FDR famously said that government debt doesn’t matter, because “we owe it to ourselves.” In that case, Butler Shaffer helpfully asks, what’s the harm in default? We’re simply repudiating our obligations to ourselves.

Of course, default isn’t so bad even from a purely economic point of view.

WSJ Marketwatch’s Darrell Delamaide worries about the Misesian takeover:

The U.S. economy has fared somewhat better than Europe precisely because Obama in his first term was able to get some stimulus spending passed, while Europe remains mired in the obsolete and discredited policies of the “Austrian” school of economics, which sees austerity as the answer to everything — much as medieval doctors saw leeching as the cure for all illness.

Of course, as EPJ points out, “austerity” in Europe mostly means tax increases, with no real reductions in government spending or government intervention in the economy. The essence of the Austrian program, right?

Today is the 57th anniversary of  the death of H. L. Mencken, perhaps the greatest of American writers. Murray Rothbard called him the “joyous libertarian” (a term that describes Rothbard as well). Rothbard wrote that “American Kultur . . . was incapable of understanding H. L. Mencken. . . . It is difficult for Americans to understand a merger of high-spirited wit and devotion to principle; one is either a humorist, gently or acidly spoofing the foibles of one’s age, or else one is a serious and solemn thinker. That a man of ebullient wit can be, in a sense, all the more devoted to positive ideas and principles is understood by very few; almost always, he is set down as a pure cynic and nihilist.” Mencken was no nihilist, but a “serene and confident individualist, dedicated to competence and excellence and deeply devoted to liberty.”

To honor Mencken, I direct you to one of his  typically funny essays, “The Dismal Science,” about the economists of his day. A few excerpts:

One of [my poisons], following hard after theology, is political economy. What! Political economy, that dismal science? Well, why not? Its dismalness is largely a delusion, due to the fact that its chief ornaments, at least in our own day, are university professors. The professor must be an obscurantist or he is nothing; he has a special and unmatchable talent for dullness; his central aim is not to expose the truth clearly, but to exhibit his profundity, his esotericity—in brief, to stagger sophomores and other professors. The notion that German is a gnarled and unintelligible language arises out of the circumstance that it is so much written by professors. . . .

[There is no] inherent reason why even the most technical divisions of its subject should have gathered cobwebs with the passing of the years. Taxation, for example, is eternally lively; it concerns nine-tenths of us more directly than either smallpox or golf, and has just as much drama in it; moreover, it has been mellowed and made gay by as many gaudy, preposterous theories. As for foreign exchange, it is almost as romantic as young love, and quite as resistant to formulae. . . .

Political economy, in so far as it is a science at all, was not pumped up and embellished by any such academic clients and ticket-of-leave men. It was put on its legs by inquirers who were not only safe from all dousing in the campus pump, but who were also free from the mental timorousness and conformity which go inevitably with school-teaching—in brief, by men of the world, accustomed to its free air, its hospitality to originality and plain speaking.

Gavin Kennedy offers a nice review of Alexander Brodie’s 2012 book, Agreeable Connexions: Scottish Enlightenment links with France. Hayek, of course, locates the roots of classical liberalism in the 18th-century Scottish philosophers such as Ferguson, Smith, and Hume, while Rothbard, influenced by Hayek’s student Marjorie Grice-Hutchinson, among others, emphasized the contributions of the Scholastics, particularly the 16th-century School of Salamanca. Writes Gavin:

Brodie’s thesis is that what became known as the Scottish Enlightenment has its roots in a long history of connections between Scottish intellectuals from the medieval period onwards, primarily with their French opposite numbers, despite their different theological traditions, particularly after the Reformation (largely inspired from Luther’s Germany).

Lots of interesting details about the rich interactions among Scottish and French academics and universities and the development of a shared intellectual legacy.

A few years ago an economist colleague of mine debated a professor from our university’s school of public health on gun violence and gun control. My colleague walked through the empirical evidence on the effects of gun control laws on crime, accidental injury, and other social ills, citing well-known studies by economists and legal scholars such as John Lott, John Donahue, Gary Kleck, Ian Ayres, etc. As Circle Bastiat readers probably know, the empirical social science evidence, while not conclusive, clearly suggests that stronger gun control leads to increased rates of gun violence.  The public health professor — an MD who also teaches in the medical school — ignored these issues entirely, instead telling emotional stories about ER patients he’d treated for gunshot wounds and how everything must be done to stop this “epidemic” of gun violence.

The two speakers were, of course, talking totally past each other. One approached gun control from a simple, “rational actor,” cost-benefit approach. Gun control laws may make it slightly more difficult for bad people to get guns and for good people to do bad things, accidentally or in the heat of the moment, with a deadly object. But gun control also makes it more difficult for good people to acquire and use guns defensively, to deter crime. The net effect is ambiguous, but the existing empirical evidence strongly suggests that the latter effect outweighs the former. (Of course, I’m ignoring for the moment the relevant normative, political, and Constitutional issues.) The other speaker did not see gun violence, and violence more generally, as the result of purposeful human action. Rather, he saw violence as a disease, like the flu or cancer, which — while affected in some ways by people’s preferences, beliefs, and choices — is basically an epidemiological problem.

Indeed, the epidemiological approach to gun control is gaining adherents. “Is It Time to Treat Violence Like a Contagious Disease?” asks Wired in its latest issue. MSNBC breathlessly reports a claim that the National Rifle Association “suppressed” an important study, “rigorously conducted by ten credentialed experts” and “appearing in the prestigious New England Journal of Medicine,” showing that owning a gun makes a person less safe, rather than more safe. But these studies, conducted by public health professionals rather than empirical social scientists, are typically marred by basic methodological flaws such as sampling on the dependent variable, failure to account for endogeneity and unobserved heterogeneity, and other problems that would flunk a first-year econometrics grad student. Jacob Sullum offers a nice summary of some of this literature. Sullum focuses on researcher bias (e.g., selective citation of the existing literature), but also discusses some of the most infamous gaffes, such as a 2009 paper in the American Journal of Public Health showing that gun owners were more likely to be shot than “similar” people not owning guns, but matching only on age, gender, and race, ignoring the fact that people who are more likely to be the victim of gun violence are more likely to own firearms — i.e., that the causation is reversed. (This is a typical problem of what econometricians call “identification,” for which there are several generally accepted remedies, all apparently unknown to the public health research community.)

My sense is that the basic problem is the disease model of violence. Medical professionals are used to running controlled experiments, using clinical trials, and are unaware of how to perform empirical social science research outside a laboratory setting, so they apply the epidemiological model to issues like gun control, not recognizing that the decision to engage in violent acts, like crime more generally, is a form of purposeful human action. It’s time for journalists and politicians to recognize that the disease model is fundamentally flawed, and to turn to the best available research by economists, legal scholars, and other social scientists trained in how to do this kind of work.

(NB: I’m not suggesting that the mainstream law-and-economics research on crime, based on neoclassical economics, is free from problems. Ignoring time preference. See Samuel Cameron’s thoughtful essay.)

Austrian business cycle theory explains the general pattern of the boom-bust cycle — credit expansion, lowered interest rates, malinvestment, crash, liquidation — but the particulars differ in each historical case. (Austrians sometimes distinguish “typical” from “unique” features of each cycle.) To explain particular episodes, we appeal to specific technological, regulatory, political, legal, or other conditions. For example, in the 1990s, much of the malinvestment was channeled into the IT sector, where uncertainty driven by rapid technological change made entrepreneurs particularly susceptible to forecasting errors. In the 2000s, of course, malinvestment appeared largely in real estate, the result of government programs designed to relax underwriting standards and otherwise increase investment in particularly risky real-estate assets. In other words, ABCT tells us to look for malinvestment during the boom, but not where that malinvestment will show up.

Regarding the latter example, however, there has been a persistent dispute among mainstream economists about the role of government housing policy, particularly the Community Reinvestment Act which was used, in the 1990s, to make banks increase their lending to particular low-income neighborhoods. Paul Krugman asserts, for example, that the “Community Reinvestment Act of 1977 was irrelevant to the subprime boom.” Actually, no. A new NBER paper (gated) on the CRA is causing quite a stir. Authored by four economists from NYU, MIT, Northwestern, and Chicago, the paper is the first to use instrumental-variables regression to distinguish changes in bank lending caused by the CRA from changes that would likely have happened anyway. (The authors use the timing of loan decisions relative to the dates of CRA audits to identify the effect of the CRA on lending.) The results suggest that CRA enforcement did, contra Krugman, lead banks to make substantially riskier loans than otherwise. Raghu Rajan puts it in a very Austrian-sounding way:

The key then to understanding the recent crisis is to see why markets offered inordinate rewards for poor and risky decisions. Irrational exuberance played a part, but perhaps more important were the political forces distorting the markets. The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans. And the willingness of the Fed to stay on hold until jobs came back, and indeed to infuse plentiful liquidity if ever the system got into trouble, eliminated any perceived cost to having an illiquid balance sheet.

I’d reverse the order of emphasis — credit expansion first, housing policy second — but Rajan is right that government intervention gets the blame all around.

Warmest holiday wishes, and a hearty thank you, to our bloggers, commenters, and readers for making this a great year for the Circle Bastiat! Enjoy the holiday season, and look forward to more timely, provocative, and informative commentary in the new year.

Robert Bork, who died yesterday, is remembered largely as a Constitutional scholar, but his most important contributions dealt with antitrust. He was sharply critical of the modern application of US antitrust law, while remaining wedded to the Knight-Friedman-Stigler idea of perfect competition as a welfare benchmark, leading to a number of confusions and contradictions. One of the best treatments of Bork’s approach to competition is Jack High’s 1984 article, “Bork’s Paradox: Static vs. Dynamic Efficiency in Antitrust Analysis” (Contemporary Economic Policy 3: 21–34). Writes High:

Judge Robert Bork holds two opposing attitudes towards perfect competition. It is a highly useful economic model for illustrating allocative efficiency, but it is a defective policy model because it deliberately omits productive efficiency. He reconciles these attitudes by combining perfectly competitive allocative efficiency with dynamically competitive productive efficiency in his analysis.

However, these two kinds of competition do not readily mix. One is a static equilibrium concept, the other a dynamic disequilibrium concept. One assumes perfect knowledge and the absence of change; the other assumes imperfect knowledge, learning, and continual flux. Each kind of competition is built on assumptions which, if true, would preclude the existence of the other.

Bork’s policy conclusions require the simultaneous existence of both kinds of competition. If he drops dynamic competition from the analysis, a much more stringent antitrust policy is called for. If he drops static competition, economic theory does not justify even his strictures against mergers and cartels.

See also these remarks by Dominick Armentano (whose 1982 book will be celebrated in a special session of the upcoming Austrian Economics Research Conference):

Many of the Chicago people have been helpful in the empirical research they’ve done on some of these cases. Scholars like Robert Bork, Yale Brozen, William Bowman, Harold Demsetz and others, have performed valuable services by showing, for example, that just because markets are concentrated doesn’t mean the leading companies earn exorbitant rates of return. They’ve shown what big business has really done: innovated and kept prices low. They’ve shown that mergers make economic sense.

Where you get a dramatic divergence is on the theoretical level, and that plays itself out in some aspects of policy. The Chicago School is still married to neoclassical price theory. It is still married to equilibrium theory and to a version of the perfect competition as a model, or a benchmark against which you compare performance in the real world. And Chicago School economists still hold an incorrect theory of monopoly power. They still want to talk about market share and concentration ratios. They still haven’t adopted the view that so long as markets are legally open, they are necessarily competitive and rivalrous, and they ought not to be regulated.

The consequence is this: Chicago School economists will not argue that we should abolish the antitrust laws. I remember spending hours upon hours trying to persuade Yale Brozen that we should get rid of the antitrust laws. He would go 99 percent of the way, and suddenly say: “well, Dominick, what about price fixing?”

For the Chicago School, nothing is more offensive and anticompetitive than firms getting together to fix prices. Even if you review the literature showing that price fixing usually doesn’t work (and even George Stigler recognizes that), they still argue that it is unproductive activity and that it doesn’t accomplish a social purpose.

The Chicago School does not have an Austrian-style coordination theory of efficiency that recognizes that markets are in a continual process of development. These economists do not recognize that it is impossible to freeze the market in place and declare this arrangement or that arrangement to be efficient according to some extra-market criteria.

Therefore, they will never go all the way and support abolition. Instead, they adopt what appears to be an ad hoc approach to antitrust. It is important to somehow convince the Chicago people that they should give up their equilibrium models and adopt the Austrian theory. I somehow doubt that will ever happen.

We’ve had a terrific response to our advertisement for a Chief Technology Officer. It’s been encouraging to hear from so many of you and to learn how many brilliant and experienced technical folks are in our circles. A hearty thanks to all those who’ve applied. If you’re considering it, please send me your materials right away, as the ad is coming down tomorrow.

Know an IT professional with a passion for liberty? The Mises Institute is looking for a Chief Technology Officer. See the ad below (html) and here (jpg), and please share with potentially interested parties.

Chief Technology Officer

The Ludwig von Mises Institute, a research and educational organization promoting free markets, individual liberty, and peace, seeks a Chief Technology Officer.

About the Institute

The Mises Institute is the world’s leading center of research, teaching, and outreach in the tradition of the Austrian school of economics. The Austrian school emphasizes individual choice, voluntary cooperation, and decentralized approaches to social and organizational problems. Through its website, www.mises.org – consistently ranked among the world’s most important economics sites – the Mises Institute distributes freely a wide range of materials to researchers, students, policymakers, and the general public, most available free of charge via Creative Commons. These include books, essays, research reports, videos and audios from conferences, interviews, and other events, blogs, wikis, discussion forums, and online courses.

About the Position

The Institute seeks to leverage its existing content, develop new content, and manage its internal systems more effectively in spreading the message of free markets, individual choice, and peaceful cooperation. The Chief Technology Officer will oversee all aspects of the Institute’s external and internal technology platforms. The CTO will partner with the Institute’s authors, editors, content strategists, and other personnel to develop and implement new and improved procedures for delivering content, facilitating the creation of new content, maintaining and protecting data, managing internal systems, and other technology functions appropriate for a nonprofit organization. The CTO will report to the Executive Director and work closely with the Institute’s senior staff.

The successful candidate will have a strong technology background, excellent leadership and management skills, and a commitment to the ideas of personal and economic liberty and the free and open exchange of ideas. Relevant experiences and skills include, but are not limited, to:

• mastery of content management systems
• experience leading teams of employees and contractors and managing relationships with external vendors and volunteers
• ability to envision new technical opportunities and create new technical solutions
• experience with enterprise resource management applications
• familiarity with information security and risk management

Applicants with a variety of formal qualifications and experiences are welcome.

The Institute is located in the university town of Auburn, Alabama, less than two hours from downtown Atlanta. It is expected that the CTO will spend significant time onsite. Salary and benefits are competitive.

Applying

To apply, or for more information, write Peter Klein, Executive Director, pklein@mises.org.