit lines. Finally, the whole page was filled with a box called Ďunutilized trade credit' - that is, whatever you can charge on the credit cards in your pocket. Do you really think, he asked, this little black box controls all the others." The Michael 1 crowd understood well that it didn't, but Friedman and other Monetarist thinkers believed it then, much as Sumner and others promote his monetary form of Keynesian mysticism today.
Laffer et al once again didn't bite. As Bartley further explained Laffer's explanation of the quantity theory of money, "The money supply, he insisted, was Ďdemand determined.' What the big boxes demanded the little one supplied." Monetarists at present decry the Fed paying interest on reserves (IOR), and while the Fed should not be paying for bank reserves it needlessly created with the imposition of its adolescent QE policies, it does precisely because demand for money is so low. More comically for a truly dangerous theory is the more that money is corrupted by the creation of it clamored for by Monetarists, the lower is the demand for it. Money's sole purpose is as a stable measure of value, but so deluded are Monetarist thinkers by monetary aggregates that they can't see how very much their own policies work against the rising monetary aggregates they desire.
Stable money in terms of value is heavily demanded, and as a result soars in terms of supply, but all of this confuses the Monetarist School. Then as now, monetarists got inflation backwards. Bartley noted that "With big inflation [meaning devaluation - always], for example, consumers would not want to hold currency. They would shift to high-interest deposits not counted in narrow aggregates, or to real assets like real estate or gold, not counted at all. This would mean that demand for money would fall, pull down the statistical aggregate. When the aggregate fell, the Fed would inject more bank reserves, fueling the inflation. Yet if the real economy swung into boom, say because taxes were cut, the demand for money would grow, pushing up the aggregates. Watching the aggregates grow because of higher money demand, the Fed would worry about inflation, choke off bank reserves, curtail the availability of credit, push up interest rates and stop the recovery."
The Reagan policy mix truly took hold in 1983; '83 when the Reagan tax cuts were finally fully implemented, and the economy soared. With a rising economy money demand naturally soared given the tautology that producers are demanding money when they offer up goods and services for sale. As the economy took off Friedman, wedded to a monetary theory that is rooted in confusion about inflation, made the rounds of Wall Street to argue that the recovery was inflationary even though the value of the dollar was on the way up. Rest assured that if and when the U.S. economy emerges from the Bush/Obama disaster, money demand and the aggregates that confused Monetarists will soar again. Modern believers in that which doesn't work like Sumner will first claim that they predicted the boom based on rising aggregates, then they'll claim an inflation problem despite a stronger dollar. Lost on the Monetarist crowd is the simple truth that the stable money values they dismiss are the only path to the rising money in circulation that they're asking for.
Not so the Michael 1 thinkers. Well aware that an economy is a collection of billions of individuals making infinite decisions every millisecond, they weren't so arrogant as to presume to know how many dollars an economy would need. Their solution was a return to quality money defined by gold. As Bartley wrote, the monetary "system needs an Ďanchor,' some method of judging how much money the world needs. If all nations use their monetary policy to fix the currency of nation n, the nth nation can use its monetary policy to anchor the whole system, to gold or some other indicator." Bartley knew well of gold's historical stability, so he called for monetary policy that would stabilize the price of the dollar by virtue of adjusting supply to meet demand; the gold price serving as the market signal that would tell the monetary authority whether there we too many or too few dollars in the system.
The above description brings up another minor disagreement with the author of this most essential of books. Paul Volcker gets a mostly free pass in an economic memoir which refers to him as a Ďsaint.' In truth, and Bartley obviously knew this welll, Volcker not only regularly leaked against the Reagan tax cuts, but he also foisted Friedman's monetary policies on the economy in such a way that the Reagan Revolution almost never was. Administrations once again get the dollar they want, and as Reagan was for a strong dollar in the way that Nixon and Carter were not, the markets were going to correct the dollar upward no matter the Ďtight money' policies rooted in quantity theory imposed by Volcker. More to the point, stable money in terms of value has little to do with Ďtight money' as Bartley suggested in the book. More realistically, stable money is heavily demanded as the unit used in trade and investment, so if stable money is the goal, the supply of the credible currency will naturally rise.
Volcker ultimately abandoned Friedman's Monetarism in late '82 such that the Reagan boom would soon begin, but in waiting until then he nearly made Reagan a one-term president. Notably, when he shed Friedman's failed policies that are perhaps unsurprisingly being revived today, Laffer and Kadlec concluded that he was following some sort of dollar price rule; a stable dollar always necessary for economic growth. Volcker surely looms large in any discussion of the Ď80s economic renaissance, but the story should be more about how he almost suffocated it as opposed to being a major factor in the seven fat years that Bartley chronicled.
It's also sadly true that while a dollar price rule loomed large in the recovery, Reagan and the Michael 1 crowd never achieved their goal of returning the dollar to a gold standard. We have the 2000s to thank for this not having happened, and as Bartley noted, resolving monetary policy in a way that rids the economy of unstable money was "the one big unfinished task of the Seven Fat Years." So true, but Rome wasn't built in a day.
About trade and the mythical Ďtrade deficits' that still captivate those in the ever fraudulent economics profession, Bartley noted that "In all the pantheon of economic statistics, there is none so meaningless and misleading." He went on to write that we somehow "have trouble remembering that commerce takes place between consenting adults, that the bargain makes both sides richer in one way or the other. Instead, we tend to view trade as some kind of nationalistic competition." This misunderstanding which presumes that trade is war such that one side weakens the other is the driver of all manner of policy stupidity.
But as Bartley so expertly pointed out (thank goodness once again that he wasn't an economist), "In fact, international transactions are always in balance, by definition." Of course they are. We can only trade insofar as we produce something to trade with. We trade products for products, and our ability to demand that which we don't have is a function of our supplying what we do; that or borrowing from the production of others. All trade once again balances.
Back to trade Ďdeficits,' Bartley revealed the absurdity of the calculation. As he wrote, "The export of an airliner is called trade. The export of a share of stock is called foreign investment." Why this is important has to do with his later point that "a rapidly growing economy will demand more of the world's supply of real resources and run a trade deficit." We are able to import a great deal in the U.S. precisely because we're able to export not just goods and services, but shares in our leading companies. With the exception of the Great Depression and other periods where bad policy has repelled foreign capital, we've always run a trade Ďdeficit' precisely because the U.S. has been correctly seen by investors as the best locale in which to commit capital.
Of course to the economic and political commentariat, the eagerness of global investors to place their money in the U.S. is seen as a negative. Indeed, so debased is economic commentary today (just as it was then) that the investment inflows are decried as a negative signal for making us a Ďdebtor nation.' Horrors! All that investment somehow weakens us. What's more horrific is that economics is generally a highly paid profession.
All of which brings us to worries about the budget deficit that reigned supreme then, and that still captivates far too many thinkers today. Bartley wrote that the "deficit is not a meaningless figure, only a grossly overrated one." Unfortunately, it being overrated means that this "great national myth" impacted policy then, just as it does today.
Rising deficits forced a giveback of some of Reagan's tax cuts, and then in modern times any tax cut is viewed in Washington through the prism of its impact on the deficit. Such an accounting abstraction did not cloud the minds of the grand thinkers at Michael 1. Internationalists all who understood per Mundell that "the only closed economy is the global economy," it was apparent to them that "it's not government borrowing that crowds out the private sector, but government spending."
Remember, a dollar is a dollar, and dollar credit is dollar credit. Dollar credit is everywhere (note this, Monetarists) in the world. Whether a government that tautologically lacks resources borrows or taxes the money it spends is economically of little consequence. Either way, limited capital is extracted from the more productive private sector and the investment driving the latter in favor of often wasteful government consumption. In that case, the only statistic that matters is how much government spends on an annual basis because the number is a clear signal of what the private sector is losing. Deficits are just finance, they're a waste of time, and any sentient being should understand that we'd be much better off economically if we had annual deficits of $500 billion per year out of $600 billion in annual spending, over balanced budgets of $3.5 trillion.
The above is important when we consider that much as it does today, Keynesian thinking dominated economic discussion in the Ď70s when Bartley et al led an intellectual revolt. To Keynesians there's no distinction between government and private sector investment. Ever worshipful of demand, they just want the money spent; hence their support of large government budgets.
Bartley obviously saw all of this in a different light. How the money is spent is crucial, and in response to the industrial policy types who felt then and do now that government should direct investment, Bartley wrote "Rank in order the most likely recipient of capital from an industrial planning bureaucracy:
(A) Steve Jobs's garage.
(C) A company in the district of the most powerful congressman."
Hopefully readers get the point. Government, whether overseen by Republicans or Democrats, is by nature Ďconservative' in the non-ideological sense such that it very much resides in the Ďseen.' If government employees had a clue about what the future of commerce might be they certainly wouldn't be allocating capital from Washington. Instead, they would be making real money investing in the private sector. Government allocation of capital, though said to be stimulative, is logically the opposite. Government spending and investment means that the connected get credit over revolutionary thinkers like Jobs who got started in garages. With the above passage Bartley cleverly exploded the lie that is Keynesian government Ďstimulus.'
About the taxes that governments collect with an eye on redistributing the inflow, Bartley helpfully made plain throughout The Seven Fat Years that high rates of taxation make productive work more expensive. Taxes are a price, or better yet a penalty placed on productive work. To get more work, lower the price. It's that simple.
Looked at in terms of investment, he logically noted that the prospect of a capital gain "is the big jackpot that attracts entrepreneurial vigor." Along those lines he pointed out that "there were no high-tech startup companies founded in 1976, while more than 300 had been founded in 1968." No surprise there. Capital gains taxes were increased in the Ď70s until being reduced in 1978, and then as investors are buying future dollar income streams when they provide capital to entrepreneurs, high taxes on investment combined with dollar devaluation dried up investment altogether.
The economics profession almost to a man and woman elevates consumption above everything else, but there again the non-economist in Bartley revealed the absurdity of the thinking that informs this most worthless of professions. As he put it so well, "If you scraped up $100,000 and used it to buy a Rolls-Royce, you don't get taxed per luxury-driving mile. But if you use it to buy stock, providing the company with investment funds, and then you want to sell it to buy another stock, you only have paper to show for your $100,000, yet you still have to pay a tax." The capital gains tax is anti-company formation, and worse for a political class that worships at the altar of job creation, it's anti-job creation. To put it very simply, there are no companies and no jobs without investment first. We should abolish the capital gains tax.
It was said early on that The Seven Fat Years was quite the book in a visionary sense, and this should be stressed. Bartley wrote it in the early Ď90s when the economy was weak, but throughout had a very optimistic tone about the future. He wrote that "By 1990, a whole subculture was hooking itself together every night, posting messages, information, secrets and insults on tiny bulletin boards of silicon." I was in college at the time, but this in no way described my experience; the point being that a major informer of Bartley's optimism was an Internet future that most then didn't regard, and certainly didn't understand.
About banking, he spent a lot of time on the S&L debacle. He understood that the industry was regulated out of existence through caps on interest rates that could be offered, and then when near extinction, was allowed to swing for the fences; all while overseen by regulators totally and logically unequal to regulating that which they couldn't possibly understand. Bank regulators are the people who couldn't get jobs at banks. Naturally politicians played a role here too (remember the Keating Five?) in protecting errant S&Ls from regulators who were once again unequal to that which they were asked to do.
Where his visionary nature came into play with banking was in his assertion that "the essence of financial safety is diversification. And a financial system that outlaws diversification - breaking finance into a succession of narrow splinters - is a series of disasters waiting to happen." Bartley in a strong sense could see that the regulation of banks was their inevitable undoing; the latter taking place more recently. Bartley would have understood the problems within banks in 2008 very well for having seen what government was doing to them back in the Ď90s.
And to show how history always repeats itself, the response to the S&L crack-up was a great deal more regulation in the form of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) that economist Lawrence White referred to as "an Act of anger." FIRREA was the Dodd-Frank of its day that in Bartley's words "set out to Ďsolve' the crisis of unprofitable thrifts by shrinking thrift profits, through higher insurance premiums, more indirect taxes, higher capital requirements, other increased regulation and a reduction in diversification authority."
Bartley seemed to sense that when we shackle any business with rules we reduce its profits, and with reduced profits, drive away the very talent that makes businesses more financially sound to begin with. Bartley correctly understood that the reforms of the early Ď90s were setting the stage for something much worse down the line, and he was proven very correct.
About the ratings agencies that were wrongly fingered for a financial Ďcrisis' that was wholly a creation of government error, Bartley understood what too many did not in 2008. So many were quite eager to blame the drones toiling in agency cubicles for their flawed analysis of bonds that Ďtricked' the best investors in the world. What a laugh. As Bartley put it so well, "No one at Michael 1 would believe an individual bond rater could outguess the collective decisions of the market; if he could, he'd be rich and not have to work in such a stodgy place." So true, and his analysis is a reminder that we truly lost a great thinker when Bartley passed in 2003.
As a keen follower of the dollar, Bartley's brilliant book suggests that he would have foreseen our present economic problems early on. He would have known that spiking oil prices were a function of a cheap dollar that was going to author an economy-sapping rush into hard assets like housing least vulnerable to the devaluation. As a keen follower of finance, he would have known that the dollar's descent foretold major problems in a banking sector that was going to and did chase the money illusion into all manner of finance related to housing. And then having witnessed the wrongheaded re-regulation of the banks in the Ď90s, he likely would have written very presciently about how this was all going to work out.
Writing about the Ď70s toward the end of his book, Bartley observed that in that failed decade "the United States led the world to the brink of economic crisis without ever knowing it. It simply didn't understand what it was doing." Other than his tax cuts, President Bush in many ways mimicked the devaluationist, high spending, heavy regulating policies of Nixon and Carter, and a president who surely didn't know what he was doing similarly led the world into crisis once the results of his policies came to fruition.
It says here that Robert Bartley wrote one of the best economic books of all time in 1992. For readers who want to understand why the Ď70s and Ď80s were so different economically, including the seven fat years from 1983-1990, they should read his book. Even better, for those who want to understand what happened in the 2000s on the way to an inevitable crack-up, they should also read Bartley's book. History rhymes, and Bartley told the story of the 2000s in 1992.
John Tamny is editor of RealClearMarkets and Forbes Opinions
Economics: Britain's' Laffer' effect
Reply #274 on:
December 06, 2013, 01:10:05 PM »
False, static scoring of tax rate cuts (and the ignored damage from tax rate increases) needs to hit the trash bin forever. "Extra growth and changed business behavior will likely recoup 45%-60% of that revenue [From a significant corporate tax rate cut in Britain]. The report says that even that amount is almost certainly understated, since Treasury didn't attempt to model the effects of the lower rate on increased foreign investment or other spillover benefits."
Dec. 5, 2013 WSJ Editorial (Subscribe at
While America dawdles over tax reform, new evidence from Britain shows that cutting corporate tax rates is a tax revenue winner.
Chancellor of the Exchequer George Osborne has cut Britain's corporate tax rate to 22% from 28% since taking office in 2010, with a further cut to 20% due in 2015. On paper, these tax cuts were predicted to "cost" Her Majesty's Treasury some £7.8 billion a year when fully phased in. But Mr. Osborne asked his department to figure out how much additional revenue would be generated by the higher investment, wages and productivity made possible by leaving that money in private hands.
The Treasury's answer in a report this week is that extra growth and changed business behavior will likely recoup 45%-60% of that revenue. The report says that even that amount is almost certainly understated, since Treasury didn't attempt to model the effects of the lower rate on increased foreign investment or other "spillover benefits." This sort of economic modeling is never an exact science, but the results are especially notable because the U.K. Treasury gnomes are typically as bound by static-revenue accounting as are the American tax scorers at Congress's Joint Tax Committee.
While the British rate cut is sizable, the U.S. has even more room to climb down the Laffer Curve because the top corporate rate is 35%, plus what the states addó9.x% in benighted Illinois, for example. This means the revenue feedback effects from a rate cut would be even more substantial. (more at link) http://online.wsj.com/news/articles/SB10001424052702303997604579240072829229810?mod=WSJ_Opinion_AboveLEFTTop
Last Edit: December 06, 2013, 01:12:50 PM by DougMacG
Re: Economics, Minimum Wage Laws, Neumarkm, Wascher, Murphy
Reply #275 on:
December 13, 2013, 09:49:24 AM »
My perspective on minimum wage is not what wages should be but who should set them. Wages should be set by consenting the parties of employer and potential employee for both efficiency and moral reasons, not controlled by the state or the federal government.
Paul Krugman, dishonest and unworthy of quoting, says ďthere just isnít any evidence that raising the minimum wage near current levels would reduce employmentĒ.
But there is.
Start here, at the MIT press with a Jan 2013 book, Minimum Wages, By David Neumark and William L. Wascher
David Neumark is Professor of Economics at the University of California, Irvine, Research Associate at the National Bureau of Economic Research, Senior Fellow at the Public Policy Institute of California, Research Fellow at the Institute for the Study of Labor. William L. Wascher is Senior Associate Director in the Division of Research and Statistics at the Federal Reserve Board.
"Neumark and Wascher demonstrate the overwhelming weight of careful U.S. evidence and other evidence showing the detrimental effects of minimum wages on low-skilled workers."
Synthesizing nearly two decades of their own research and reviewing other research that touches on the same questions...
Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. They
reduce employment opportunities for less-skilled workers and tend to reduce their earnings
; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital.
The evidence still shows that minimum wages pose
a tradeoff of higher wages for some against job losses for others
, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.
Of the 19 states with higher-than-federal minimum wages, six are among the top-ten for teen unemployment, while only one is among the bottom ten. The probability this could have happened by chance is under 1%.
Last Edit: December 14, 2013, 10:26:58 AM by DougMacG
Re: Economics - Minimum Wage, George Will
Reply #276 on:
December 14, 2013, 10:43:12 AM »
i was pleased to see George Will pick up on yeserday's minimum wage discussion. He tries so eloquently to not say you have to be a complete idiot to think you can raise the cost of something and get more of it. If we really want to help the downtrodden, why wouldn't we wouldn't we raise the minimum wage to $50? Why wouldn't we "require anyone who gives money to panhandlers to give a minimum of $10"? Won't that bring in more money than smaller donations? Panhandlers don't think so.
"raising the price of low-productivity workers will somewhat reduce demand for them. If you reject that last sentence, name other goods or services for which you think demand is inelastic when their prices increase."
Raise minimum wage? Itís iffy
By George F. Will, Published: December 13
ďItís not true that life is one damn thing after another ó itís one damn thing over and over.Ē
ó Edna St. Vincent Millay
Liberalsí love of recycling extends to their ideas, one of which illustrates the miniaturization of Barack Obamaís presidency. He fervently favors a minor measure that would have mostly small, mostly injurious effects on a small number of people. Nevertheless, raising the minimum hourly wage for the 23rd time since 1938, from todayís $7.25 to $10.10, is a nifty idea, if:
If government is good at setting prices. Government ó subsidizer of Solyndra, operator of the ethanol program, creator of HealthCare.gov ó uses minimum-wage laws to set the price for the labor of workers who are apt to add only small value to the economy.
If you think government should prevent two consenting parties ó an employer and a worker ó from agreeing to an hourly wage that government disapproves.
If you think todayís 7 percent unemployment rate is too low. (It would be 10.9 percent if the workforce participation rate were as high as it was when Obama was first inaugurated; since then, millions of discouraged workers have stopped searching for jobs.) Because less than 3 percent of the workforce earns the minimum wage, increasing that wage will not greatly increase unemployment. Still, raising the price of low-productivity workers will somewhat reduce demand for them.
If you reject that last sentence. If you do, name other goods or services for which you think demand is inelastic when their prices increase.
If you think teenage (16-19) unemployment (20.8 percent), and especially African American teenage unemployment (35.8 percent), is too low. Approximately 24 percent of minimum-wage workers are teenagers.
If you think government policy should encourage automation of the ordering and preparation of food to replace workers in the restaurant industry, which employs 43.8 percent of minimum-wage workers.
If you think it is irrelevant that most minimum-wage earners are not poor. Most minimum-wage workers are not heads of households. More than half are students or other young people, usually part-time workers in families whose average income is $53,000 a year, which is $2,000 more than the average household income.
If you do not care that there are more poor people whose poverty derives from being unemployed than from low wages. True, some of the working poor earn so little they are eligible for welfare. But an increase in the minimum wage will cause some of these people to become unemployed and rely on welfare.
If you do not mind a minimum-wage increase having a regressive cost-benefit distribution. It would jeopardize marginal workers to benefit organized labor, which supports a higher minimum in the hope that this will raise the general wage floor, thereby strengthening unionsí negotiating positions.
If you think it is irrelevant that nearly two-thirds of minimum-wage workers get a raise in their first year.
If you think a higher minimum wage, rather than a strengthened Earned Income Tax Credit, is the most efficient way to give money to the working poor.
If you think tweaking the minimum wage is a serious promotion of equality by an administration during which 95 percent of real income growth has accrued to the top 1 percent.
If you think forcing employers to spend X dollars more than necessary to employ labor for entry-level jobs will stimulate the economy. If you believe this, you must think the workers receiving the extra dollars will put the money to more stimulative uses than their employers would have. If so, why not a minimum wage of $50.50 rather than the $10.10? Because this might discourage hiring? What makes you sure you know the threshold where job destruction begins?
If you think the high school dropout rate is too low. In 1994, Congress decreed that by 2000 the graduation rate would be ďat leastĒ 90 percent. In 2010 it was 78.2 percent. Increasing the minimum wage would increase the incentive to leave school early. One scholarly study concluded that, in states where students may leave school before 18, increases in the minimum wage caused teenage school enrollment to decline.
If the milk of human kindness flows by the quart in your veins, so you should also want to raise the minimum street charity: Take moral grandstanding oblivious of consequences to a new level by requiring anyone who gives money to panhandlers to give a minimum of $10. Beggars may not benefit, but you will admire yourself.
Re: Economics, Incomes are stagnated? Depends on how we measure!
Reply #277 on:
December 18, 2013, 09:17:10 AM »
Did incomes go up 3% or 37%? Depends on how you measure - or fail to measure.
From Greg Mankiw's blog, Chariman of the Economics Dept at Harvard
Monday, December 16, 2013
On Measuring Changes in Income
To divert attention from the disastrous rollout of his health reform, President Obama has decided to change the national conversation to discuss increasing inequality. This phenomenon is not new--the trend started about four decades ago--but it is real and important. In case you are a new reader of this blog, you can find my personal views on the matter in this paper.
This national conversation has generated renewed attention to the highly influential Piketty-Saez data. It is worth pointing out, therefore, some limitations of these data, which have been stressed by Cornell economist Richard Burkhauser: The data are on tax units rather than households, they do not include many government transfer payments, they are pre-tax rather than post-tax, they do not adjust for changes in household size, and they do not include nontaxable compensation such as employer-provided health insurance.
Does this matter? Yes! Here are some numbers from the Burkhauser paper:
1. From 1979 to 2007, median real income as measured by pre-tax, pre-transfer cash income of tax units rose by only 3.2 percent. That is a paltry amount for such a long period. You might conclude that middle class incomes have been stagnant. But wait.
2. Households are more important than tax units. Two married people are one tax unit, whereas a couple shacked up are two tax units. We would not want to treat the movement from marriage to shacking up as a drop in income. If we look at households rather than tax units, that meager 3.2 percent rises to a bit more respectable 12.5 percent.
3. Now consider government transfer payments. If we add those in, that 12.5 percent number becomes an even better 15.2 percent.
4. What about taxes? The middle class received some tax cuts during that period. Factoring taxes in, the 15.2 percent figure rises to 20.2 percent.
5. But not all households are the same size, and the size of households has fallen over time. Adjusting for household size increases that 20.2 percent to 29.3 percent.
6. There is still one thing left: employer-provided health insurance, an important fringe benefit that has grown in importance. Adding an estimate of that into income raises the 29.3 percent figure to 36.7 percent.
So, during this period, has the middle class experienced stagnant real income (a mere 3.2 percent increase) or significant gains (a 36.7 percent increase)? It depends on which measure of income you look at. It seems clear to me that the latter measure is more relevant, but the former measure of income often gets more attention than it deserves.
Take this as a cautionary tale. When people talk about changes in income over time, make sure you know what measure of income they are citing.
Randomized clinical trials in Economics
Reply #278 on:
December 25, 2013, 08:23:44 PM »
ę Reply #1459 on: Today at 08:12:13 AM Ľ
Prospective trials of and not only retrospective collection of after the fact "big Data" will prove the Columbia "know-it-all's" are wrong.
**** The common conclusion from such trials is that the poorís own decisions matter much more than was once thought. Even the poorest of the poor have tiny amounts of discretionary cash and their decisions about what to spend it on (bednets, for example) make a huge difference to development. This view of the poor is at odds with the one espoused by ďBig PushĒ economists, such as Jeffrey Sachs of Columbia University, who argue that people are stuck in poverty, can do little for themselves and that development should therefore consist of providing the poor with benefitsólike irrigation, roads and hospitalsóthat spring the poverty trap. But it is also at odds with critics of Big Push thinking. J-PALís trials show not only that the poorís decisions are important but that they are sometimes bad****
Another article from the Economist:
Once treated with scorn, randomised control trials are coming of age
Dec 14th 2013 | From the print edition
IT ALL began with a white envelope. Inside, a letter from the provost of the Massachusetts Institute of Technology offered three young economists at MIT $100,000 to spend as they wanted (those were the days). Two of them, Esther Duflo and Abhijit Banerjee, used the money to set up an organisation to run ďrandomised control trialsĒ (RCTs), an experimental technique a bit like drugs trials, but for economics. To test if, say, boosting teachersí pay improved educational outcomes, an RCT would take a collection of comparable schools, randomly assign higher wages to some teachers but not others, and see what happens. The organisation, called J-PAL (to give it its full title, the Abdul Latif Jameel Poverty Action Lab), has just celebrated its tenth anniversary. Its methods have transformed development economics.
When J-PAL started in 2003, RCTs were regarded as wacky. Critics said that doing a trial was like putting people in a cage and experimenting on them. They pointed out that you cannot conduct randomised trials for big macroeconomic questions (ďWhat happens if we devalue the currency by 50%?Ē) because there can be no control group. They conceded RCTs might generate useful nuggets of evidence (raising teachersí wages in India, for example, did surprisingly little to improve learning). But they argued that evidence from such trials would always remain small-scale, tied to a specific context and not be useful beyond it.
Massachusetts Institute of Technology
Organisation for Economic Cooperation and Development
Ten years on, few of those criticisms have stood up to scrutiny. RCTs have entered the mainstream. J-PAL has conducted 440 of them (it started with five). The World Bank runs RCTs. So do regional bodies like the Inter-American Development Bank. Even governments deploy them: Indonesia used one to test whether identity cards would improve the delivery of subsidised rice to the poor, the largest anti-poverty programme in the country (they did). Techniques for designing and doing trials have improved, with more accurate measurements and more reliable ways of ensuring that samples are random and not merely arbitrary. Trials are bigger. A recent one took place throughout the Indian state of Andhra Pradesh, which has a larger population than Germany. Trials are now investigating questions previously thought off-limits to RCTs, such as labour-market policies or policing. J-PAL did a trial in half the cities in France to determine whether job-training encouraged employment growth overall or just boosted the prospects of trainees at the expense of the untrained. (Answer: before 2007, it helped everyone; afterwards, it redistributed jobs rather than creating them.)
As the number and scope of trials have grown, the accumulation of detail has started to generate broader insights. Take education. J-PAL ran trials on many questions, from the effect of remedial classes in India and Ghana (enormous) to what happens if you double the number of teachers in Kenya (not much). One conclusion kept cropping up: the biggest improvements to educational outcomes occur when you teach children things they are capable of learning. That sounds like a statement of the obvious. But it is quite different from the view of (say) the OECD, a club mainly of rich countries, which runs influential studies on mathematics and literacy among its members. The OECD thinks the quality of teachers matters most. J-PALís finding also goes against the grain of what many parents believe: that the focus should be on the quality of the curriculum.
In other areas, RCTs have revealed as much about what is not known as what is known. Microfinance, for example, does not turn the poor into entrepreneurs, as was hoped, but does make them better off: many use the tiny loans to buy television sets. It is not clear why. Poor people also buy too little preventive health care for themselves, even though the benefits are huge. RCTs show that if you charge a pittance for simple products such as bednets treated to combat malaria or water purification tablets, people do not buy them; the products have to be free.
Development economics on trial
The common conclusion from such trials is that the poorís own decisions matter much more than was once thought. Even the poorest of the poor have tiny amounts of discretionary cash and their decisions about what to spend it on (bednets, for example) make a huge difference to development. This view of the poor is at odds with the one espoused by ďBig PushĒ economists, such as Jeffrey Sachs of Columbia University, who argue that people are stuck in poverty, can do little for themselves and that development should therefore consist of providing the poor with benefitsólike irrigation, roads and hospitalsóthat spring the poverty trap. But it is also at odds with critics of Big Push thinking. J-PALís trials show not only that the poorís decisions are important but that they are sometimes bad (for example, their underinvestment in health). Critics of the Big Push, such as William Easterly of New York University, say the best way to help the poor is to stand back and stop messing up their lives. In contrast, J-PALís trials imply that there is a role for outsiders to improve the decision-making of the poor by, say, improving information or incentives.
Over the past ten years, randomised trials have changed hugely. They began as ways to provide hard evidence about what was actually happening. Now they have become techniques for testing ideas that cannot be investigated in any other way. (Are teachers or trained volunteers better at providing simple remedial lessons? Do a trial.) Over the next ten years they will change again. They are likely to get more ambitious still, use ďbig dataĒ, engage even more with governments and probably measure things that cannot now be tested (RCTs are already measuring cortisol levels as a way of judging how policies affect peopleís happiness). Who knows, their proponents might even find a way to apply them to the sweeping assertions of macroeconomists.
Re: Randomized clinical trials in Economics
Reply #279 on:
December 27, 2013, 11:01:48 AM »
Quote from: ccp on December 25, 2013, 08:23:44 PM
...the poorís own decisions matter much more than was once thought. Even the poorest of the poor have tiny amounts of discretionary cash and their decisions about what to spend it on (bednets, for example) make a huge difference to development. This view of the poor is at odds with the one espoused by ďBig PushĒ economists, such as Jeffrey Sachs of Columbia University, who argue that people are stuck in poverty, can do little for themselves and that development should therefore consist of providing the poor with benefitsólike irrigation, roads and hospitalsóthat spring the poverty trap. But it is also at odds with critics of Big Push thinking. J-PALís trials show not only that the poorís decisions are important but that they are sometimes bad (for example, their underinvestment in health). Critics of the Big Push, such as William Easterly of New York University, say the best way to help the poor is to stand back and stop messing up their lives. In contrast, J-PALís trials imply that there is a role for outsiders to improve the decision-making of the poor by, say, improving information or incentives.
There is an old axiom that poor people have poor ways. In a wealthy society like America where opportunity abounds, there is truth in that. In a truly poor society, there may be no individual path out. That is where charity and outside help can do the most good IMHO, not in places where we are already rewarding and reinforcing poor choices.
Last Edit: December 27, 2013, 11:28:11 AM by DougMacG
Economics: Capitalism is the precondition of generosity
Reply #280 on:
December 27, 2013, 11:26:49 AM »
Posting this to both Economic threads. There are crucial points being made here. Government doesn't produce anything. Indoividuals can't demonstrate generosity without first investing and producing something. The story of Santa includes the existence of an amazing, benevolent, (unregulated) magical investment, factory, production and delivery system. Not exactly a description of government, see Obamacare. Neither our current iteration of liberalism, Obamanomics, nor Pope Francis' guidance for us to move away from non-existent, unfettered capitalism will make generosity possible. "Capitalism is the precondition of generosity." We can have capitalism on the condition that we feed the poor is backwards. "We can feed the poor if we have capitalism. To give away wealth presumes the existence of that wealth".
Government Isnít Santa
Capitalism is the precondition of generosity.
By Kevin D. Williamson December 24, 2013
There were three wise men, bearing gifts: gold, frankincense, and myrrh. Much has been written about the mystical connotations of those gifts, but it is rarely, if ever, asked: Where did they get them?
Presumably, Balthazar, Melchior, and Caspar were not engaged in gold mining, frankincense farming, or myrrh cultivation. They had other things to do, other stars to follow. For Christians, and for men of goodwill categorically, this is an important question: Feed my sheep, saith the Lord ó okay: Feed íem what? Some of the Apostles were said to have the gift of healing through the laying on of hands; those without such gifts still have an obligation to heal the sick (if the ACLU will allow it), which means building hospitals and clinics, equipping doctors and nurses, etc. With what?
If ye had but faith in the measure of a mustard seed . . . and if the mustard-seed approach does not work, and the mountains we command to be uprooted remain stubbornly in place, then we are back to the old-fashioned problems of human existence: scarcity and production. That is what is so maddening about Pope Francisís recent apostolic exhortation ó which is, as much as my fellow Catholics try to explain it away, a problematic document in many ways. The popeís argument, fundamentally, is that we can have capitalism on the condition that we feed the poor. This is exactly backward: We can feed the poor if we have capitalism. To give away wealth presumes the existence of that wealth, whether it is an annual tithe or Jesusí more radical stance of giving away all that one owns. Giving away all that you own does not do the poor an iota of good if you donít have anything. You canít spread the wealth without wealth.
Conservatives sometimes protest that the Left presents government as though it were Santa Claus, but Santa Claus, bless him, is a producer. He has a factory up there at the North Pole, full of highly skilled (and possibly undercompensated) labor. He has logistics problems ó serious ones. He has production deadlines. The entire point of the Santa Claus myth ó at least the animated Christmas-special God Bless America version of that myth ó is that those toys arenít going to make themselves, and they arenít going to deliver themselves. Government cannot do the work of a captain of industry such as Santa Claus, because government creates nothing. More to the point, government cannot satisfy Jesusí command that we feed the poor ó it produces no food. It has no wealth of its own.
Government isnít Santa. Itís the Grinch.
Think about it: The redistributionist impulse is driven by envy and bitterness. It is an economic position held, not accidentally, most strongly by people who cringe at the sight of a manger scene ó by people who resent and suspect the very word ďChristmas.Ē The redistributors are the people culturally inclined to abolishing Christmas from the public sphere, who will spend the solstice wailing in angst if a public-school choir should so much as hum ďAway in a Manger,Ē never mind singing the verboten words ďLittle Lord Jesus.Ē And, in the Grinchiest fashion, they want to take your stuff.
Does anybody really need that many Christmas presents? Is it not the case that, at a certain point, you have enough in your stocking? And who among them has the honesty of Hillary Clinton, who once proclaims that itís necessary to take things away from us in order to achieve her vision of a better world. If you strap reindeer antlers to your dog while sharing those sentiments, youíre a Seussian villain. Strap donkey ears to yourself while endorsing the same view and youíre the president of these United States.
There is little, if any, virtue in giving gifts to the people we love. Giving gifts to those we love is like giving gifts to ourselves. There is still less virtue in taking whatís under somebody elseís Christmas tree and distributing it to your friends and allies while congratulating yourself on your compassion. To do so is unseemly. Pope Francis is quite right to argue that economic growth alone does not ensure the humane treatment of the poor and the vulnerable ó where he is mistaken is that he assumes that there is another side in that argument. Nowhere in the classical liberal tradition, and certainly not in the Anglo-American liberal tradition, has the idea taken root that capitalism is a substitute for generosity. Capitalism is the precondition of generosity. If you want to feed the Lordís sheep, you must begin by planting the fields.
Re: Economics, The Inequality Bogeyman, By Thomas Sowell
Reply #281 on:
January 28, 2014, 12:29:36 PM »
The Inequality Bogeyman
By Thomas Sowell - January 28, 2014
During a recent lunch in a restaurant, someone complimented my wife on the perfume she was wearing. But I was wholly unaware that she was wearing perfume, even though we had been in a car together for about half an hour, driving to the restaurant.
My sense of smell is very poor. But there is one thing I can smell far better than most people -- gas escaping. During my years of living on the Stanford University campus, and walking back and forth to work at my office, I more than once passed a faculty house and smelled gas escaping. When there was nobody home, I would leave a note, warning them.
When walking past the same house again a few days later, I could see where the utility company had been digging in the yard -- and, after that, there was no more smell of gas escaping. But apparently the people who lived in these homes had not smelled anything.
These little episodes have much wider implications. Most of us are much better at some things than at others, and what we are good at can vary enormously from one person to another. Despite the preoccupation -- if not obsession -- of intellectuals with equality, we are all very unequal in what we do well and what we do badly.
It may not be innate, like a sense of smell, but differences in capabilities are inescapable, and they make a big difference in what and how much we can contribute to each other's economic and other well-being. If we all had the same capabilities and the same limitations, one individual's limitations would be the same as the limitations of the entire human species.
We are lucky that we are so different, so that the capabilities of many other people can cover our limitations.
One of the problems with so many discussions of income and wealth is that the intelligentsia are so obsessed with the money that people receive that they give little or no attention to what causes money to be paid to them, in the first place.
The money itself is not wealth. Otherwise the government could make us all rich just by printing more of it. From the standpoint of a society as a whole, money is just an artificial device to give us incentives to produce real things -- goods and services.
Those goods and services are the real "wealth of nations," as Adam Smith titled his treatise on economics in the 18th century.
Yet when the intelligentsia discuss such things as the historic fortunes of people like John D. Rockefeller, they usually pay little -- if any -- attention to what it was that caused so many millions of people to voluntarily turn their individually modest sums of money over to Rockefeller, adding up to his vast fortune.
What Rockefeller did first to earn their money was find ways to bring down the cost of producing and distributing kerosene to a fraction of what it had been before his innovations. This profoundly changed the lives of millions of working people.
Before Rockefeller came along in the 19th century, the ancient saying, "The night cometh when no man can work" still applied. There were not yet electric lights, and burning kerosene for hours every night was not something that ordinary working people could afford. For many millions of people, there was little to do after dark, except go to bed.
Too many discussions of large fortunes attribute them to "greed" -- as if wanting a lot of money is enough to cause other people to hand it over to you. It is a childish idea, when you stop and think about it -- but who stops and thinks these days?
The transfer of money was a zero-sum process. What increased the wealth of society was Rockefeller's cheap kerosene that added hundreds of hours of light to people's lives annually.
Edison, Ford, the Wright brothers, and innumerable others also created unprecedented expansions of the lives of ordinary people. The individual fortunes represented a fraction of the wealth created.
Even those of us who create goods and services in more mundane ways receive income that may be very important to us, but it is what we create for others, with our widely varying capabilities, that is the real wealth of nations.
Intellectuals' obsession with income statistics -- calling envy "social justice" -- ignores vast differences in productivity that are far more fundamental to everyone's well-being. Killing the goose that lays the golden egg has ruined many economies.
The Redistribution Recession:How Labor Market Distortions Contracted the Econom
Reply #282 on:
February 08, 2014, 08:40:47 AM »
The Redistribution Recession:How Labor Market Distortions Contracted the Economy
(bringing a couple of posts over here by request)
3rd post regarding economist Casey Mulligan, someone getting it right. Buy his book:
The Redistribution Recession: How Labor Market Distortions Contracted the Economy Hardcover
by Casey B. Mulligan
Redistribution, or subsidies and regulations intended to help the poor, unemployed, and financially distressed, have changed in many ways since the onset of the recent financial crisis. The unemployed, for instance, can collect benefits longer and can receive bonuses, health subsidies, and tax deductions, and millions more people have became eligible for food stamps.
Economist Casey B. Mulligan argues that while many of these changes were intended to help people endure economic events and boost the economy, they had the unintended consequence of deepening-if not causing-the recession. By dulling incentives for people to maintain their own living standards, redistribution created employment losses according to age, skill, and family composition. Mulligan explains how elevated tax rates and binding minimum-wage laws reduced labor usage, consumption, and investment, and how they increased labor productivity. He points to entire industries that slashed payrolls while experiencing little or no decline in production or revenue, documenting the disconnect between employment and production that occurred during the recession. The book provides an authoritative, comprehensive economic analysis of the marginal tax rates implicit in public and private sector subsidy programs, and uses quantitative measures of incentives to work and their changes over time since 2007 to illustrate production and employment patterns. It reveals the startling amount of work incentives eroded by the labyrinth of new and existing social safety net program rules, and, using prior results from labor economics and public finance, estimates that the labor market contracted two to three times more than it would have if redistribution policies had remained constant.
In The Redistribution Recession, Casey B. Mulligan offers hard evidence to contradict the notion that work incentives suddenly stop mattering during a recession or when interest rates approach zero, and offers groundbreaking interpretations and precise explanations of the interplay between unemployment and financial markets.
Economics: Marginal tax rates including forgone subsidies
Reply #283 on:
February 08, 2014, 08:42:23 AM »
Marginal tax rates for Heads of Households and spouses with median earnings potential including forgone subsidies.
Note that the beginning of 2007 was when unemployment was at its low point (and when Democrats took control of Congress).
Tax something more, work in this case, and you will get less of it.
Economics: Income Inequality and Income Mobility
Reply #284 on:
February 08, 2014, 10:50:19 AM »
I am sorry to inform President Obama and his team of pretend economists that inequality and specifically the rich getting richer does not correspond with the poor getting poorer or having fewer opportunities to move up. It simply isn't true.
"Neither measure of inequality nor the size-of-middle-class measure has a correlation with any of the mobility measures that is statistically different from zero."
Economics: Growth, Inequality, Redistribution debate
Reply #285 on:
February 10, 2014, 12:06:28 PM »
For anyone interested in the inside-baseball debate of Economics, this is interesting stuff, IMO. Links are to pdfs.
Greg Mankiw, Chair of the Harvard Economics Dept, who recently wrote, 'Defending the One Percent':
From the article: Optimal redistribution centers on the elasticity of labor supply
Using the force of government to seize such a large share of the fruits of someone elseís labor is unjust
No amount of applied econometrics can bridge this philosophical divide.
Redistibutionist Robert Solow, Nobel winner, MIT, takes issue and Mankiw responds:
Journal of Economic Perspectives, 2013-2104
Re: Economics - Recent Trends in Intergenerational Mobility
Reply #286 on:
February 26, 2014, 10:59:18 AM »
According to a recent study of mobility (see Figure 1), the correlation between parent's income rank and children's income rank is about 0.3.
Reply #287 on:
March 24, 2014, 06:55:27 PM »
Ludwig von Mises, "Nation, State, and Economy" (1919):
One of the great ideas of [classical] liberalism is that it lets the consumer interest alone count and disregards the producer interest. No production is worth maintaining if it is not suited to bring about the cheapest and best supply. No producer is recognized as having a right to oppose any change in the conditions of production because it runs counter to his interest as a producer. The highest goal of all economic activity is the achievement of the best and most abundant satisfaction of wants at the smallest cost. . . .
Preferring the producer interest over the consumer interest, which is characteristic of antiliberalism, means nothing other than striving artificially to maintain conditions of production that have been rendered inefficient by continuing progress. Such a system may seem discussible when the special interests of small groups are protected against the great mass of others, since the privileged party then gains more from his privilege as a producer than he loses on the other hand as a consumer; it becomes absurd when it is raised to a general principle, since then every individual loses infinitely more as a consumer than he may be able to gain as a producer. The victory of the producer interest over the consumer interest means turning away from rational economic organization and impeding all economic progress.
Reply #288 on:
April 10, 2014, 05:30:30 PM »
ďAfter theologyóeconomics is the most important science to study because the two things that impact everyone are God and the market.Ē
Pravda on the Hudson: Marx rises again
Reply #289 on:
April 20, 2014, 11:13:34 AM »
IN the season of resurrection, itís fitting that heís with us once again ó bearded, prophetic, moralistic, promising to exalt the humble and cast down the mighty from their thrones.
Yes, thatís right: Karl Marx is back from the dead.
Not on a Soviet-style scale, mercifully, and not with the kind of near-scriptural authority that many Marxists once invested in him. But Marxist ideas are having an intellectual moment, and attention must be paid.
As Timothy Shenk writes in a searching essay for The Nation, there are two pillars to the current Marxist revival. One is the clutch of young intellectuals Shenk dubs the ďMillennial Marxists,Ē whose experience of the financial crisis inspired a new look at Old Karlís critique of capitalism. The M.M.ís have Occupy Wall Street as a failed-but-interesting political example; they have new-ish journals (Jacobin, The New Inquiry, n + 1) where they can experiment and argue; they are beginning to produce books, two of which Shenk reviews and praises.
What they lack, however, is a synthesis, a story, of the kind that Marx himself offered. This is where the other pillar rises ó Thomas Pikettyís ďCapital in the Twenty-First Century,Ē a sweeping interpretation of modern economic trends recently translated from the French, and the one book this year that everyone in my profession will be required to pretend to have diligently read.
Piketty himself is a social democrat who abjures the Marxist label. But as his title suggests, he is out to rehabilitate and recast one of Marxís key ideas: that so-called ďfree markets,Ē by their nature, tend to enrich the owners of capital at the expense of people who own less of it.
This idea seemed to be disproved in the 20th century, by the emergence of a prosperous, non-revolutionary working class. But Piketty argues that those developments were transitory, made possible mostly by the massive destruction of inherited capital during the long era of world war.
Absent another such disruption, he expects a world in which the returns to capital permanently outstrip ó as they have recently ó the returns to labor, and inequality rises far beyond even todayís levels. Combine this trend with slowing growth, and we face a future like the 19th-century past, in which vast inherited fortunes bestride the landscape while the middle class fractures, weakens, shrinks.
Pikettyís dark vision relies, in part, on economic models I am unqualified to assess. But it also relies on straightforward analysis of recent trends in Western economies, and here a little doubt-raising is in order.
In particular, as the Manhattan Instituteís Scott Winship has pointed out, Pikettyís data seems to understate the income gains enjoyed by most Americans over the last two generations. These gains have not been as impressive as during the post-World War II years, but they do exist: For now, even as the rich have gotten much, much richer, the 99 percent have shared in growing prosperity in real, measurable ways.
Winshipís point raises the possibility that even if Pikettyís broad projections are correct, the future he envisions might be much more stable and sustainable than many on the left tend to assume. Even if the income and wealth distributions look more Victorian, that is, the 99 percent may still be doing well enough to be wary of any political movement that seems too radical, too utopian, too inclined to rock the boat.
This possibility might help explain why the far left remains, for now, politically weak even as it enjoys a miniature intellectual renaissance. And it might hint at a reason that so much populist energy, in both the United States and Europe, has come from the right instead ó from movements like the Tea Party, Britainís UKIP, Franceís National Front and others that incorporate some Piketty-esque arguments (attacks on crony capitalism; critiques of globalization) but foreground cultural anxieties instead.
The taproot of agitation in 21st-century politics, this trend suggests, may indeed be a Marxian sense of everything solid melting into air. But whatís felt to be evaporating could turn out to be cultural identity ó family and faith, sovereignty and community ó much more than economic security.
And somewhere in this pattern, perhaps, lies the beginnings of a more ideologically complicated critique of modern capitalism ó one that draws on cultural critics like Daniel Bell and Christopher Lasch rather than just looking to material concerns, and considers the possibility that our systemís greatest problem might not be the fact that it lets the rich claim more money than everyone else. Rather, it might be that both capitalism and the welfare state tend to weaken forms of solidarity that give meaning to life for many people, while offering nothing but money in their place.
Which is to say that while the Marxist revival is interesting enough, to become more relevant it needs to become a little more ... reactionary.
Krugman: Sadomonetarism in Sweden screwing things up
Reply #290 on:
April 21, 2014, 11:17:49 AM »
The Most Important Book Ever Is All Wrong
Reply #291 on:
April 21, 2014, 05:15:22 PM »
The Most Important Book Ever Is All Wrong
By Clive Crook
It's hard to think of another book on economics published in the past several decades that's been praised as lavishly as Thomas Piketty's "Capital in the Twenty-First Century." The adulation tells you something, though not mainly about the book's qualities. Its defects, in my view, are greater than its strengths -- but the rapturous reception proves that the book, one way or another, meets a need.
Martin Wolf of the Financial Times calls it "extraordinarily important." Paul Krugman, writing in the New York Review of Books, says it's "truly superb" and "awesome." Branko Milanovic, a noted authority on global income disparities, calls it "one of the watershed books in economic thinking." Even John Cassidy, in a relatively balanced appraisal for the New Yorker, says "Piketty has written a book that nobody interested in a defining issue of our era can afford to ignore."
That issue is inequality, and in confronting it Piketty should certainly be applauded for his ambition. The title invites comparison with Karl Marx's great work, and the author offers nothing less than a general theory of capitalism.
Better still, his theory makes arresting claims -- "that a market economy," as Piketty puts it, "if left to itself, contains powerful forces of convergence [in the distribution of wealth]...; but it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based." And he argues that the divergent forces are likely to be more powerful in the 21st century than they were in the 20th.
When it comes to exploring historical data on incomes and wealth, Piketty is second to none in industry and ingenuity. It's how he made his name as a scholar, and the book, as you would expect, is packed with new information. (A companion website puts all the numbers and sources online.) In addition to intellectual ambition and tireless excavation of the historical record, Piketty brings a zeal for accessibility: He writes in non-technical language, with almost no mathematical apparatus to confound the interested non-specialist.
All of which is grand. So what's the problem?
Quite a few things, but this to start with: There's a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws. At times this borders on schizophrenia. In introducing each set of data, he's all caution and modesty, as he should be, because measurement problems arise at every stage. Almost in the next paragraph, he states a conclusion that goes beyond what the data would support even if it were unimpeachable.
This tendency is apparent all through the book, but most marked at the end, when he sums up his findings about "the central contradiction of capitalism":
The inequality r>g [the rate of return on capital is greater than the rate of economic growth] implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying ...
Every claim in that dramatic summing up is either unsupported or contradicted by Piketty's own data and analysis. (I'm not counting the unintelligible. The past devours the future?)
As he explains elsewhere, r>g isn't enough by itself to trigger the dynamic he describes. If capital grows faster than the economy, inequality will indeed tend to increase because ownership of capital is concentrated -- though much less so than in the past. But capital will outpace the economy only if owners of capital save a sufficiently large part of the income they derive from it. (Suppose they save none of it: Their wealth won't grow at all.)
You might say this misses the point. Wolf offers this clarification: Piketty "argues that the ratio of capital to income will rise without limit so long as the rate of return is significantly higher than the economyís rate of growth. This, he holds, has normally been the case." That's better: The gap between r and g has to be "significant." The bigger the gap, the more likely it is that saving will build capital faster than output rises -- and Piketty does show that the gap usually has been big.
The trouble is, he also shows that capital-to-output ratios in Britain and France in the 18th and 19th centuries, when r exceeded g by very wide margins, were stable, not rising inexorably. The same was true of the share of national income paid to owners of capital. In Britain, the capitalists' share of income was about the same in 1910 as it had been in 1770, according to Piketty's numbers. In France, it was less in 1900 than it had been in 1820.
What about the 21st century? Perhaps the capitalists' share will rise inexorably in future -- and that's what matters.
Perhaps it will, but Piketty advances reasons to doubt this too. He expects r to be a bit lower and g a bit higher than their respective historical averages. There are many other factors to consider, as he says, but on his own analysis the chances are good that the future gap between return on capital and growth will be smaller than the gap that failed to produce an inexorably rising capital share in the two centuries before 1914.
As I worked through the book, I became preoccupied with another gap: the one between the findings Piketty explains cautiously and statements such as, "The consequences for the long-term dynamics of the wealth distribution are potentially terrifying."
Piketty's terror at rising inequality is an important data point for the reader. It has perhaps influenced his judgment and his tendentious reading of his own evidence. It could also explain why the book has been greeted with such erotic intensity: It meets the need for a work of deep research and scholarly respectability which affirms that inequality, as Cassidy remarked, is "a defining issue of our era."
Maybe. But nobody should think it's the only issue. For Piketty, it is. Aside from its other flaws, "Capital in the 21st Century" invites readers to believe not just that inequality is important but that nothing else matters.
This book wants you to worry about low growth in the coming decades not because that would mean a slower rise in living standards, but because it might cause the ratio of capital to output to rise, which would worsen inequality. In the frame of this book, the two world wars struck blows for social justice because they interrupted the aggrandizement of capital. We can't expect to be so lucky again. The capitalist who squanders his fortune is a better friend to labor than the one who lives modestly and reinvests his surplus. In Piketty's view of the world, where inequality is all that counts, capital accumulation is almost a sin in its own right.
Over the course of history, capital accumulation has yielded growth in living standards that people in earlier centuries could not have imagined, let alone predicted -- and it wasn't just the owners of capital who benefited. Future capital accumulation may or may not increase the capital share of output; it may or may not widen inequality. If it does, that's a bad thing, and governments should act. But even if it does, it won't matter as much as whether and how quickly wages and living standards rise.
That is, or ought to be, the defining issue of our era, and it's one on which "Capital in the 21st Century" has almost nothing to say.
To contact the writer of this article: Clive Crook at
To contact the editor responsible for this article: Tobin Harshaw at
Re: Economics, Thomas Piketty: (Extinguishing) Capital in the 21st Century
Reply #292 on:
April 30, 2014, 11:45:49 AM »
Reaction by Greg Mankiw, Chair of Harvard Econ Dept:
The book has three main elements:
A history of inequality and wealth.
A forecast of how things will evolve over the next century
Policy recommendations, such as a global tax on wealth.
Point 1 is a significant contribution. I like this part of the book a lot.
Point 2 is highly conjectural. Economists are really bad at such things. In particular, the leap from r>g to the conclusion of a growing role of inheritance in society seems too large to me. Many capital owners consume much of the return on their capital, so wealth does not grow at rate r. This consumption ranges from fancy cars and luxurious vacations to generous charitable giving. In addition, unless mating is perfectly assortative, or we return to an era of primogeniture, wealth per family shrinks as it is split among children. So, from my perspective, Piketty tries to draw way too much from r>g. (Quick Quiz for econonerds: (a) What does r>g tell you in a standard overlapping generations model? That the economy is dynamically efficient (that is, it has not over-accumulated capital). (b) And what is the magnitude of bequests in that model? (Zero)
Point 3 is as much about Pikettyís personal political philosophy as it is about his economics. As we all know, you canít get ďoughtĒ from ďis.Ē Like President Obama and others on the left, Piketty wants to spread the wealth around. Another philosophical viewpoint is that it is the governmentís job to enforce rules such as contracts and property rights and promote opportunity rather than to achieve a particular distribution of economic outcomes. No amount of economic history will tell you that John Rawls (and Thomas Piketty) offers a better political philosophy than Robert Nozick (and Milton Friedman).
The bottom line: You can appreciate his economic history without buying into his forecast. And even if you are convinced by his forecast, you don't have to buy into his normative conclusions.
Reply #293 on:
May 01, 2014, 11:54:06 AM »
Good to see discussion on Piketty. Here's some more-- note also the comments about Warren.
We are going to be clear in our thinking here. What, if anything, is right about Piketty? If he is wrong, we will need to be able to condense our answer into bullet point sound bit size-- witness Warren's use of the toaster. This is effective persuasion technique.
Here is Scott Grannis's reply to Piketty:
There hasn't been such a polarizing book that I can remember. Liberals love it because it justifies progressive taxation and government control to "fix" the "problems" of capitalism, almost all of which occur because of prior government interventions. Conservatives hate it because progressive taxation aimed explicitly at taxing away wealth is destructive of the economy. Liberals just don't understand how economies work. Their's is a religion, just as global warming is a religion. David Goldman puts it quite succinctly:
Why Liberals Donít Care About Consequences
No amount of evidence will convince liberals that they were wrong. Evidence abounds, to be sure: Appeasement invites aggression. Handouts increase dependency. Coddling terror-states like Iran elicits megalomania. Big government stifles the economy. They donít care. Really.
John Kerry romanced Basher Assad and Vanity Fair published a fawning profile of the Assad family, while the Obama administration secretly courted Iran. As a result we have in Syria the worst humanitarian catastrophe in the Arab world in modern times. Algeria racked up more casualties during the independence war of 1954-1962 and the civil war of 1991-2002, to be sure, but the casualties are coming faster in Syria and the displacement of immiserated civilians is greater. Do you hear liberals wringing their hands and asking, ďWhere did we go wrong?Ē They donít, and they wonít. Ditto the disaster in Libya, which is turning into a Petri dish for terrorists post-Qaddafi. It doesnít matter. Being in love with yourself means never having to say youíre sorry.
In the one part of the Middle East where nothing bad is happening or likely to happenĖnamely IsraelĖliberals are in full-tilt panic, with John Kerry warning that Israel will turn into an apartheid state. Itís not just Kerry, who is a national embarrassment, but the whole liberal world that thinks this way. In reality, Israelís booming economy is enriching Israeli as well as Palestinian Arabs, to the extent that the kleptocratic Palestinian Authority lets them do business. There is no urgency at all to Israelís situationĖnot, at least, where the Palestinians are concerned. Iran is another story.
Why donít liberals seem to notice the catastrophic consequences of their policies, and why do they imagine imminent horrors where none exist? If you corner a liberal and point to a disaster that followed upon his policy, at very most he will sayĖwith a tear in the eye and a quivering upper lipĖĒWe did the right thing.Ē
Itís all about having done the right thing according to the dogma of the ersatz liberal religion. Liberalism has nothing whatsoever to do with policy and its real-world consequences. Instead of finding oneís salvation on the path of traditional religions, liberals look for salvation in a set of right opinionsĖon race, the environment, income distribution, gender, or whatever. Last month I called attention to Joseph Bottumís new book An Anxious Age, which I reviewed at the American Interest. Jody argues that modern liberalism is the old Mainline Protestantism, and especially the old Social Gospel, turned into a secular cult. I wrote:
Todayís American liberalism, it is often remarked, amounts to a secular religion: it has its own sacred texts and taboos, Crusades and Inquisitions. The political correctness that undergirds it, meanwhile, can be traced back to the past centuryís liberal Protestantism. Conservatives, of course, routinely scoff that liberalsí ersatz religion is inferior to the genuine article.
Joseph Bottum, by contrast, examines post-Protestant secular religion with empathy, and contends that it gained force and staying power by recasting the old Mainline Protestantism in the form of catechistic worldly categories: anti-racism, anti-gender discrimination, anti-inequality, and so forth. What sustains the heirs of the now-defunct Protestant consensus, he concludes, is a sense of the sacred, but one that seeks the security of personal salvation through assuming the right stance on social and political issues. Precisely because the new secular religion permeates into the pores of everyday life, it sustains the certitude of salvation and a self-perpetuating spiritual aura. Secularism has succeeded on religious terms. That is an uncommon way of understanding the issue, and a powerful one.
Itís hard to make sense of liberalism without recourse to theologyĖnot the superficial theology of doctrinal comparison, but Jodyís sensitive investigation of how the liberal religion looks from the inside, from the vantage point of its true believers (the ďposter children,Ē as Jody calls them). Itís a rare book that helps us to peer more deeply into everyday phenomena, and Jodyís is one of them. It really must be read.
Page 2 of 2
Liberals donít see failed liberal policies as ďfailed,Ē any more than people of faith think that unanswered prayers are ďfailedĒ prayers. The difference is that people of faith abnegate themselves in prayer to a wholly-other divine person, while liberal poster-children subject the world to the narcissistic demands of their own spiritual needs. Jody isnít the first to make the point. ďRemember the war against Franco/Thatís the kind where each of us belongs,Ē sang Tom Lehrer. ďHe may have won all the battles/But we had all the good songs.Ē But he makes it in a theologically-informed way that exposes the phenomenology of liberal self-worship.
The slaughter in Syria is a minor annoyance to the poster children, whereas peace and prosperity in Israel are cataclysmic disasters. That sounds funny, but it isnít to the liberals: bringing a liberally-conceived peace to the Middle East is one of those Great Opportunities for Redemption, and to miss it is a tragedy of unimaginable proportions. Darwin forbid that Israel might carry on as a pocket superpower in science, business, and the arts, educating and empowering a new Arab middle class, without submitting to the demands of liberal theology. Itís not only John Kerry who stands to lose his last shot at a Nobel Prize. Liberals of all stripes stand to lose the chance, to demonstrate that particularity (for example, Zionism) is inherently wrong and that liberal universality is right.
You canít argue with liberals. Prove to them their policy has made things worse, and they will say in effect, ďWorse for whom? It sure made me feel better!Ē Tell them that they have foredained their own extinction because their metrosexuality doesnít leave time for children, and they will gaze heavenward and contemplate martyrdom on behalf of the earth-goddess Gaia. There are too many people polluting the earth anyway.
Dr. Frankenstein didnít care that he had created a monster. You canít argue with the man; the only thing to do is to persuade the villagers to march on his castle.
A postscript on neo-conservatives: Irving Kristol liked to say that a neoconservative was a liberal who was mugged by reality. The neocons were liberals who actually cared about the consequences of their actions, and ipso facto stopped being liberals. After the occupation of Iraq and Afghanistan, the failed Bush Freedom Initiative, the abortive Arab Spring, and the Libyan disaster, there appear to be diminishing returns to the marginal mugging.
Re: Economics, Piketty, inequality, wealth tax
Reply #294 on:
May 02, 2014, 10:06:28 AM »
"What, if anything, is right about Piketty?"
He did a serious study on income inequality and put the results of his study in Section I of the book. That is worthy of reading and understanding, but he did not get it right. He ignores the progressive taxation effect and ignores the wealth transfer effect to the poor and to the middle class. Taking those into account, income inequality is stagnant. A 'problem' already 'solved'.
"... witness Warren's use of the toaster. This is effective persuasion technique."
Elizabeth Warren: It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the streetĖand the mortgage wonít even carry a disclosure of that fact to the homeowner. Similarly, itís impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?
The difference between the two markets is regulation.
Warren uses deception and a straw argument. Conservatives don't favor a world without consumer protection law and conservatives don't support unregulated mortgage practices. The mortgage meltdown didn't come from lack of regulation; it came out of the botched intervention by government in the mortgage market. Conservatives support regulation rules exactly as Warren implies, that a consumer ought to be able to look at the front page of a mortgage document and know what they will be required to pay. Her toaster story tells us nothing about the differences between conservative and leftist policies. Is the choice of a fully disclosed, adjustable rate mortgage analogous to a frayed cord on a toaster? No. And UL (Underwriters Laboratories) is a private company headquartered in Northbrook, IL. Not all solutions come from government programs and regulations.
If he (Piketty) is wrong, we will need to be able to condense our answer into bullet point sound bit size--
1. Their 'solution' does not address the perceived problem. Witness year 6 of the Obama administration and the way the French socialists had to so quickly back off of their new 75% tax bracket on the rich.
Tax increases kill jobs and over-regulation worsens inequality
2. To a hammer, every problem looks like a nail - the one tool toolbox. To Warren, Piketty, Obama, and all government-centric, 20th century leftists, every problem and challenge we face need the same solution, another tax on the rich. Take from Peter, give to Paul, and Mary, and the others. Poverty, hunger, homelessness, healthcare, climate change, and now income inequality all (surprisingly) need exactly the same thing, a tax on the rich and a wealth transfer to the poor. It was what they wanted to do before they even discovered the problem, just as the hammer knows what it wants to do before it sees the nail. But this problem wasn't a nail, it was your finger you just hit. Capital employs labor. Stomping out wealth also stomps out jobs and stomps out the revenues to pay the people who can't work. Ouch!
3. A logic fallacy as old as the Latin language: Cum Hoc, Ergo Propter Hoc. With this, therefore because of this. The wealth tax idea follows an impressive income inequality study in the book, therefore we should do what he suggests to address it. Piketty proposes to end wealth. What our side sees in the data is that amazing wealth is achievable but there are far too many people who are not participating in the wealth side of the economy.
4. Piketty's main contention: Rates of returns on investments (before taxes) are too high and growth rates are too low. Therefore we should choke off investment returns and make economic growth even worse?!
The opposite is what makes sense. Get more and more people into the investment side of the economy and pursue the economic policies that
our growth rate.
Last Edit: May 02, 2014, 12:21:24 PM by DougMacG
Reply #295 on:
May 02, 2014, 11:33:47 AM »
Excellent work Doug.
and now something more my speed on Piketty
Reply #296 on:
May 02, 2014, 11:58:56 AM »
Economics Textbooks: Different coverage of market failure and government failure
Reply #297 on:
May 12, 2014, 06:12:32 PM »
I wonder which books have the worst balance? Krugman and Wells 'Macroeconomics' covers 27 cases of market failure. None of government failure.
Re: Economics: freedom and inequality, USSC Justice Pitney, 1915
Reply #298 on:
May 13, 2014, 09:33:34 AM »
A little reflection will show that wherever the right of private property and the right of free contract coexist, each party when contracting is inevitably more or less influenced by the question whether he has much property, or little, or none, for the contract is made to the very end that each may gain something that he needs or desires more urgently than that which he proposes to give in exchange. And since it is self-evident that, unless all things are held in common, some persons must have more property than others,
it is from the nature of things impossible to uphold freedom of contract and the right of private property without at the same time recognizing as legitimate those inequalities of fortune that are the necessary result of the exercise of those rights
- Supreme Court Justice, Mahlon Pitney, 1915, Coppage v. Kansas
Geithner: The Paradox of Financial Crises
Reply #299 on:
May 13, 2014, 01:17:13 PM »
Respect to Geithner for forthrightly stating his hypothesis.
Let's discuss it:
The Paradox of Financial Crises
Aggressive government intervention will lead to a stronger financial system less dependent on the taxpayer.
By Timothy F. Geithner
May 12, 2014 6:52 p.m. ET
During the terrifying autumn of 2008, when I was serving as president of the Federal Reserve Bank of New York, my team was on a conference call with Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke debating whether the administration should ask Congress for stronger weapons to confront the crisis. Meg McConnell, a colleague, pressed the mute button on the speakerphone and pleaded with me to tell them that if they didn't go to Congress now, "there will be shantytowns and soup lines across the country."
Why did she fear that? We were in the midst of a classic financial panicósimilar to the bank runs in the Great Depression. But most people did not yet feel the impact of the run. The losses suffered on Wall Street seemed welcome and deserved, and of no consequence to the vast majority of Americans.
There was little memory of how panics kill economies, but the panic was already killing ours. American households lost 16% of their wealth in 2008 alone, several times as large as the losses at the start of the Great Depression, during which unemployment rose to 25% and total output fell more than 25%.
Financial crises are devastating, but unlike threats to national security, Americans don't give their presidents much in the way of emergency authority to fight them. That reluctance stems from the fear of "moral hazard"óthe valid concern that market actors who can expect a bailout in case things go wrong will be encouraged to take too many risks. That same fear typically makes governments, even when they do have the authority, too slow to act.
And so the government had very limited weapons with which to combat the financial crisis of 2008. On "Lehman weekend" (Sept. 13-14), it had no ability, in the absence of a willing buyer, to prevent the investment bank from collapse. And that's why Presidents Bush and Obama had to ask Congress for successive waves of emergency authority.
Ultimately, Congress provided both presidents with the authority to prevent the collapse of the financial system and get the economy growing again. Yet the actions we took were highly controversial, deeply unpopular on the left and the right, and met by vocal skepticism from academics and the public.
That was partly because what one has to do in a panic is the opposite of what seems fair and just. In a financial crisis, the natural instinct is to let creditors suffer losses, let firms fail, and protect taxpayers from any risk of loss. But in a financial panic, a strategy based on those instincts will lead to depression-level unemployment.
Instead, the government and the central bank have to step in and take risks on a scale that the private sector can't and won't. They have to reduce the incentive for investors, lenders and depositors to run and liquidate assets in panic selling. They have to raise the confidence of businesses and individuals that there will not be a systemwide collapseóbreaking a vicious cycle in which the fear of a financial-system collapse and a deep recession feed on each other and become self-fulfilling.
Breaking this cycle requires a massive injection of cash into the economy, as directly as possible into the hands of those who will spend it, to offset the loss of private earnings and the collapse in private demand. It also requires doing whatever it takes to keep the financial system from collapse. The banking system is like the power grid; the economy simply can't function if the lights go out and people can't get access to credit.
In a true financial panic, the moral imperative is to ignore moral hazard and first put out the fire. This is counterintuitive. It feels deeply unfair. And it creates some unfortunate collateral beneficiaries in terms of the firms protected from their mistakes. But this is the only way to ultimately protect the innocent victims of the crisis from the calamitous damage of economic depressions.
Because two presidents were willing to put politics aside and deploy a massive and creative rescue, we prevented economic catastrophe and got the economy growing again in about six months. We kept the ATMs working, saved the auto industry, fixed the broken credit channels so that the economy could grow, recapitalized the banking system, and restored much of the damage to America's savings.
The conventional wisdom in early 2009 was that the financial rescue would cost $1-$2 trillion. In fact, the financial system paid for the protection we provided and taxpayers have already earned tens of billions of dollars in profits on these programs.
Herein lies the central paradox: The more aggressive the government is in designing a rescue plan, the easier it is to force more restructuring in the financial sector, and the better the chances of leaving the surviving system stronger and less dependent on the taxpayer.
It is true that we were not able to do all that was important or desirable. The rescue was unorthodox and messy, and the country is still living with the deep scars of the crisis. Long-term unemployment remains alarmingly high. There are very high levels of poverty and appalling inequality, not just in income and wealth, but in the opportunities Americans have for a quality education or economic mobility.
But we did do the essential thing, which was to prevent another Great Depression, with its decade of shantytowns and bread lines. We put out the financial fire, not because we wanted to protect the bankers, but because we wanted to prevent mass unemployment.
We still face many challenges as a country. But we are a stronger country today and in a much stronger position to confront those challenges because America passed its stress test.
Mr. Geithner was secretary of the Treasury from 2009-13 and is the author of "Stress Test: Reflections on Financial Crises" published this week by Crown.
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