Archive for June 2013

Crisis: Interventionism or Free Markets?

Shawn Ritenour, author of Foundations of Economics, channels Mises to dispute the “sad narratives of the financial meltdown of 2008 and its aftermath .. that it was and remains the result of unbridled capitalism. Too much freedom spoiled the economic broth” is his excellent commentary  Is the Economic Crisis an Indictment of Capitalism?” His conclusion:

In a free market rooted in private property, the only way entrepreneurs are able to sustain profits is by serving customers better than anyone else. It is only when they receive special privileges through preferential regulation, subsidies, bailouts and the like that they are able to reap profits for which they have not sowed productive activity.

I was struck by how much of what Mises said about the response of many to the Great Depression applies closely to our current situation. Just like Mises, we must never tire of explaining the fallacies in the thinking of those who think the Great Recession is a clear case of the failure of capitalism. In fact, it is a quintessential example of the failures of interventionism to bring about anything other than economic destruction and relative impoverishment.

Pierre Lemieux’s Somebody in Charge: A Solution to Recessions? “debunks the “markets caused the problem” literature in “The Laissez-Faire Scapegoat,” and “The Crime Scene”.”

From my review:

The U.S. reforms were truly incomplete and were being reversed. Prior to the 2007–2009 recession, the U.S. system was an entrenched mixed economy with, as Lemieux puts it, “the line between politicians and bureaucrats on one hand and tightly regulated private companies on the other hand . . . blurred” (p. 82). The regulatory climate, from at least the mid- to late 1990s, was not pro-business, free market, or antiregulatory. In fact, the George W. Bush years were “one of the most regulation-heavy periods in American history,” with an “American banking system and financial system that certainly could not be described as laissez-faire. It was tightly supervised and controlled by the authorities—in the spirit of the times” (p. 102, emphasis added). One major financial institution of central control was mostly unaffected by the liberalizations of the 1980s and actually ended the era with enhanced prestige and power—the Federal Reserve System (the Fed).

Once the crisis hit, many economists (pp. 83–102), pundits, and political opportunists such as the democratic majority on the Financial Crisis Inquiry Commission jumped to the conclusion that “the banks led us into the financial crisis” (Wallison 2011). According to this faulty representation of the events leading to crisis and recession, blame lies with a malfunctioning private sector, driven by unconstrained greed and supported by a laissez-faire ideology (Wallison 2011). However, this crisis was not one of capitalism, but of “regulated capitalism” (Friedman 2009). Lemieux debunks the “markets caused the problem” literature (see chapter 4, “The Laissez-Faire Scapegoat,” and chapter 5, “The Crime Scene”).

Salerno Interview on the Fed

Joseph Salerno appeared on Russia Today’s TV show Prime Interest to discuss money, the Fed and the future economic crisis. He comes on at about the 3 minute mark.

Link to show

“Cultural Entrepreneurship”

I am wary of adding yet another conceptual margin for entrepreneurial action but I highly recommend a new (and for the moment, ungated) paper in the Scandinavian Economic History Review by the distinguished economic historian Joel Mokyr on “cultural entrepreneurship.” Starting from a broadly Schumpeterian perspective, Mokyr focuses on individuals who introduce and disseminate novel ideas:

[E]ach individual makes cultural choices taking as given what others believe. It is not a priori obvious how that affects one’s choices. It may affect them positively because conformism implies that there is some social cost associated with deviancy, or because people may reason that if the majority believes a certain thing, there may be wisdom in it (thus saving on information costs). But there can be a reverse reaction as well, with non-conformists perversely rebelling against existing beliefs. What matters for my purposes is that for a small number of individuals, the beliefs of others are not given but can be changed. I shall refer to those people as cultural entrepreneurs. Their function is much like entrepreneurs in the realm of production: individuals who refuse to take the existing technology or market structure as given and try to change it and, of course, benefit personally in the process. Much like other entrepreneurs, the vast bulk of them make fairly marginal changes in our cultural menus, but a few stand out as having affected them in substantial and palpable ways.

Succinctly expressed: “cultural entrepreneurs are the creators of epistemic focal points that people can coordinate their beliefs on.”

Mokyr’s focus, like Schumpeter’s, is not entrepreneurship per se, but its effects, particularly on long-run economic growth, and his entrepreneurship construct is somewhat undertheorized. But he provides fascinating examples, ranging from Mohammed and Luther to Francis Bacon, Isaac Newton, and Adam Smith. He focuses in particular on Bacon and Newton, describing Bacon’s work as “the coordination device which served as the point of departure for thinkers and experimentalists for two centuries to come. The economic effects of these changes remained latent and subterranean for many decades, but eventually they erupted in the Industrial Revolution and the subsequent processes of technological change.” Newton and the Royal Society “raise[d] the social standing of scientists and researchers as people who should be respected and supported and [provided] them with a comfortable material existence.” (Mostly good.)

I’m not an expert on cultural theory or history and am not sure how much the “cultural entrepreneur” construct ads to our understanding of cultural change (other than relabeling, a frequent worry in entrepreneurship studies). But the paper is a great read, highly provocative and informative, and addresses big questions. Check it out.

[Cross-posted from Organizations and Markets]

Connell on Machlup

Carol Connell, author of several insightful articles on Fritz Machlup (including “Fritz Machlup’s Methodology and The Theory of the Growth of the Firm” in the 2007 QJAE), has a new book, Reforming the World Monetary System: Fritz Machlup and the Bellagio GroupThe book deals with Machlup’s attempts in the 1960s to organize a group of elite economists to make recommendations on international monetary policy. No one in Machlup’s group, including Machlup himself, recommended a return to the international gold standard, which led to a temporary falling-out between Machlup and Mises.

“Banish Fractional Reserve Banking for Real Reform”

. . . says Thomas Mayer, a former IMF economist and former Chief Economist of Deutsche Bank Group and Head of DB Research, and now a Deutcshe Bank Senior Advisor. In a letter today to the Financial Times, Mayer writes:

But no reform can make banking really safe as long as the industry operates within a fractional reserve system, where banks create “inside” money (for example sight deposits) by extending credit and promise to exchange this against “outside” money at any time on demand.

Mayer goes on to cite Austrian monetary and business-cycle theorist Jesus Huerta de Soto on the causal connection between fractional reserves and banking crises throughout history. He points out: “Since there is no single state in the eurozone able to bail out banks in a systemic crisis, a banking regime without state backing is needed.” He concludes his letter with a four-step plan for “comprehensive” banking reform that would implement just such a regime:

First, define as safe an asset that can be converted any time and under any circumstances at face value into legal tender. Second, create safe (“insured”) deposits by requiring banks to back them fully with reserves at the central bank. Third, create a cascade of loss-absorbing bank liabilities, starting starting with bank equity and ending with investor deposits (not subject to the 100 percent reserve holding). Fourth, make banks treat eurozone government bonds as assets that can default and help them to reduce their holding of these bonds.

Mayer discusses his proposal for 100 percent reserves in more detail in a policy paper published by the Centre for European Policies Studies.

HT to Toby Baxendale.

Who Says the Market Cannot Supply Its Own Money?

I just arrived back from lecturing at the week-long Free State Project’s Tenth Annual Porcupine Freedom Festival, a huge gathering of libertarians of all stripes from all over the U.S. in the beautiful White Mountains of New Hampshire. As you can see by browsing the schedule, the festival was chock full of educational and social events as well as commercial activities of the “grey market” (and perhaps  darker) variety. Many of the vendors accepted an array of payments media. I was particularly struck by the sign on one stall which read: “Bitcoin, silver coins, Shire Silver, ammo and even Federal Reserve notes accepted.”

Speaking of alternative payments media, I was very impressed with the panel on Bitcoin’s Future featuring Darren Tapp, Jay Best, Josh Harvey,and Teresa Warmke. It was very informative and the panelists avoided the usual hysteria common among Bitcoin supporters in favor of a serious and sober discussion of the advantages and disadvantages of holding and using Bitcoin and the various technological and political  factors that may affect its future value and developments as an anonymous means of transferring money payments.

shire silver photo

I was also delighted to discover that privately minted gold and silver money were circulating at the festival in the form of the aforementioned Shire Silver. This consisted of flat strips and wire strands of silver or gold of various weights embedded in plastic cards and denominated in various weight units from .05 grams to 1.0 grams. These were widely accepted as media of exchange by vendors and paid out in change. Pictured on the left are .5 grams of silver with a purchasing power of $1.00 and .05 grams of gold with a purchasing power of $4.00.

 

Mises Institute South Africa

There is now a Ludwig von Mises Institute in South Africa. This interview with Chris Becker describes the Austrian scene in South Africa and the purpose of the Institute. However, it also has a good discussion about the decline of South Africa, the rise of Subsaharan Africa, gold and much more.

The Bush-Obama Great Stagnation

Robert Higgs has another must read in his “Etceteras …  Real Gross Domestic Private Product, 2000-2012” in the most recent Independent Review.

He provides good arguments on why government product should be (and perhaps almost was) excluded from income and product accounts. He then builds a measure of Real Gross Domestic Private Product for the Bush-Obama years.

Based on his calculations, he states, “Perhaps the most positive statement we can make about the private economy’s performance during this thirteen-year period is that it has been somewhat better than complete stagnation.” Recent daily articles have highlighted how the Hoover-Roosevelt Great Depression was the result of bad policy and accompanying regime uncertainty (see here and here).  Drawing on work by Mark Thornton (“Hoover, Bush, and Great Depressions”), I have been, too slowly, working on an argument that U.S. is currently in the middle of the Bush-Obama Great Stagnation. A Great Stagnation caused by bad policy and the associated regime uncertainty.  This new data helps cement the case.

Professor Higgs might be even more pessimistic:

If the government and the Fed persist in the kind of destructive policies they have undertaken since 2007, the potential for another great depression will remain. Even without such a catastrophe, the U.S. economy presents at best the prospect of weak performance for many years to come.

“Neoclassical” Geometry

EUCLIDEAN GEOMETER: Given the standard axioms of Euclidean geometry, I have proved that the interior angles of a triangle always sum to 180 degrees.

AUSTRIAN ECONOMIST: Okay.

MAINSTREAM NEOCLASSICAL ECONOMIST: I regard the proposition that the interior angles of a triangle sum to 180 degrees as a testable hypothesis. I have obtained a $15.8 million grant from the National Science Foundation to conduct a field study. My graduate students will visit 118 countries to measure and record the interior angles of empirically observed triangles. We will then analyze these data with the latest econometric methods to determine whether, at conventional levels of statistical significance, the data warrant rejection of the hypothesis. In view of the subject’s importance, we expect that our report will be published in the American Economic Review or the Journal of Political Economy. Even if we conclude that the data do not warrant rejection of the hypothesis, however, we will continue to regard it as provisional, pending new data and tests that might warrant its rejection.

Mises Goes Global

Here is a directory of Misesian organizations. I count almost 30 Mises Institutes and over 30 Misesian-leaning organizations in all. Not all appear to be fully functional at this time, but it is a refreshing to see that we are winning the battle of idea around the world

The NSA’s Spying and Why it Matters

Here is an interview I did with notable Thomas Jefferson scholar Coy Barefoot on the NSA spying scandel.

The Skyscraper Curse Comes To New York?

The Wall Street Journal ran a very optimistic article on the rising prices for Skyscrapers and new construction in New York. This is my letter to the editor in response.

Dear Editor, Wall Street Journal:

So what does “Skyscraper Prices Head North” C1, 6/10 tell us? Have perhaps Dr. Bernanke’s “green shoots” from 2008-9 finally taken root? Likewise, is the near completion of the record-setting (US) Freedom Tower an indicator of looming economic stability and growth?

History indicates otherwise. The record setting Chrysler, 40 Wall Street, and Empire State buildings were at various stages of construction just prior to the stock market crash of 1929. The same ugly correlation between record-setting skyscrapers and economic crisis held true with the World Trade Towers in 1970, the Petronas Towers in 1997, Taipei 101 in 2000, and the Dubai Tower in 1997.

When central banks print money and pursue easy credit polices they produce bubbles and malinvestments such as record-setting skyscrapers.

Mark Thornton, Ph.D.
Senior Fellow
Ludwig von Mises Institute

Oakley on Pathological Altruism

Barbara Oakley, an engineering professor at Oakland University in Rochester, Michigan, has just published in the Proceedings of the National Academy of Science, a brilliant article on “pathological altruism.” People often act out of a desire to help others, but this by no means ensures that what they do will have good consequences, whether for the intended beneficiaries or for others. Sometimes these bad consequences cannot reasonably be foreseen; but all too often action proceeds in blithe disregard of them. It is this sort of misguided action that Oakley characterizes as pathological.

Several of her examples deal with public policy and are likely to be of great interest to readers of this blog. The Fannie Mae and Freddie Mac loans aimed to promote better access to housing for those unable to meet prevailing standards to obtain mortgages. This misguided attempt to assist the disadvantaged helped to bring on a severe financial crisis. Foreign aid to Africa has served to entrench tyrants in power. More generally, various altruistic measures have led to a massive government deficit with dire consequences to come.

Oakley also gives examples of the baneful effects of pathological altruism in personal conduct. These effects are not confined to the intended beneficiaries or to third parties; the altruist may also in certain cases suffer personality damage. Oakley’s discussion of these various effects  is informed by an extensive knowledge of the literature of evolutionary psychology and other relevant disciplines. She calls for more research on pathological altruism but suggests that such research will confront obstacles. Researchers tend to be sympathetic to altruistically motivated conduct, even if it has bad effects,and as a result studies that challenge such conduct tend to be viewed with disfavor. People who criticize accepted ideas tend to have great difficulty in gaining an audience for their views. This suppression of research into the malign effects of altruism is itself an expression of pathological altruism. Oakley calls for a new research paradigm that will put an end to the harmful taboos that constrain the study of altruism.

Intro to Bitcoin

Mark Thornton is interviewed about the basics of Bitcoin

Rothbard in the New Yorker

Not exactly correct on all point, but worth a read.

In fact, there is one anarchist who could be considered influential in Washington, but he wasn’t among the activists who participated in the Occupy movement—he died nearly twenty years ago. His name is Murray Rothbard, and, among small-government Republicans, he is something of a cult hero. He was Ron Paul’s intellectual mentor, which makes him the godfather of the godfather of the Tea Party.

Robert William Fogel (July 1, 1926 – June 11, 2013)

Robert Fogel died a few days ago. He was a prominent figure in the academic economic history profession for five decades, virtually from the time he burst onto the scene with the publication of a polished-up version of his Johns Hopkins Ph.D. dissertation, Railroads and American Economic Growth, in 1964. This book was the most impressive accomplishment to date of the type of research espoused by those who participated in a research program known as the new economic history, econometric history, or cliometrics, which had begun to take shape in the late 1950s. The hallmark of this program was the systematic application of neoclassical economic theory and the methods of statistical inference in the study of economic history.

In his book, Fogel undertook to determine how important the railroads had been as contributors to U.S. economic growth by calculating what he called their “social saving,” essentially the amount by which GDP would have been diminished if they had not existed and Americans had been compelled to use the next best means of transporting goods—by horse-drawn wagons on the land and by canal boats on a national system of canals. His conclusion that the social saving had been equal to less than 3 percent of the national product in 1890 cast great doubt on the beliefs historians had previously held about the railroad’s great importance. Although many objections were raised subsequently to Fogel’s approach, his specification of the no-railroads counterfactual, and his data, the book became an instant cliometric classic.

Having entered the economic history profession at the very top, Fogel then proceeded, along with his Johns Hopkins classmate Stanley Engerman, to tackle the subject of slavery in the United States. This time the target was the widely accepted idea that prior to the War Between the States slavery had been on its economic last legs, and therefore had the war not led to slavery’s destruction, this labor system would have died a natural death before long. In 1974, Fogel and Engerman brought their findings together in Time on the Cross: The Economics of American Negro Slavery, a book that probably made a bigger splash than any economic history book ever published in the United States. The main claims this time were that slavery had been economically thriving on the eve of the war, slave-plantation productivity had exceeded the productivity of comparable free-labor production, slaves had received much better treatment than generally believed, and the system had yielded handsome returns to the slave owners, in most cases at least as great as the returns that feasible alternative investments would have yielded them. The reaction to these findings bordered on academic violence as historians and fellow economists rushed to challenge Fogel and Engerman’s methods, data, and conclusions, and to indict them for omissions and errors of various sorts.

Fogel, who believed that any research project that required less than a decade was scarcely worth undertaking, then spent much of the next decade and a half in accumulating additional evidence and carrying out additional analyses, often in collaboration with colleagues or graduate students, to support the initial findings. The fruits of these follow-up efforts appeared in a two-volume work, Without Consent or Contract: The Rise and Fall of American Slavery, published in 1989.

From the 1980s onward, however, Fogel devoted the lion’s share of his research efforts to work that relates more closely to demographic changes in history than to economic history, although he always maintained that critical interrelations existed, for example, between improvements in nutrition and increases in labor productivity. I did not follow closely the mass of research that emerged from this project, much of it by other researchers in the United States, Europe, and elsewhere. I found that I could stand only a certain number of calculated height-by-age profiles and that I could not always accept the conclusions drawn on the basis of such data. In any event, many publications by Fogel and other economic historians grew out of this project.

Fogel taught mainly at the University of Chicago and, for a few years (1975-81) at Harvard. In 1993, he and Douglass C. North shared the Nobel prize in economics for their work as leaders of the new economic history. Fogel’s work was also recognized by his election to prestigious scientific bodies and by the award of honorary degrees by leading universities in the United States and abroad. Yet he never rested on his laurels and remained engaged in research and writing until the end.

I got to know Bob in the early 1970s. At that time I was carrying out research on what had happened to the U.S. freedmen and their descendants during the half-century after the War Between the States, and I imagined that my book on this subject might be seen as a sequel to Fogel and Engerman’s Time on the Cross. In 1977, Cambridge University Press published my book titled Competition and Coercion. Although it failed to receive anything like the gigantic recognition that Fogel and Engerman’s blockbuster had received, Bob was gracious in his own reception. He rarely wrote book reviews, but he did review my book in 1978 for the Business History Review and gave it high marks. Shortly afterward, he invited me to Harvard to make a presentation at the economic history workshop (where I first met Robert Margo, then a graduate student and later a friend and coauthor of mine), and he and his wife Enid entertained me at their home for dinner with some colleagues from the Harvard Department of Economics. In the late 1970s Bob used to encourage me when I complained that my book had been largely neglected, assuring me that in fifty years, it would still stand up.

Bob never showed any indication that he understood Austrian economics or cared to understand it. He was a Chicago School economist, and he enjoyed immense professional success as such. At Chicago and Harvard he oversaw the training of many excellent graduate students, who are now among the leading economic historians in the world. He had no incentive to cut loose from his Chicago-School moorings, which in his mind were those of science, however much some of his work might now seem to me to be more scientistic than scientific. At a symposium to honor my dear friend Max Hartwell, held at the University of Virginia in 1991, Bob became publicly angry with me for challenging, on Austrian grounds, his computation of “slave incomes.” I left academic employment in 1994 and never had any personal contact with him afterward. He must have got over his pique eventually, however, because in 2011, when I was honored with the Alexis de Tocqueville Award, he sent a very gracious video to be shown at the event in which he recalled my early days in the profession and praised my contributions to it.

It is difficult to imagine what academic economic history might have looked like during the past half-century without Bob Fogel. With the possible exception of only Doug North as a comparably influential figure, he did more than anyone to set the profession’s standards, determine its leading topics and methods of research, and train its most highly regarded practitioners. Especially considering that he had become a Communist during his undergraduate years at Cornell and had worked afterward as a Party organizer for eight years before abandoning communism as an unscientific doctrine, one must say that he had a truly amazing career.

Cross-posted at The Beacon.

Japan is the Model?

Nobel Laurette Joseph Stiglitz claims here that Japan is the model for how economic policy can get the world economy out of its current malaise.

Now, though, Japan is leading the way. The recently elected prime minister, Shinzo Abe, has embarked on a crash course of monetary easing, public works spending and promotion of entrepreneurship and foreign investment to reverse what he has called “a deep loss of confidence.” The new policies look to be a major boon for Japan. And what happens in Japan, which is the world’s third-largest economy and was once seen as America’s fiercest economic rival, will have a big impact in the United States and around the world.

Economic History and the Austrians: The Relevance of Robert Fogel and the New Economic History

Bob Higgs provides a nice tribute to economic historian Robert Fogel, a leading economic historian and cliometrician.

In 1995 Higgs’s “Austrian Economics and the New Economic History” in Austrian Economics Newsletter vol. 15, no.1, (available here pages 2 and 3) offered a well thought out assessment of what cliometrics might offer “of value to the Austrian economist.” After stating, “At first glance one might well answer no”, he argues, “Upon closer inspection, one may revise this assessment. Austrain economists do sometimes write economic history… .”  Thus, “Austrians engaged in historical interpretation can sometimes benefit from some cliometric work.”

It is two pages well worth keeping accessible for any Austrian researcher “practicing their own disticntive style of interpretative economic history.”

It was advice I tried to keep in mind for my own research and teaching.

At Least He Spelled “Fogel” Correctly

Nicholas Wapshott is the British journalist who produced 2011′s Keynes-Hayek: The Clash that Defined Modern Economics, an entertaining but ephemeral tale of Cambridge in the 1930s (here is John Cochran’s less-than-flattering review). Wapshott sees himself as an important critic of “free-market orthodoxy,” but his grasp of economic theory, history, and policy is more than a bit muddled. His newest article, a tribute to the late Robert Fogel, is positioned as a defense of cliometrics, the application of econometric techniques to economic history (and a critique of — well, he doesn’t say, exactly, but presumably Austrian-style deductive analysis wouldn’t pass muster). Unfortunately, the article is riddled with howlers.

Wapshott describes Hayek, author of “Why I Am Not a Conservative,” as a “conservative saint” and calls Abba Lerner, one of Fogel’s teachers, an “Austrian School economist.” Fogel’s cliometric approach is described as a “data mining,” a somewhat loose term that generally applies to inductive analysis, not the kind of hypothesis testing associated with cliometrics. Wapshott takes time to praise Simon Kuznets, “whose pioneering work in econometrics led to the accurate measurement of economic growth.” Kuznets’s work was certainly pioneering, as in novel, but no respectable development economist thinks GDP is an “accurate” measure of national well-being, let along economic welfare, and its limits are well known in the growth accounting literature.

The funniest line, however is this: “Fogel was one of the best sort of economists, like Milton Friedman and Anna Schwartz, devoted to determining cause and effect through a meticulous study of the facts.” Only the most naive empirical social scientist — or journalist without any actual research experience — could believe that causality emerges from “studying the facts.” To be sure, modern empirical economics is obsessed with causal inference, but no skilled econometrician thinks that the various popular identification techniques “determine” cause and effect. The so-called identification revolution is not without critics, and many practitioners worry that it has gone too far.

Is Russia’s New Central Bank Head an Austrian?

Well not quite, but Elvira Sakhipzadovna Nabiullina, a surprise choice of President Putin to head the Central Bank of the Russian Federation, describes herself as “a liberal economist with no hint of radicalism.” She cites books by Austrian economic historian Robert Higgs and by Keynes disciple Joan Robinson as influential in her education.