Dog Brothers Public Forum
Return To Homepage
December 06, 2013, 07:01:57 PM
Login with username, password and session length
Welcome to the Dog Brothers Public Forum.
Dog Brothers Public Forum
Politics, Religion, Science, Culture and Humanities
Science, Culture, & Humanities
Topic: Economics (Read 41855 times)
Mises: Milton Friedman is not an Ecnomist; The debt to pleasure
Reply #250 on:
May 14, 2013, 04:49:25 PM »
Mises: Friedman Is Not an Economist
By Joseph Salerno
May 13th, 2013
Economist Harry Veryser of the University of Detroit-Mercy and author of It Didnt 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: Friedman is not an economist. Hes a statistician.
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 statistician was someone who aim
at discovering economic laws from the study of economic experience. 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 Misess characterization. In their Preface (p. xxii), Friedman and Schwartz stated that their aim in writing the book was to 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. In the final chapter, entitled A Summing Up, the authors (Friedman and Schwartz, p. 676) listed three propositions regarding money that they discovered to be common to U.S. monetary history and concluded, These common elements of monetary experience can be expected to characterize our future as they have our past. It would be difficult to find a better expression of the statisticians 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
SOVEREIGN in tastes, steely-eyed and point-on in perception of risk, and relentless in maximisation of happiness. This was Daniel McFaddens memorable summation, in 2006, of the idea of Everyman held by economists. That this description is unlike any real person was Mr McFaddens point. The Nobel prizewinning economist at the University of California, Berkeley, wryly termed homo economicus a rare species. In his latest paper* he outlines a new science of pleasure, 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 people 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 their own: they insist on a much higher price for a coffee cup they think of as theirs, for instance, than for an identical one that isnt. This endowment effect 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 loss aversion 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 love hormone, 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 peoples 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 successful and proud 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 default 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 revealed preference, the idea that a persons valuation of different options can be deduced from his actions. This is undoubtedly messier than standard economics. So is real life.
* The New Science of Pleasure, 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?
Nietzscheâs 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 itâs 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 enemyâa socialist, no lessâis a testament less to the reality about which they speak than to the resonance of the vocabulary they deploy.
The Nobel Prizeâwinning economist Friedrich Hayek is the leading theoretician of this movement, formulating the most genuinely political theory of capitalism on the right weâve 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 Hayekâs 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 âour present moment.â
But to understand that text and its influence, itâs necessary to turn away from contemporary America to fin de siĂšcle Vienna. The seedbed of Hayekâs arguments is the half-century between the âmarginal revolution,â 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.Â
Friedrich Nietzsche figures critically in this story, less as an influence than a diagnostician. This will strike some as an improbable claim: Wasnât 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 rightâwhich has been seeking to put labor back in its box since the nineteenth century, and now, with the help of the neoliberal left, has succeededâis thus one of elective affinity rather than direct influence, at the level of idiom rather than policy.
âOne day,â Nietzsche wrote in Ecce Homo, âmy name will be associated with the memory of something tremendous, a crisis without equal on earth, the most profound collision of conscience.â 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 couldnât 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 âsublime predecessorâ Richard Wagner.Â
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 âThe Greek Stateâ 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. âProf. Nietzscheâs manuscript does not restore our spirits,â she sniffed in her diary.Â
Though presented as a sop to a fraying friendship, âThe Greek Stateâ 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.Â
Initially ambivalent about the war, Nietzsche quickly became a partisan of the German cause. âItâs about our culture!â he wrote to his mother. âAnd for that no sacrifice is too great! This damned French tiger.â 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.Â
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 impositionsâand a quarter-century of simmering discontent and broken promisesâworkers 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 hadnât), 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!âŠ It is the worst day of my life.Â
In the quicksilver transmutation of a conventional war between states into a civil war between classes, Nietzsche saw a terrible alchemy of the future: âOver 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.âÂ
By May, the Commune had been ruthlessly put down at the cost of tens of thousands of livesâmuch to the delight of the Parisian aesthete-aristocrat Edmond Goncourt:Â
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 fightingâŠa bleeding like that, by killing the rebellious part of a population, postpones the next revolution by a whole conscription.Â
Of the man who wrote these words and the literary milieu of which he was a part, Nietzsche would later say: âI 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 thingââla force.âââ
* * *
The clash of these competing worlds of war and work echoes throughout âThe Greek State.â Nietzsche begins by announcing that the modern era is dedicated to the âdignity of work.â Committed to âequal rights for all,â democracy elevates the worker and the slave. Their demands for justice threaten to âswamp all other ideas,â to tear âdown the walls of culture.â 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.Â
The Greeks, by contrast, saw work as a âdisgrace,â because the existence it servesâthe finite life that each of us livesââhas no inherent value.â 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 âthere lurks the unconscious recognition that these conditionsâ of work âare required for the actual goalâ of art to be achieved. For that reason, the Greeks properly kept labor and the laborer hidden from view.Â
Throughout his writing life, Nietzsche was plagued by the vision of workers massing on the public stageâwhether 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. âThere is nothing more terrible,â he wrote in The Birth of Tragedy, âthan 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.â Several years after the International had left Basel, Nietzsche convinced himself that it was slouching toward Bayreuth in order to ruin Wagnerâs festival there. And just weeks before he went mad in 1888 and disappeared forever into his own head, he wrote, âThe cause of every stupidity todayâŠlies in the existence of a labour question at all. About certain things one does not ask questions.â
One can hear in the opening passages of âThe Greek Stateâ 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, âEven 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.â What theorist, after all, has ever pressed so urgentlyânot just in this essay but in later works as wellâthe claim that âslavery belongs to the essence of a cultureâ? 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 beforeâand in some German states, only a generation before Nietzscheâs birth in 1844âwhile 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 centuryâs 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?Â
If slavery was one condition of great art, Nietzsche continued in âThe Greek State,â war and high politics were another. âPolitical men par excellence,â 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 âsociety time to germinate and turn green everywhereâ and allowed âblossoms of geniusâ periodically to âsprout forth.â Those blossoms were not only artistic but also political. Warfare sorted society into lower and higher ranks, and from that hierarchy rose âthe military genius,â 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.Â
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 âan instrument of the stock exchangeâ rather than the terrain of heroism and glory. With the âspecifically political impulsesâ of Europe so weakenedâeven his beloved Franco-Prussian War had not revived the spirit in the way that he had hopedâNietzsche could only âdetect dangerous signs of atrophy in the political sphere, equally worrying for art and society.â 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. âThe Paris commune,â Nietzsche would later write in his notebooks, âwas perhaps no more than minor indigestion compared to what is coming.â
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 Germanyâfrom the Schleswig-Holstein crisis of the early 1860s to the imperial push of the late 1880sâhe remained leery of programs, movements and platforms. The best he could muster was a vague principle: that society is âthe continuing, painful birth of those exalted men of culture in whose service everything else has to consume itself,â and the state a âmeans of setting [that] process of society in motion and guaranteeing its unobstructed continuation.â It was left to later generations to figure out what that could mean in practiceâand where it might lead. Down one path might lay fascism; down another, the free market.
* * *
Around the timeâalmost to the yearâthat 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 Mengerâs Principles of Economics and William Stanley Jevonsâs The Theory of Political Economy. Along with LĂ©on Walrasâs Elements of Pure Economics, which appeared three years later, these were the European facesâAustrian, English and French-Swissâof 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. Thatâs 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 âfor 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.âÂ
According to Hayek, the âimmediate receptionâ of Mengerâs Principles âcan hardly be called encouraging.â Reviewers seemed not to understand it. Two students at the University of Vienna, however, did. One was Friedrich von Wieser, the other Eugen von BĂ¶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 capitalismâs forces of âcreative destruction.â Through BĂ¶hm-Bawerk and Wieser, Mengerâs 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 aâif not theâsource 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 sphereâa 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 statusâand political authorityâthat 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 nameâand even more so with that of his competitor Ferdinand Lasalle, about whom Nietzsche read a fair amountâas well as with the larger socialist and trade union movements of which he was a part. That association helped set the stage for the marginalistsâ 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 marketâs 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 âthe best exampleâŠof the evils and disastersâ 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. âTo avoid such a disaster,â he argued, âwe must diffuse knowledgeâ to the workersâempowered as they were by the vote and the strikeââand the kind of knowledge required is mainly that comprehended in the science of political economy.âÂ
Menger interrupted his abstract reflections on value to make the point that while it may âappear deplorable to a lover of mankind that possession of capital or a piece of land often provides the owner a higher incomeâŠthan the income received by a laborer,â the âcause of this is not immoral.â It was âsimply 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.â Any attempt to get around that truth, he warned, âwould undoubtedly require a complete transformation of our social order.âÂ
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. âThe most momentous consequence of the theory,â declared Wieser in 1891, âis, I take it, that it is false, with the socialists, to impute to labor alone the entire productive return.âÂ
* * *
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 âour economistsâ for having ânot yet wearied of scenting a similar unity in the word âvalueâ and of searching after the original root-concept of the word.â In his preliminary outline for the summa he hoped to publish on âthe will to power,â he scored the ânihilistic consequences of the ways of thinking in politics and economics.âÂ
For that reason, Nietzsche saw in laborâs appearance more than an economic theory of goods: he saw a terrible diminution of the good. Morals must be âunderstood as the doctrine of the relations of supremacy,â he wrote in Beyond Good and Evil; every morality âmust be forced to bowâŠbefore the order of rank.â But like so many before them, including the Christian slave and the English utilitarian, the economist and the socialist promoted an inferior human typeâand an inferior set of valuesâas 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: âWhat does nihilism mean?â he asked himself in 1887. âThat the highest values devaluate themselves.â The nihilism consuming Europe was best understood as a democratic âhatred against the order of rank.âÂ
Part of Nietzscheâs 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 âChristianity made natural,â the aristocracy had lost âits naturalnessââthat is, the traditional vindication of its power. How then might a hierarchy of excellence, aesthetic and political, re-establish itself, defend itself against the massâparticularly a mass of workersâand dominate that mass? As Nietzsche wrote in the late 1880s:
A reverse movement is neededâthe 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.
âââHe needs the opposition of the masses, of the âleveled,â a feeling of distance from them. [He] stands on them, he lives off them. This higher form of aristocracy is that of the future.âMorally 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.
Nietzscheâs 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 valueâits fabricated natureâand 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. âThrough esteeming alone is there value,â Nietzsche has Zarathustra declare; âto esteem is to create.â 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. Â
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 âit knows itself to be that which first accords honor to thingsâ can the noble type truly be âvalue-creating.âÂ
Labor belonged to nature, which is not capable of generating value. Only the man who arrayed himself against natureâthe artist, the general, the statesmanâcould claim that role. He alone had the necessary refinements, wrought by âthat pathos of distance which grows out of ingrained difference between strata,â 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:Â
Whatever has value in our world now does not have value in itself, according to its natureânature is always value-less, but has been given value at some time, as a presentâand it was we who gave and bestowed it.Â
That was in 1882. Just a decade earlier, Menger had written: âValue 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.â Jevonsâs 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.Â
Jevons, for example, was prepared to follow Jeremy Bentham in his definition of utility as âthat property in an object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness.â He thought this âperfectly expresses the meaning of the word Economy.â But he also insisted on a critical rider: âprovided that the will or inclination of the person concerned is taken as the sole criterion, for the time, of what is good and desirable.â 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 donât want is merely a representation, a snapshot of the motions of our willâthat 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, âthe means of measuring directly the feelings of the human heart.â The inner life is inaccessible to our inspections; all we can know are its effects, the will it powers and the actions it propels. âThe will is our pendulum,â declared Jevons, a representation of forces that cannot be seen but whose effects are nevertheless felt, âand its oscillations are minutely registered in all the price lists of the markets.âÂ
Menger thought the value of any good was connected to our needs, but he was extraordinarily attuned to the complexityâand contingencyâof that relationship. Needs, wrote Menger, âat least as concerns their origin, depend upon our wills or on our habits.â 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 âcome into existenceââthat is, only when we become aware of themâcan we truly say that âthere is no further arbitrary elementâ in the process of value formation.Â
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 bearâhow many satisfactions we are willing to forgoâin order to secure it. Only when we have answered these questions are we ready to speak of value, which Menger reminds us is âthe importance we attribute to the satisfaction of our needs.â Value is thus âa judgmentâ that âeconomizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being.â It âdoes not exist outside the consciousness of men.â Even though previous economists had insisted on the âobjectification of the value of goods,â Menger, like Jevons and Nietzsche, concludes that value âis entirely subjective in nature.âÂ
* * *
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, âAny 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.â Indeed, with the help of kindred notions such as âsocial justice,â 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 Nietzscheâs 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. âThe provision of material goods,â declared Mises, âserves not only those ends which are usually termed economic, but also many other ends.â All of us have ends or ultimate purposes in life: the cultivation of friendship, the contemplation of beauty, a loverâs companionship. We enter the market for the sake of those ends. Economic action thus âconsists 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.â We simply cannot speak, writes Hayek in The Road to Serfdom, of âpurely economic ends separate from the other ends of life.â
This claim, however, could just as easily be enlisted as an argument for socialism. In providing men and women with the means of lifeâhousing, food, healthcareâthe 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 resourcesâwhether time, money or effortâon behalf of some end. In making that choice, we reveal which of our ends matters most to us: which is higher, which is lower. âEvery 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,â says Mises.Â
For those choices to reveal our ends, our resources must be finiteâunlimited time, for example, would obviate the need for choiceâand 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 choiceâand 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 âmerelyâ economic loss is thus one whose effect we can still make fall on our less important needsâŠ. Economic changes, in other words, usually affect only the fringe, the âmargin,â 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.Â
Should the government decide which of our needs are âmerely economic,â 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 lowerâin short what men should believe and strive for.Â
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. âEconomic values,â he writes, âare 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.â But we can be free to make those choices only if they are left to us to makeâand, paradoxically, if we are forced to make them. If we didnât have to choose, weâd never have to value anything.Â
* * *
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 duressâthe ordealâof our lived lives, those moments when we are not only free to choose but forced to choose. âFreedom to order our own conduct in the sphere where material circumstances force a choice upon us,â Hayek wrote, âis the air in which alone moral sense grows and in which moral values are daily re-created.â
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 ofâand opportunity forâmoral 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 channelsâwhere every decision to expend some quantum of energy requires us to make a calculation about the desirability of its posited endâthat 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?Â
While there are precedents for this argument in Mengerâs 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 âon earth of freedom, subtlety, boldness, dance, and masterly surenessâ 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 ingenuityâeither to overcome these obstacles or to adapt to them with the minimum of sacrifice. The results were novel, value-creating.Â
Nietzscheâs point was primarily aesthetic. Contrary to the romantic notion of art being produced by a process of âletting go,â Nietzsche insisted that the artist âstrictly and subtlyâŠobeys thousandfold laws.â The language of inventionâwhether poetry, music or speech itselfâis bound by âthe metrical compulsion of rhyme and rhythm.â 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 artsâGoethe, say, or Beethovenâbut in politics and ethics as well: Napoleon, Caesar, Nietzsche himself (âGenuine philosophersâŠare commanders and legislators: they say, âthus it shall be!ââ).
One school would find expression for these ideas in fascism. Writers like Ernst JĂŒnger 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 politicsâwar, the âdecision,â the âexceptionââwhen âthe power of real life,â as he put it in Political Theology, âbreaks through the crust of a mechanism that has become torpid by repetition.â 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 âcreated out of nothingness.âÂ
It was the peculiarâand, in the long run, more significantâgenius 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 âthe medium through which a forceââthe selfâs âdesire for power to achieve unspecified endsâââmakes itself felt.â
* * *
The second challenge confronting the philosophers of capital was more daunting. While Nietzscheâs transvaluation of values gave pride of place to the highest types of humanityâvalues were a gift, the philosopher their greatest sourceâthe 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 workerâin his capacity as consumerâwho 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 benefitsâas well as unionizationâas 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 Nietzscheâs 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.Â
Schumpeterâs entrepreneur is one of the more enigmatic characters of modern social theory. He is not inventive, heroic or charismatic. âThere is surely no trace of any mystic glamour about him,â 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 âsay boo to a goose.â Yet it is this nothing, this great inscrutable blank, that will âbend a nation to his willâânot unlike the father figures of a Mann or Musil novel.Â
What the entrepreneur hasâor, better, isâare force and will. As Schumpeter explains in a 1927 essay, the entrepreneur possesses âextraordinary physical and nervous energy.â 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 âgiven way to a state of exhaustion,â he retains his âfull force and originality.â By âoriginality,â Schumpeter means something peculiar: âreceptivity to new facts.â It is the entrepreneurâs 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 âa leading man,â Schumpeter suggests in Capitalism, Socialism and Democracy, overcoming all resistance in order to create the new modes and orders of everyday life.Â
Schumpeter is careful to distinguish entrepreneurialism from politics as it is conventionally understood: the entrepreneurâs power âdoes not readily expandâŠinto the leadership of nationsâ; âhe wants to be left alone and to leave politics alone.â 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.Â
Rejecting the static models of other economistsâequilibrium is death, he saysâSchumpeter depicts the economy as a dramatic confrontation between rising and falling empires (firms). Like Machiavelli in The Prince, whose vision Nietzsche described as âperfection in politics,â 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.Â
Schumpeter often resorts to political and military metaphors to describe this dance. Production is âa history of revolutions.â Competitors âcommandâ and wield âpieces of armor.â Competition âstrikesâ at the âfoundationsâ and âvery livesâ of firms; entrepreneurs in equilibrium âfind themselves in much the same situations as generals would in a society perfectly sure of permanent peace.â In the same way that Schmitt imagines peace as the end of politics, Schumpeter sees equilibrium as the end of economics.Â
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 âthe routine tasks which everybody understands.â He overcomes the multiple resistances of his worldââfrom simple refusal either to finance or to buy a new thing, to physical attack on the man who tries to produce it.âÂ
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.Â
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 âsocializes the bourgeois mind.â In the same way that modern regiments had destroyed the âvery personal affairâ of medieval battle, so did the corporation eliminate the need for âindividual leadership acting by virtue of personal force and personal responsibility for success.â The âromance of earlier commercial adventureâ was ârapidly wearing away.â With the entrepreneurial function in terminal decline, Schumpeterâs 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 thoughtâLe Bon, Pareto and Freudâto emphasize not only âthe importance of the extra-rational and irrational element in our behavior,â 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.Â
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 consumptionâand beyond that, the deepest beliefs and aspirations of a people.Â
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 Hayekâs 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 donât understand it. Most of our knowledge is like that: we know the âhowâ of thingsâhow to turn on the computer, how to call up our word-processing program and typeâwithout knowing the âthatâ 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.Â
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, individualsâall individualsâmust 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. Hayekâs argument for freedom rests less on what we know or want to know than on what we donât know, less on what we are morally entitled to as individuals than on the beneficial consequences of individual freedom for society as a whole.Â
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: âWhat 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.â
Deep inside Hayekâs understanding of freedom, then, is the notion that the freedom of some is worth more than the freedom of others: âThe 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.â Hayek cites approvingly this statement of a nineteenth-century philosopher: âIt may be of extreme importance that some should enjoy libertyâŠalthough such liberty may be neither possible nor desirable for the great majority.â That we donât grant freedom only to that individual is due solely to the happenstance of our ignorance: we cannot know in advance who he might be. âIf 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.âÂ
* * *
As this reference to âfuture wants and desiresâ suggests, Hayek has much more in mind than producers responding to a pre-existing market of demand; heâs talking about men who create new marketsâand 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.Â
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.Â
While some might claim that Hayekâs argument here is driven less by a dim view of ordinary men and women than his dyspepsia about politics, he explicitly excludes âthe decision of some governing eliteâ 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 âindependent,â both of whom are dedicated to âshaping and reshaping a plan of life,â the workerâs orientation is âlargely a matter of fitting himself into a given framework.â He lacks responsibility, initiative, curiosity and ambition. Though some of this is by necessityâthe workplace does not countenance âactions which cannot be prescribed or which are not conventionalââHayek insists that this is ânot only the actual but the preferred position of the majority of the population.â The great majority enjoy submitting to the workplace regime because it âgives 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.â Simply put, these are people for whom taking orders from a superior is not only a welcome relief but a prerequisite of their fulfillment: âTo do the bidding of others is for the employed the condition of achieving his purpose.âÂ
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:Â
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 âwhat we regard as good or beautiful,â to the ambitions, goals and ends we pursue in our everyday lives, to âthe propagation of new ideas in politics, morals, and religion.â 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, evenâor especiallyâwealth 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 productsâcheap enough, that is, for the majority to enjoy them. What was before a luxury of the idle richâstockings, automobiles, piano lessons, the universityâis 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 âidle richââa phrase Hayek seeks to reclaim as a positive goodâcan 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 generationsâHayek 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 wheelâbut they are immune to the petty lure of money. âThe grosser pleasures in which the newly rich often indulge have usually no attraction for those who have inherited wealth.â (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: âHowever 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.â 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: âThere is something seriously lacking in a society in which all the intellectual, moral, and artistic leaders belong to the employed classesâŠ. Yet we are moving everywhere toward such a position.â
When labor becomes the norm, in both senses of the term, culture doesnât stand a chance.
* * *
In a virtuoso analysis of what he calls âThe Intransigent Right,â 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. Andersonâs cosmopolitan indifference to the indiscreet charms of the Anglo bourgeoisie usually makes him the most sure-footed of guides, but in Hayekâs case it has led him astray. Like many on the left, Anderson is so taken with the bravura and brutality of Straussâs and Schmittâs self-styled realism that he canât grasp the far greater daring and profundity of Hayekâs political theory of shopkeepingâhis 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 âheard in the chancelleries.â Yet whose voice has been more listened to, across decades and continents, than Hayekâs? 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 associatedâEuropean fascism and American neoconservatismâhave never generated the global traction or gathering energy that neoliberalism has now sustained for more than four decades.Â
It would be a mistake to draw too sharp a line between the marginal children of Nietzscheâwith 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 Pinochetâs power in Chile, Hayek told a Chilean interviewer that when any âgovernment is in a situation of rupture, and there are no recognized rules, rules have to be created.â The sort of situation he had in mind was not anarchy or civil war but Allende-style social democracy, where the government pursues âthe mirage of social justiceâ through administrative and increasingly discretionary means. Even in The Constitution of Liberty, an extended paean to the notion of a âspontaneous orderâ that slowly evolves over time, we get a brief glimpse of âthe lawgiverâ whose âtaskâ it is âto create conditions in which an orderly arrangement can establish and ever renew itself.â (âOf the modern German writingsâ on the rule of law, Hayek also says, Schmittâs âare still among the most learned and perceptive.â) 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 AntĂłnio Salazar, with a cover note professing his hope that it might assist the dictator âin his endeavour to design a constitution which is proof against the abuses of democracy.â Pinochetâs Constitution of 1980 is named after the 1960 text.Â
Still, itâs 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 more immediate influence on public debate than any previous paper in the history of economics, 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 uncivil behaviour 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 financial repression (imposing lower real returns on creditors) over immediate austerity.
Those policies are much more to Mr Krugmans 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.****
« Last Edit: June 02, 2013, 08:50:57 PM by ccp »
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 worlds 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, Europes 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 dont need spending restraint. Instead, we need stimulus, stimulus, and more stimulus to revive economic growth. Well 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 worlds 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 Unions 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 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 dont pony up, youll 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 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. Eurostats 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: Austerity is everywhere but in the statistics.
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 miserly 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 Japans rescue). Stimulus cheerleader, New York Times columnist Paul Krugman (Japan the Model), answers his own question how is Abenomics working? with: The safe answer is that its too soon to tell. But the early signs are good
Krugmans 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 Japans public debt to prove the failure of Japans Keynesian experiments. In 1990, Japans 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 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 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 wheres the beef? we should ask wheres the austerity? 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 normal. 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 normal (non austerity) rate, it will spend $32 trillion in 2043. Maybe then well finally have enough 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 theres one economic conclusion we can make from recent data, its that the Keynesian model has failed - again.
Remember that fiscal cliff clock 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 still is in some quarters 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 here we go, its started.
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 which take out the monthly volatility caused by autos, gas, and building materials have been up eleven months in a row and didnt miss a beat after the sequester went into effect. Assuming consumer prices rose 0.1% in May (see our forecast table, below), real (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 havent even been right about the stock market. Were not going to call anyone out by name, but were thinking of a famous Keynesian economist who is widely known for having made a prescient call about 2008-09, whose name starts with an R and sounds a lot like Houdini.
Its 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%. Thats nothing compared to the late 1990s but, hey, it aint 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 equation of exchange. 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.
Its 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 countrys 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 didnt 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 good 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 equation of exchange. 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 meaning a wide spread between long- and short-term interest rates. In addition, the real (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.
Japans 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 Japans 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 wont 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 levers of the economic machine, 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 Newtons physical system of the world became Adam Smiths great machine 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 Godels 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, Godels proof put an end to the idea of the universe, or the economy, as a mechanism. Godels proof, as he himself understood, implied the existence of autonomous creation.
Godels 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 great machines or Newtonian systems of the world. 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 they could not be machines. 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 Godels and Turings 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 entropy. 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 news 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 exogenous 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 peoples 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 didnt, 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 stimulus 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, Growth comes not from dollars in peoples pockets but from ideas in their heads. 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: Life 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 creativity
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 OverBut 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 all above average.
Perhaps this explains why some reviewers have understood the glum predictions of Tyler Cowens Average Is Overthat shifts in the labor market will cause the middle class to dwindleas heralds of the death of the American Dream. This understanding misses the real thrust of Cowens 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 life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement. Cowens 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 Cowens work are, at least marginally, more optimistic than most people would expect. While Cowen foresees an America with more polarizing income inequality, the country wont 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.
Cowens 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.
Cowens Freestyle Future
One of Cowens 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.
Cowens 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, its not difficult to see why incomes will become increasingly polarized. The top end of the income distributionwhich he envisions as the 15 percent, rather than the 1 percentwill be comprised of those who are truly talented or creative in their ability to work with technology. These folks will win 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 opportunity inequality. 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 deservinga fact, says Cowen, that will make it easier to ignore those who are left behind.
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 for a lot of people upward mobility will be a lot easier. 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 perennial competitor 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 individualsfor whom attending an elite university is not an optionwill have the opportunity to showcase their ability and be rewarded for it. Machine intelligence is the friend of the educational parvenu, Cowen says.
And Then What?
The question that logically follows from worsening income inequality is how it will affect Americas social fabric. Plenty of doomsayers predict that it will lead to a revolutionthat 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 some of the least thought-out and least well-supported arguments with wide currency.
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, By broad historical standards, what I share with Bill Gates is far more significant than what I dont share with him. Indeed, the advancements of modern society have allowed more Americans to enjoy higher standards of living than at any other time in our nations 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 caseand by the most advanced methodological standards, it isthen income inequality might not be as devastating an issue as many believe. Thats 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. Its directed at the guy down the street who got a bigger raise. [ ] Most of us dont compare ourselves to billionaires. He doesnt 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 hyper-meritocracy. 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 Adams 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 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 nations 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 didnt 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 worlds 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, Custers 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 nations history. It wasnt enough. You want government training for schools and highly skilled workers -- the Democratic alternative? There was plenty of that, to Boeings 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, were told, to stay competitive. It has all the leverage, because enough states -- and countries -- are willing to give it everything it asks for. Who wouldnt 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 its easier to play state against state, the race to the bottom.
What Boeings 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 didnt 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.
Im tired of being slapped in the face, said John Gilman, who has worked at Boeing for nearly 40 years. Building airplanes -- it takes years of training and skill. The people who run this company used to understand that. But now its run by bean counters and lawyers.
Gilman was among the thousands of factory workers voting on Boeings take-it-or-we-leave proposal Wednesday. The anger was palpable. The president of the local machinists union had called the proposal a piece of crap. Others referred to it as the Walmartization of aerospace. 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 dont 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 machinists rebellion, Boeing is likely to move. Were left with no choice but to open the process competitively and pursue all options for the 777X, said Boeings 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, arent 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 hasnt 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. Thats twice what the state gives to the University of Washington, the regions 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 trickle-down 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 Churchs 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 popes 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 Perón 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:
at 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 80s, along with the slow-growth 70s that preceded the alleged Decade 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 70s, only for Bartley and others to revive Classical economics in the 80s; 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 debtor 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 80s 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 70s, Bartley righted the false history about oil in correctly putting quotes around oil 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 crisis' 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 70s, 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 70s. 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 market 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 70s, 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 70s "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 boom' in much the same way that he and the rest of the Michael 1 crew weren't fooled back in the 70s. 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 70s 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 70s there was similarly according to Bartley a rush into "real assets such as gold or real estate."
In the 70s 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 70s, but with the resumption of largely stable money in the 80s and 90s, 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 70s 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 wise 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; this 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 unutilized 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 demand 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 anchor,' 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 saint.' 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 tight money' policies rooted in quantity theory imposed by Volcker. More to the point, stable money in terms of value has little to do with tight 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 80s 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 trade 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 deficits,' 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 deficit' 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 debtor 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 70s 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 conservative' in the non-ideological sense such that it very much resides in the seen.' 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 stimulus.'
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 70s 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 90s 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 90s.
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 solve' 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 90s 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 crisis' 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 tricked' 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 90s, he likely would have written very presciently about how this was all going to work out.
Writing about the 70s 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 70s and 80s 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:
at 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 Ł7.8 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 add9.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
at 01:12:50 PM by DougMacG
Please select a destination:
DBMA Martial Arts Forum
=> Martial Arts Topics
Politics, Religion, Science, Culture and Humanities
=> Politics & Religion
=> Science, Culture, & Humanities
=> Espanol Discussion
Dog Brothers Information
=> Instructor Lists
=> Biographies & Instructor Details
Powered by SMF 1.1.17
SMF © 2011, Simple Machines