Line of the day, from Michael Kinsley: “Krugman sometimes writes as if, right or wrong, his view is the courageous one, held by folks willing to stand up to the plutocrats and their lackies. But his message to all classes is: party on.”

I also like the way Luigi Zingales put it in 2009:

Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behavior. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.

See also my comments here.

“The seeds of this moral defense of free markets were planted by John Locke, Adam Smith and Ludwig von Mises,” writes Steven Pearlstein in the Washington Post. He emphasizes the work of Ayn Rand in popularizing the moral case for the market, but could have also mentioned Hazlitt, Hayek, Baldy Harper, Edmund Opitz, Rothbard, and other Austrians and libertarians who justified free markets on ethical grounds, both consequentionalist and natural-rights based.

In an unusually perceptive post, Krugman complains that “again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above.” He points out that one side of the macroeconomic debate “is, in essence, political,” driven by “hostility to any intellectual approach” that might cast doubt on its preferred p0licies. “Too many influential people just don’t want to believe that we’re facing the kind of economic crisis we are actually facing,” leading to “the spectacle of famous economists retreading 80-year-old fallacies, or misunderstanding basic concepts.”

Of course, Krugman is talking about all non-Krugmanians — he doesn’t provide names, because he sees Not Krugman as an amorphous blob of evil and stupidity — but he’s really onto something, just with the players reversed. Old fashioned Keynesianism, as practiced by the likes of Krugman, resembles a set of religious dogmas, not scientific propositions. Austrians view economics as a science, a body of theory and application that helps us understand the world. Keynesians see economics as a set of political tools useful to rationalize and justify an a priori faith in unlimited government. Krugman, like Keynes himself, dislikes businesspeople, consumers, and especially entrepreneurs and investors, and prefers a world in which an elite cadre of intellectuals and bureaucrats controls most investment, production, and consumption decisions. Fine, everyone has a right to his personal belief system. But let’s not pretend there’s anything scientific about the multiplier, the marginal propensity to consume, the liquidity trap, and the other relics and sacraments of the Keynesian religion.

Engaging True Believers like Krugman on economic theory and policy is mostly a waste of time — one side uses reason and evidence, the other appeals to personal faith. (BTW this doesn’t apply to New Keynesians such as Mankiw and the Romers, whom I regard as reasonable and serious folks.)

I have a new paper with John Chapman and Mario Mondelli, “Private Equity and Entrepreneurial Governance: Time for a Balanced View,” in the February 2013 issue of the Academy of Management Perspectives. (Ungated SSRN version here.) The paper is part of a symposium called “Private Equity: Managerial and Policy Implications.” Our paper builds on the “judgment-based view” of entrepreneurship that builds on Mises and Frank Knight and evaluates how judgment rights are assigned between private equity investors and companies receiving private equity funding. Here’s an excerpt:

Judgment refers to decision making that cannot be represented by formal models or decision rules, but is nonetheless different from luck or chance. Unlike other entrepreneurial attributes such as alertness (Kirzner, 1973), judgment is manifest in the ownership of productive assets. It reflects ultimate decision authority—residual rights of control, in Grossman and Hart’s (1986) terminology—about the deployment and use of valuable resources under conditions of uncertainty. Entrepreneurs act to combine and recombine heterogeneous capital resources, whose attributes are subjectively perceived, to pursue financial or other gain. As Lachmann (1956, p. 16) put it: “We are living in a world of unexpected change; hence capital combinations … will be ever changing, will be dissolved and reformed. In this activity, we find the real function of the entrepreneur.”

Are PE firms more entrepreneurial, in this sense, than publicly traded firms? Yes and no. Both theory and the empirical evidence, summarized below, support a balanced view in which PE is best regarded as a governance structure that, like all forms of organization, has benefits and costs that vary according to circumstances. As Jensen (1989) famously argued, PE has substantial potential governance benefits over public equity due to a closer alignment of ownership and control. The high-powered incentives associated with ownership can lead to what Wright, Hoskisson, Busenitz, and Dial (2000) termed a “change in managerial mindset” that prefers long-range, strategic, holistic thinking over a short-term focus on quantitative performance metrics. At the same time, however, privately held firms are often constrained from pursuing potentially attractive profit opportunities by the nature of their debt obligations. Put succinctly, PE favors management by fixed rules while public equity allows a greater degree of managerial discretion, and both rules and discretion have benefits and costs.

Henry Manne is a brilliant and original scholar who made important contributions to the literatures on takeovers, insider trading, higher education, and other fields and is a key figure in the modern law-and-economics movement. His contributions were featured in a session of the 2010 Austrian Scholars Conference. Henry has given an interview to the Securities and Exchange Commission Historical Society as part of its oral history project. There is an audio file and an edited transcript. He mentions in particular the influence of Mises and Hayek on his thinking:

Because of my dissatisfaction with what developed as my program at Yale, I began doing considerable reading in areas mainly I’d learned from Aaron Director, works of Hayek, whom I had met at Chicago, and Mises. I always used to joke that I was one of the few people in the world who probably sat down and read the whole of Human Action, Mises’ great work on philosophy and economics, which later on, you’ll see, played a role in my intellectual development.

And:

Just before the ’62 article ["The 'Higher Criticism' of the Modern Corporation," Columbia Law Review], probably the seminal intellectual event in my life occurred. I was invited to a small conference for young professors at Claremont College, in which three very distinguished people held seminars for these young professors. One was John [Jewkes] from Oxford, who had taken a very strong position against British socialism, then the Labour government. Another was Felix Morley, who was a political opponent of Roosevelt during the New Deal, a distinguished journalist and political theorist. The third was a then somewhat young economist from UCLA by the name of Armen Alchian. I mentioned before that the Mises I read at Yale in 1952 or 1953 came back in the early sixties, because Alchian began his seminar by reading a paragraph. It was a paragraph about property, and he asked if anyone in the group could identify it. I was the only one; I recognized immediately that that was from Mises’ Human Action. As he developed that first lecture – which became I think one of the most important economic articles of the twentieth century, “Economics of Property Rights” – it was like a light bulb went off in my head, it was incredible. All of a sudden, everything that I had done intellectually for thirteen years came together, with this one idea of Alchian’s about the real nature of property rights and the Misesian notion of people making choices, with every choice being a tradeoff, meaning that there is a cost – what you give away is the cost of what you get.

The media are bombarding us with stories of how sequestration, with its “drastic cuts” in government spending, will affect our lives. Marketplace ran one yesterday about the USDA and the potential loss of federal meat inspectors. Don’t worry, we were told, the authorities won’t allow tainted meat on the shelves! But they might inspect more slowly, meaning less meat for sale, and higher prices.

Not being a reporter, I thought it would be useful to collect some facts. So I spent 5 minutes on the CBO website and discovered the following. The USDA spent $145 billion in 2012. Its proposed budget for 2013 was $155 billion, a 6.9% increase. Of that, $128 billion is considered “mandatory” spending — e.g., payments to farmers based on a formula — and isn’t affected by the sequester. What’s in play is $27 billion of projected “discretionary” spending. The sequester cuts that by 8% to about $24 billion. So the sequestered 2013 budget is $152 billion, a 4.8% increase over 2012.

Man, that is one savage cut!

Hayek famously argued that prices embody information and that economic actors, responding to price changes, act as if they knew the underlying circumstances generating these changes. “[I]n a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” To economize, people don’t need “knowledge of the particular circumstances of time and place,” they only need access to prices. “The mere fact that there is one price for any commodity . . . brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.” Hayek illustrates with his famous example of the tin market: “All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply.”

Hayek offers a powerful argument against interference with the price mechanism. But we should remember that prices embody information about the past, and the entrepreneur’s job is to anticipate, or “appraise,” the future. Entrepreneurs, far from discovering and exploiting “gaps” in the existing structure of prices, deploy resources in anticipation of expected — but uncertain — profits generated by future prices. For this, they rely on what Mises called a “specific anticipative understanding of the conditions of the uncertain future,” an understanding that requires a lot of knowledge of particular circumstances of time and place!

The knowledge requirements of the successful entrepreneur or arbitrageur are vividly illustrated in this passage from Carsten Jensen’s magnificent novel, We the Drowned, in a passage about 19th-century ship brokers, entrepreneurs who own, lease, and manage ships and shipping contracts:

A ship broker needs to know how the Russo-Japanese War will hit the freight market. He doesn’t need to be interested in politics, but he has to pay attention to his skippers’ finances, so a knowledge of international conflict is essential. Opening up a newspaper — he’ll see a photograph of a head of state and if he’s bright enough, he’ll read his own future profits in the man’s face. He might not he interested in socialism, in fact he’ll swear he isn’t: he’s never heard such a load of starry-eyed nonsense. Until one day his crew lines up and demands higher wages, and he has to immerse himself in union issues and other newfangled notions about the future organization of society. A broker must keep up to date with the names of foreign heads of state, the political currents of the time, the various enmities between nations, and earthquakes in distant parts of the world. He makes money out of wars and disasters, but first and foremost he makes it because the world has become one big building site. Technology rearranges everything, and he needs to know its secrets, its latest inventions and discoveries. Saltpeter, divi-divi, soy cakes, pit props, soda, dyer’s broom — these aren’t just names to him. He’s neither touched saltpeter nor seen a swatch of dyer’s broom. He’s never tasted soy cake (for which he can count himself lucky), but he knows what it’s used for and where there’s a demand for it. He doesn’t want the world to stop changing. If it did, his office would have to close. He knows what a sailor is: an indispensable helper in the great workshop that technology has made of the world.

There was a time when all we ever carried was grain. We bought it in one place and sold it in another. Now we were circumnavigating the globe with a hold full of commodities whose names we had to learn to pronounce and whose use had to be explained to us. Our ships had become our schools. They were still powered by the wind in their sails, as they had been for thousands of years. But stacked in their holds lay the future.

[Cross-posted at Organizations and Markets]

The eminent Austrian economist Israel M. Kirzner turns 83 today. Last week I was privileged to participate in an event honoring Kirzner with the Fund for the Study of Spontaneous Order Lifetime Achievement Award. Here is a video of Kirzner’s acceptance speech. The other videos should be available shortly.

I spoke of Kirzner’s vast influence on the management and entrepreneurship fields. Despite the valiant efforts of Kirzner and other Austrians, mainstream economics largely remains trapped in what Murray Rothbard called the Walrasian box. Management and entrepreneurship studies, on the other hand, are much more open to alternative ways of thinking about organizations and markets, including Austrian perspectives. Entrepreneurship research and teaching, for example, is dominated by the opportunity-discovery perspective, which builds largely — if not always carefully –  on Kirzner’s notion of entrepreneurial discovery. I have been somewhat critical of this literature, and the underlying notion of alertness, though I have built on Kirzner’s capital theory in my own work. In any case, I recognize the enormous influence of Kirzner’s writings on the entrepreneurship field. Please join me in congratulating Professor Kirzner on his many scholarly accomplishments.

A guest post from Professor Ed Stringham:

Eighteen years ago when I was a student of Prof. Walter Block at College of the Holy Cross, I remember Prof. Block saying “Critics of markets have so many catchy folk songs. Economists don’t have any.”

That changed when John Papola created the brilliant Keynes versus Hayek videos that have been watched millions of times. I am working to meet Walter Block’s ends, and am pleased to announce the second annual economics video contest.

The goal is to encourage students to make videos that convey economic concepts in an interesting way. The first year’s contest asked students to make videos on Supply and Demand and the theme of this year’s contest is: “Economic Value is Subjective.”

Watch the growing list of current entries here.

The contest is open to all students and entries are due May 15, 2013. The winners gets $2,500 and the professor of the winner gets $500.

For more details about how to enter visit: hackleychair.wordpress.com

Ken Rogoff is not too impressed with the Fed’s critics. Restricting the Fed’s activities, or “worse” — I guess he means scrapping the Fed altogether — is “nonsense,” and “to single out Fed governors for missing the coming catastrophe is ludicrous.” He concedes that the Fed made some egregious mistakes leading up to the financial crisis (he doesn’t see credit expansion per se as playing any role), but argues that no one else saw it coming either. Here’s Ken’s list of people, places, and things just as incompetent as the Fed:

• Congress
• The IMF
• “Central banks’ state-of-the-art macroeconomic models”
• “[M]ainstream academic thinking – including the so-called real business cycle models and New Keynesian models – which assumed that financial markets operate flawlessly”
• “[C]anonical macroeconomic models [that] do not adequately allow for financial-market fragilities” (he helpfully notes that “fixing the models while retaining their tractability is a formidable task”)

Well, I suppose I agree, though one can make a structural argument that Congressional control of monetary policy would be less bad, on average, than control by a technocratic elite facing particular governance and management problems. But talk about damning with faint praise! Ken’s argument is that the Fed follows the mainstream macroeconomic consensus, and since that entire consensus got it wrong this time, the Fed can hardly be blamed. The idea that the mainstream macroeconomic consensus might itself be fatally flawed isn’t even on the table.

The appropriate comparison is among alternative institutional arrangements, where the Fed is compared with a commodity standard, competing currencies, fixed rules, and other non-Fed options. But that’s a comparison the IMF’s chief economist clearly doesn’t want to make.