Author Archive for Robert Higgs

“We” Are Doing Great Things

220px-We_first_ed_dust_jacketI never went to the moon. I never even wanted to go there. So you can just stop talking about how “we went to the moon” or how “we sent men to the moon.”

If other people want to go to the moon or to send someone else there, I have no objection provided they do not force me to contribute any part of the funds needed to pay for the project.

Remember, however, that no matter how impressive an engineering feat someone’s going to the moon might be, it indicates absolutely nothing about “our” ability to solve pressing economic, social, or political problems. To suppose that it does shows that one has no real understanding of the nature of such problems.

State Monopolists Don’t Work for You

1280px-US_Customs_and_Border_Protection_officersI see that some people have become a bit upset with how the police are conducting themselves recently. They declare that the police need to be reminded that “they work for us, not the other way around.” This statement expresses an utterly naive and untutored idea.

The police don’t work for us, if by “us” we mean you, me, and at least 95 percent of the rest of the population. On the contrary: we work for them, literally; we work to earn money and acquire wealth that they take forcibly from us for their own support, either by taxation or by outright confiscation (civil forfeiture). The cops don’t work for us; they never worked for us. They work now, as they have always worked, for the government, which is to say, for the small part of the population that has any nonnegligible control over the government at any level — federal, state, or local. Certainly no more than 5 percent of the population has any such control. More likely the percentage is 1 percent or less of the population.

Burgeoning Regulations Threaten Our Humanity

450px-Code_of_Federal_Regulations_Mid-Manhattan_LibraryInsofar as mainstream economics may be said to make moral-philosophical assumptions, it rests overwhelmingly on a consequentialist-utilitarian foundation. When mainstream economists say that an action is worthwhile, they mean that it is expected to give rise to benefits whose total value exceeds its total cost (that is, the most valued benefit necessarily forgone by virtue of this particular action’s being taken). But nearly always the economists make no attempt to evaluate as part of their benefit-cost calculus any costs that might be incurred as a result of how and by whom the action is taken.

Often they verge on the assumption that benefits and costs exist apart from those who take the action, even though this assumption clashes with the foundational principles of their science. Thus, in benefit-cost calculations, economists often attach a value to certain expected benefits (e.g., the dollar value of lives saved as a result of a safety regulation) and compare this value to the dollar outlays by the government that imposes and enforces the regulation and by the private parties who are compelled to comply with it, often at great private expense.

I cannot recall, however, ever seeing a benefit-cost computation that attaches any cost valuation to the loss of freedom by the regulated parties. It is as if it matters not at all that an action is mandated, as opposed to freely chosen. Freedom itself is, in effect, considered worthless, and hence its loss entails no sacrifice regarded as worthy of receiving weight in the calculation.

On the basis of such procedures, at least in a pro forma sense, countless regulations and laws have been imposed on the public willy-nilly. Apart from the many questions that might be raised even in the context of the usual benefit-cost study, one who values freedom cannot help but be struck by how entire societies have been overwhelmed by suffocating regulations and by how drastically people’s freedoms have been curtailed, all under the presumption that each drop of this deluge constituted a net improvement in social well-being. Insofar as the trampled freedom is concerned, the motto seems to have been: nothing valued, nothing lost.

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Chances Are that You Have No More Expertise in Economics than You Have in Astrophysics

Henri_Julien_Dumont_-_The_AlchemistAlthough the statement is commonly attributed to Mark Twain, his friend Charles Dudley Warner was the one who said, “Everybody complains about the weather, but nobody does anything about it.” Regardless of who said it, the statement was and remains fairly accurate.

In contrast, we might observe, “Everybody complains about the economy, and a great many unfortunately try to do something about it.” Economic policy is the name given to such attempts by government officials, their consultants, and their contractors. For the general public, economic policy is a tragic matter because regardless of what the man in the street may think, the government’s actions almost invariably make economic life worse than it would have been had the policy makers kept their hands off of it.

Despite a gigantic outpouring of talking, writing, and studying, at least 90 percent of this yammering is worthless, and much of it is positively harmful. Look, I’m not going to lie to you: I’m an economist. I’m not bragging about this professional status; it’s simply a fact. If I were a plumber or a carpenter, I’d admit being one just as readily. Now, tens of thousands of other people also say that they are economists, but scarcely any of them is so in more than a nominal sense. They may have a Ph.D. in economics, yet it remains the case that their ideas about economics are no better than your average crackpot’s. The overwhelming part of what people learn in graduate school in economics is mathematical mumbo-jumbo whose substance boils down—if it boils down to anything, rather than simply evaporating—to what F. A. Hayek called the pretense of knowledge. In short, these “experts” are ill-educated fakers. My best guess is that no more than a couple thousand real economists exist in the entire world, and I would not be surprised if my estimate were too high by a thousand.

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Why We Should Not Underestimate the State

799px-Police_State_Pittsburgh_G20Many of my friends think of the state as stupid, and therefore an easy foe for determined dissidents to defeat. I have a different view.

For one thing, the state has always had ready resort to those with cutting-edge expertise in the private sector, from the days when it hired Eli Whitney to manufacture muskets with interchangeable parts to our own time, when it hires Oracle, Microsoft, and a host of other high-tech companies to help it spy on us. History has shown that no task is so revolting and criminal that the state cannot attract private contractors to carry it out.

Moreover, even if the private-sector geniuses refuse to sign up, the state can, whenever push comes to shove, simply send its goons to smash your door and haul you off to one of its dungeons. Such actions, especially if taken on a wide scale, have a marvelously educational effect on dissidents and would-be dissidents.

Because the state has the capacity to raise enormous amounts of money and to bamboozle the great mass of the public, it can employ these two tactics — outsourcing of operations and use of raw force — pretty much as it finds optimal. It is a mistake to underestimate the state simply because its visible face consists of seemingly idiotic politicians.

Photo credit.

‘What are states but warlord organizations?’

800px-SWATK9Anarchists are constantly tempted to respond to their critics in a way that verges on the tu quoque fallacy — in children’s playground lingo, “it takes one to know one” — because often a critic’s claim about the horrors that anarchy would bring is essentially a claim that it would bring about a condition that already exists under the rule of states. Why the warlords would take over, the critic claims. But what are states but warlord organizations in their most developed expression? Why we’d have no protection against thieves and marauders, the critic claims. But today’s police provide no such protection. They are either marauders themselves or, at their best, worthless note takers who show up long after a private crime has been committed and pretend to go about bringing the wrongdoer to justice. But there would be no justice under anarchy, the critic declares. Such claims ignore the absence of real justice today in the state’s so-called criminal justice system, a machine for punishing people who have violated no one’s natural rights and dishing out arbitrary and senseless punishments through plea bargains extracted from hapless victims caught in the state’s unjust web of lies and arrogant pretense.

Of course, no sensible anarchist expects that the abolition of the state will create heaven on earth. Such an anarchist understands full well that even the best feasible form of human social organization will be vulnerable to any number of crimes and other wrongs — after all, we’re dealing with real flesh-and-blood human beings here. But under anarchy, voluntary cooperation, peace, and justice have, so to speak, at least a fighting chance, which is one helluva lot more than we can say about social life under state domination.

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Do You Remember the Sixties?

Visit_of_President_Johnson_in_VietnamDo you remember the Sixties? I do, vividly. The latter half of that decade was the worst time of my life so far as the enveloping social and political conditions were concerned: endless, horrifying war; unraveling civil rights movement; urban riots and violence; political assassinations and mass protests; university upheavals and bombings; police brutality at every turn; political leaders—the cosmically offensive LBJ above all, with Nixon a close second—so foul that one had to avert his eyes from their hideous visage and pinch his nose to keep out their stench of death and moral putrefaction.

Yet amid all of this social and political horror, the time was pervaded by a bizarre hopefulness, especially among young people. Caught up with one basis or another for optimism and personal commitment—New Leftism, anti-Establishmentism, communitarianism, hippy love-harmony, anti-militarism, anti-imperialism, and so on—many of us became convinced that the future would be better, that never again would we be fooled by the “new boss,” that in some fundamental way we were living through an irreversible revolution. Before long, of course, most of these youthful optimists ran off the rails into violence, drug-dazed escapism, abandonment of social engagement for more personal goal-seeking, and a thousand other forms of personal accommodation to the defeat of all attempts at sweeping societal transformation.

Thus, the new world we anticipated and worked to create never arrived, and so we went on to make our separate ways through a world that in its essentials remained the same as the old: war after war; political corruption that stinks to heaven’s heights; spiritual anxiety and rootlessness; fascination with culturally superficial and ephemeral foolishness.

We now have, of course, some things that we lacked then—personal computers, the Internet, the Web, and an abundance of electronic gizmos—and some of us fancy that these things will allow people to congeal in the creation of a truly better world. I have my doubts. The Establishment is stronger than ever: more pervasive and inescapable in its surveillance; more lethal and invasive in its police presence; more lavishly funded; stronger in its ability to lock hundreds of millions in helpless dependency; and no less ruthless than it was then. Against these immense forces of the Establishment, we can only send, at most, a few million mostly youthful optimists, unorganized and mutually quarrelsome, easily distracted by the vibrations of the latest tweet or twerk. This scenario is not a promising portent of genuine revolution. What I saw and experienced and participated in during the Sixties had much greater promise and, for a decade or so, much wider participation, yet it fizzled out, leaving only marginal changes for the better (the major exception being the elimination of the draft, which was truly important). The idea that today’s dissidents will have more success strikes me as the sheerest wishful thinking.

Also posted at The Beacon. 

The Unbroken-Leg Fallacy

Paris_Duty_who_works_for_the_Pocahontas_Corporation_at_the_Amonate_Mine,_received_a_broken_leg_in_mine_coal_car..._-_NARA_-_541091In recent years, many people, at least in certain circles, have become familiar with Bastiat’s broken-window fallacy and have come to recognize that Keynesian macroeconomic policy amounts to little more than this fallacy writ large.

Perhaps even more important is what we might call the unbroken-leg fallacy. This is the presumption, which underlies all sorts of state intervention, both macroeconomic and microeconomic, in the market system, that the participants in markets are perfectly capable of acting more productively but, owing to various “market failures,” are not doing so on their own and require state action to repair the situation. The fallacy is that this reasoning completely ignores the countless ways in which the state’s own intrusions and engagements in the economic system in effect “break the legs” of private-sector actors by distorting prices (including interest rates), penalizing productive actions, and subsidizing destructive actions. Having invaded the economic order like the proverbial bull in a China shop, the state’s kingpins, functionaries, and intellectual bootlickers then have the chutzpah to blame “market failures” for the wreckage they themselves have created — an ever-changing hodgepodge of bad incentives, misdirected state efforts, and ominous fears about further unsettling state actions to come.

Owing to the built-in feedback that occurs in a genuinely free, profit-and-loss-based market system, people do not systematically err and fail in their multifaceted efforts to coordinate their own economic activities — unless, that is, the state runs amok, breaking their legs willy-nilly and crippling the operation of the price system. Economic analysis and policy-making that disregard this reality rest on a fallacious foundation.

Some Basics of State Domination and Public Submission

51y+gUr59fL._SY344_BO1,204,203,200_Familiarity may indeed, as the saying goes, breed contempt, but it also breeds a sort of somnolence. People who have never known anything other than a certain state of affairs—even an extraordinarily problematic state of affairs—have a tendency not to notice it at all, to relate it, so to speak, as if they were sleepwalking through it. Such is the situation of modern people in relation to the state. They have always known it, and they take it completely for granted, regarding it as one might regard the weather: whether it brings rain or sunshine, lightning bolts or soothing spring breezes, it is always there, an aspect of nature itself. Even when it proves destructive, its destruction still qualifies as something akin to “acts of God.”

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Tolstoy’s Remarkable Manifesto on Christian Anarchy and Pacifism

225px-L.N.Tolstoy_Prokudin-GorskyI’ve just finished reading Leo Tolstoy’s remarkable book The Kingdom of God Is Within You. This was written in Russian and completed in 1893, but the Russian censors forbade its publication. It circulated in unpublished form in Russia, however, and was soon translated into other languages and published abroad. It had substantial influence on the course of history, perhaps most of all because of its influence on Gandhi.

The book is odd in several respects. In a purely literary sense, it is by no means a masterpiece, as Tolstoy’s great novels, written earlier in his life, were. In places it reads more like a set of notes for a book than as a polished work. For example, it contains many very long block quotations and much unnecessary repetition. However, Tolstoy’s mastery as a writer still shines in the brilliance of some of his formulations, especially in the second half of the book.

Odd, too, is Tolstoy’s own curiously uneven command of different aspects of his subject. In regard to the nature and operation of the state and the sociology of human interrelations in the socio-political order, Tolstoy’s clear-eyed insights cut to the quick. He makes even an analyst such as James Buchanan, who complained about people’s “romantic” views of politics and the state, seem utterly romantic. In contrast, Tolstoy’s understanding of economics was abysmal and leads him into foolish notions of the equivalence between state acts and capitalist acts. He seems also to have given no thought to what the consequences would be if his communistic preferences about the distribution of property were adopted in practice. Although he had excellent insights into the role of (what I call) ideology in the maintenance of the state-dominated social order, he entertained a view of how the dominant ideology was changing and would continue to change that seems to me completely lacking in contemporary evidence and utterly at variance with everything we now know about how ideology did change during the past century or so. He greatly overestimated the hold that Christian morality had on the souls of people in the West at the time he was writing, not to speak of later, even less Christian times.

Tolstoy is one of the most important Christian anarchists in history, yet his views on Christianity were anything but typical. For example, he regarded the various Christian churches as totally corrupt and as the propagators of false and spurious doctrines that only helped the dominant elites to retain their hold on political, social, and political power while oppressing the great mass of the people. Self-serving members of the upper crust were, in his eyes, willing to avert their eyes from the truth, especially the Truth of Christianity as expressed above all by the Sermon on the Mount. This sermon, indeed, seems to have amounted to not only the heart of Tolstoy’s Christianity, but to the bulk of it, as well. For him, Christianity was above all a commitment to love others as one’s self and to abstain from the use of force and violence, even in resistance to evil or in self-defense. Thus, as a Christian anarchist, he comes close to occupying a class of his own (though not quite all his own).

I plan to write at greater length about Tolstoy’s fascinating book for a future “Etceteras” feature in The Independent Review. Aside from its interest as a manifesto for Christian pacifism and anarchism, the book contains many anticipations of ideas later developed in economics and public choice, and it deserves much greater attention in these regards than it has previously received.

[Also posted at The Beacon.]

The U.S. Government Makes a Mockery of the Principal-Agent Relationship

The philosophical and legal foundation of the U.S. government (and some other governments) is that government officials are the agents of the citizens—in the familiar phrase, those who govern have the “consent of the governed.” An agent, of course, is someone I authorize to act on my behalf. For a host of reasons, this doctrine has always been more or less absurd, but its absurdity has been placed in stark relief recently by the government’s mass spying, which violates the Constitution, various statutes, and many official declarations and promises.

Imagine that I have an agent—for example, I currently have a building contractor in Mexico to whom I have given a legal power of attorney to act in specified ways for a specified duration in carrying out various transactions related to the construction of my house there. Now suppose that my agent refuses to give me full information on his activities performed on my behalf and—outrageous as it might seem—undertakes to spy on me. Then, when I challenge his defective agency and his unauthorized actions in court, he has the impudence to defend himself on the grounds that I lack standing to sue him and that the secrets he keeps from me are legally unblemished because they are “state secrets.” Obviously no one would tolerate such an agent; nor would any court uphold such blatant highhandedness.

Unless, of course, my agent—my agent according to the alleged agent, that is, not according to me—happened to be a government, the U.S. government in particular. Indeed, this twisted, sophistical, legal mumbo jumbo has prevailed for more than half a century pretty much without objection. In the past year, Edward Snowden’s revelations about the NSA’s massive spying activities have provoked for the first time substantial public protest and legal challenges to the government’s outrageous conduct in relation to the “principals” (the public) on whose behalf government officials purport to act as agents. Never before has the U.S. government’s sheer imperiousness been placed so clearly on public display.

To repeat, the claim that the rulers act as our agents has always been nonsensical, as Lysander Spooner showed almost a century and a half ago, but its incoherence is now illuminated as never before. If the government acts as my agent, it does so entirely by accident, because no agent that acts without my knowledge, approval, or accountability to me can make a plausible claim to agency. Our rulers may or may not be accurately described as dictators, but in no event may they be accurately described as my agents or as acting with my consent.

[Cross-posted at The Beacon.]

Governor Stevens and I

Isaac_Stevens_-_Brady-HandyWhen Governor Isaac Stevens went around Puget Sound in the mid-1850s making treaties with the Indian tribes to clear the way for an anticipated influx of whites, he found again and again that asking for the tribal chief got him nowhere. The Indians would look around and shrug their shoulders. They had no chiefs. Like many North American Indian tribes, they made communal decisions by consensus, with at most a special influence being exerted by one or two respected elder males.

But Stevens, hellbent on following the treaty-making protocol established among Western nations, plowed ahead, finding someone on each occasion to treat as the chief who would put his X on the treaty to make it official. To make matters worse, the negotiations took place via interpreters who employed the Chinook Jargon, a trade language used by the local Indians to communicate (roughly) with one another, a language with only a few hundred words, a language obviously incapable of facilitating Stevens’s rather delicate negotiations. What the hell: the treaties were written in English, “signed” by some Indian or another, and treated as sufficient by the whites who sought to keep the Indians out of the way as they took over the area and exploited its natural resources.

More than a hundred years later, these phony-baloney treaties became the basis for federal court cases decided in what is known as the Boldt decision, after the judge who handed it down in 1974. In the aftermath of this decision, all hell broke loose because the Indians, who had been catching less than 10 percent of the salmon in Washington waters, were now given a right to harvest half of the salmon. The white fishers went ape.

In the sequel, state and federal regulators attempted to get control of the situation and keep the melee from becoming violent, and in the process I was retained as an economic consultant, first by Washington state and later by the federal Pacific Fishery Management Council, to assist in the process. Fisheries consulting occupied me in one way or another from the mid-1970s to the early 1980s and again in the early 1990s, when I worked for an industry association in connection with federal regulation of the Bering Sea pollock fishery. (For a while, the famous economist Arnold Harberger was part of our team.) Thus is established the connection between Isaac Stevens and me. Ain’t history fascinating!

Cross-posted at The Beacon.

The State is more Dangerous than Anarchy

Most people fear that without government (as we now know it), social and economic conditions would be horrible, with rampant crime, including theft, extortion, robbery, rape, and murder; chronic fighting among warlords and organized criminal gangs; and low rates of saving and investment, hence little or no economic growth, owing to people’s inability to form reliable expectations about the future, even for the intermediate term, in an atmosphere of great threats to private property rights.

Yet, with government (as we now know it), all of these social and economic conditions prevail nonetheless, and many of them, especially the death and destruction caused by war and constant preparation for war and the domestic extortion and threats to private property rights, are institutionalized and carried out on a vast scale that almost certainly could not exist without government’s huge resources to maintain them. Moreover, with a traditional government in place – a government that ruthlessly smashes any rivals for its monopoly of “legitimate” coercion and brooks no competitors to coexist alongside it — people have virtually no ability to protect themselves against the entrenched threats to life, liberty, and property posed by the government itself.

Ah, government, blessed government – all the evils and costs of anarchy — many of them greatly compounded — with none of anarchy’s virtues and benefits and scarcely any of its individual freedoms.

(If the foregoing sounds wildly implausible, please consider my thesis seriously, as spelled out more fully in the lecture below and much more fully in the literature referenced there.)

 

Thinking Is Research, Too!

Bill Parker, an old friend of mine who died in 2000, was director of graduate studies in economics at Yale for thirteen years. He told me once about his struggles with his colleagues, who, he believed, were spending too much time on technique and not enough time on substance in teaching their courses. The recalcitrant colleagues maintained that they were teaching the students how to think, but Bill demurred: the students might be learning how to think, he told his colleagues, but they were not learning anything to think about.

This recollection fits in the same corner of my brain with something my old and deeply cherished friend (and my colleague as a fellow at Oxford University in 1972-72 and earlier in team-teaching a graduate seminar at the University of Washington in the summer of 1969) Max Hartwell told me more than forty years ago. His colleagues, he complained, groused that he did not do enough research, by which they meant the usual cranking out of mathematical-theoretical models and related econometric effluent. Max’s response was to insist that “thinking is research, too!” At the time, occupied as I was in trying to meet the profession’s prevailing expectations, I had my doubts—it seemed like too easy an excuse—yet, as my own career has proceeded, I have become more and more convinced that Max had hit the target at its dead center.

I return to this thought frequently, never more so than when I consider how the economics profession has received—or, in far greater degree, not received—my research and writing on what I call regime uncertainty. I first wrote about this topic in 1997 in an article in the first volume of a new journal that I edited, The Independent Review. Although the article contains some material that noneconomists might not understand immediately, it is for the most part nontechnical. It contains no formal mathematical model and no formal econometric estimation. Yet it does contain a great deal of empirical evidence and, to my mind, an analytical argument that has both theoretical substance and a respectable pedigree.

Although this article did not go entirely unnoticed, the mainstream profession paid little or no attention to it. My fellow Austrian economists seemed to find it persuasive, as did some economic historians, but mainstream macroeconomists, so far as I was aware, remained blissfully oblivious to it for many years. Eventually, during the past few years, a few such mainstream analysts took note of it, usually in passing, even though the topic of policy uncertainty (a subset of my concept of regime uncertainty) has attracted growing interest from macroeconomists as recovery from the contraction of 2007-2009 has proved so slow and, thus far, incomplete.

 

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Mainstream Economists on Policy Uncertainty

Mainstream economics has a tremendous ability to take any substantive idea and transform it into an ooze of technicalities from which an endless stream of competing theoretical and econometric models may be squeezed indefinitely, or until the researchers’ fancy shifts to a newer sexy issue on which they can lavish their talent for pyrotechnics. As the researchers push forward their work, it becomes ever more distant from the empirical realities that first gave rise to it, until eventually it evaporates entirely into a debate over conceptual, methodological, and theoretical issues that wafts like a thin, ethereal fog over the real world from which it arose.

I continue to believe that my idea of regime uncertainty is important for understanding how mixed economies function — or fail to function. However, policy uncertainty is not equivalent to regime uncertainty; the former is only a subset of the latter; and all of the latter is important. I continue to note, without great astonishment, that the paper I wrote on this topic in 1997 has somehow evaded the notice of virtually every mainstream analyst who has leaped into this research pond during the past few years. If only I’d pitched my paper in the form of a formal mathematical model complete with some fancy bells and whistles, it might have attracted more notice.

All Government Policies Succeed in the Long Run

A crazy claim you are probably thinking after reading my title. After all, “failed policies” are a staple of discussions and debates about government actions in the United States. Everybody, regardless of political preferences, has a list of what he regards as the most glaringly failed policies. This way of looking at the matter, however, is all wrong.

People label a policy as a failure because it does not bring about its declared objective. For example, drug policies do not reduce drug use; educational policies do not educate children better; national-security policies do not make Americans more secure; and so forth. The mistake is to take seriously the announced policy objectives, to forget that virtually everything the government does is a fraud. The best way to document the government’s nearly unblemished record of policy success is to follow the money. With very little trouble, you will be able to follow the trail to the individuals and groups who benefit from the policy. Occasionally the true beneficiaries do not benefit in the form of augmented income or wealth, but in other forms of reward, yet the principle remains the same.

When I first studied economics and began to practice as an economist, back in the sixties and seventies, I learned how markets and the market system as a whole operate. With this understanding in mind, I was able to identify a number of reasons why a particular policy might fail: it might be based on insufficient or incorrect information; it might give rise to unintended consequences; it might receive inadequate funding for its implementation; it might be based on unsound theory or mistaken interpretation of historical experience; and so forth.

Analysts who approach the question of failed policies along these avenues can rest assured that they will never lack for new studies to perform and new measures to propose to legislators, regulators, administrators, and judges. For example, if government fiscal or monetary policy fails to stabilize the economy’s growth because it derives from unsound macroeconomic theory, then the analyst attempts to identify the ways in which the received theory is unsound and to formulate a sounder theory, on the basis of which a more successful policy may be carried out. This sort of back and forth between theoretical tinkering and policy appraisal fills many pages in mainstream economics journals.

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Ronald Coase, Professional Odd Man Out

Ronald Coase (1910-2013) died Monday at the age of 102. Since Coase became an economist, in the early 1930s, the economics profession has been altered enormously in fundamental ways. Most notably, perhaps, (1) the degree of analytical formality (especially the mathematical specification of theoretical models) has increased greatly in every part of the field; (2) Keynesian and other types of macro theories have become central parts of economic theory; (3) econometric testing has become an integral part of the profession’s evaluation of its theoretical models; and (4) interest in and writing about economic history and the profession’s greatest contributors in previous eras have waned greatly.

Coase, however, stood completely apart from these developments. Moreover, whereas the typical big-league academic economist cranks out many journal articles each year (and occasionally a book), Coase wrote very little. His stature as an economist rests overwhelmingly on two articles: “The Nature of the Firm” (1937) and “The Problem of Social Cost” (1960). Yet Coase is widely acknowledged to have been one of the twentieth century’s most influential economists. He obviously believed that thinking carefully about important issues was more important than frittering away his efforts in producing a stream of formal pyrotechics with very short half-life.

Too bad so few academic economists followed his example in these regards. (But, then, if they had, they probably would not have received tenure at their universities.)

[Also posted at The Beacon.]

Creative Destruction—The Best Game in Town

In his justly famous 1942 book Capitalism, Socialism and Democracy, Joseph A. Schumpeter described the dynamics of a market economy as a process of “creative destruction.” In his view, innovation—“the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates”—drives this process. Its most important result is that for the first time in history, the mass of the population in developed countries enjoys a standard of living that even the aristocrats of past ages could scarcely have imagined, much less have actually had.

Yet, as Schumpeter sought to express by his pithy term, the process is not merely creative, but also destructive. As a market economy develops, it necessarily brings about an immense variety of changes in particular demands and supplies, and hence it results in losses as well as profits. For those who rely on selling goods or services in declining or disappearing demand, for those whose locations no longer fit well into emerging spatial patterns of production, for those whose techniques of production no longer represent a means of maximizing net revenues, for those whose skills and experience no longer attract eager buyers in the labor markets—for them and countless others, the process of economic development brings anxiety, disappointment, loss, and in some cases ruin.

The losers take little solace in the thought that their economic displacement or demotion by more competitive workers and producers constitutes the heart and soul of a process by which the entire society, on average, becomes richer. And their plight has always attracted legions of critics who correctly blame the market system for the wreckage. It is simply impossible for the process of economic development to operate without losers. A market economy is a profit-and-loss system. Profits signal the desirability (to consumers) of moving resources to new employments; losses signal the desirability (to consumers) of removing resources from current employments. On the one hand, people are drawn by the prospect of heightened economic pleasure; on the other hand, they are repelled by the onset of persistent economic pain. In this way the overall system continually reshapes itself to comport more effectively with the prevailing patterns of demand and supply. Read More→

Is Macroeconomics Really Economics?

The world probably would have been much better off had macroeconomics never been devised. Although I have in mind Keynesian macroeconomics above all, I include other types of macro models as well. I even include, somewhat reluctantly, the whole quantity theory approach descended from David Hume to the Friedmanites, now known as monetarism.

One of monetarism’s aspects that bothered me long before I became an Austrian (of sorts) is its oversimplification of aggregate economic activity. Resting their analysis on (a more or less elaborated version of) the Fisherian equation of exchange, monetarists maintain that changes in nominal aggregate demand (hence movements in either real output or the price level) occur in response to changes in the money stock (absent offsetting changes in the demand for money). To me this idea seemed to be a claim that the money-stock tail can and does wag the aggregate economic dog; that, more specifically, in a situation of sub-capacity real output (“recession” or “depression”), increases in money stock—and only such increases—drive increases in real output and employment.

Because I believed, and still believe, that changes in aggregate output and employment may occur also as a result of changes in other variables (e.g., investors’ perceptions of the future security of their private property rights ["regime uncertainty"]), monetarism always seemed to me to claim an implausibly high degree of explanatory power, some of which might be concealed by spurious empirical correlations between money and total output à la Friedman and Schwartz.

In short, among its many other deficiencies, as spelled out by Mises and his followers, monetarism’s most fundamental flaw is identical to the most fundamental flaw of Keynesian, Post-Keynesian, New Classical, and other theories advanced by macroeconomists during the past seventy or eighty years: not only does the theory leave out critical variables, but it is too simple, being expressed in huge, all-encompassing aggregates that conceal the real economic action taking place within the economic order.

I have written a related lament at great length and in more detail in my little article titled “Recession and Recovery: Six Fundamental Errors of the Current Orthodoxy.”

[Posted originally at The Beacon]

“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.