Author Archive for Peter G. Klein – Page 2

How To Teach Italian

italian_verbs_1_avere_essere_dare_edited-1Mike Konczal objects to the typical sequence of a first-year economics curriculum: a semester of microeconomics, studying individuals, firms, and markets, followed by a semester of macroeconomics, looking at the economy as a whole. Austrian economists generally reject the artificial distinction between micro and macro, as taught in the mainstream textbooks, but most would start with individual human action, the analysis of bilateral then interpersonal exchange, then capital and production before going on to more complex interactions among capitalists, entrepreneurs, workers, and consumers, money and banking, the business cycle, and so on — in a broad sense, micro before macro.

Konczal thinks economists should teach macro first, then micro:

What if macroeconomics came first, before the study of individual markets? If were to reverse the typical curriculum, the first thing undergraduates would encounter wouldn’t be abstract theories about people optimizing, but instead the idea of involuntary unemployment and the idea that the economy could operate below its potential. They’d study the economy in the short-run before going to issues of long-term growth, with professors having to explain the theories on how the two are linked, bringing in crucial concepts like hysteresis.

Then, in the second class, they would get to microeconomics. But that too would be taught backwards. They’d start with institutions, understanding what enables a market economy to exist. Then they’d move on to the issue of firms with market power and externalities. Then, only at the very end, they’d get to the purest abstraction of perfect markets, with a final emphasis on what it means to be the isolated, optimizing Robinson Crusoe at the very end.

Konczal confuses differences in the level of aggregation with differences in theory versus application and “perfect” versus “imperfect” settings, among other problems. (He also seems to know little about how economics is actually taught — some textbooks put macro before micro already, and many programs teach micro and macro as standalone courses that students can take in any order.) But consider his core claim that aggregate phenomena should be studied first, their constituent elements second. How would this work in other settings?

I propose a Konczalian experiment, a two-semester model for teaching Italian literature to American students. In the first semester they examine classic and modern works, in the original language, and discuss them in class. Students choose their favorites and argue the merits of each work, paying particular attention to the professor’s own idiosyncratic preferences. Next they review Italian-language newspapers and blogs and relate literary works to broader social, cultural, and political trends. In the second semester, they learn to read Italian.

Mandela and the Economics of Apartheid

Nelson Mandela, public face of the anti-Apartheid movement and South Africa’s first post-Apartheid president, has died. Much will be written about Mandela in the coming days, but little of it will deal directly with the Apartheid system, particularly its economic aspects. Apartheid is widely misunderstood as a system based purely on racial prejudice, while it was actually a more complex mix of economic controls (primarily, restrictions on capital ownership and movements of labor) and racial separatism — what Tom Hazlett calls “socialism with a racist face.” Apartheid’s political support came primarily from working-class (white) Afrikaners and their labor unions eager to suppress competition from unskilled black labor. As Hazlett notes: ”The conventional view is that apartheid was devised by affluent whites to suppress poor blacks. In fact, the system sprang from class warfare and was largely the creation of white workers struggling against both the black majority and white capitalists.”

The classic treatment of Apartheid as an economic system is W. H. Hutt’s Economics of the Color Bar, first published in 1964. Hutt advocated free markets for capital and labor and strict limits on government intervention in economic affairs. (Hutt, a student of Edwin Cannan at the LSE, was a distinguished labor and monetary economist and a well-known opponent of Keynes; see Peter Lewin’s essay on Hutt for more information.) Leon Louw and Frances Kendall’s 1986 book South Africa: The Solution (republished in 1987 as After Apartheid) offers a thoughtful analysis of South Africa’s economic system, proposing a highly decentralized alternative modeled after the Swiss cantons (see Bettina Bien Greaves’s review here).

Unfortunately, the leaders of the anti-Apartheid movement, Mandela included, viewed Apartheid as a “capitalist” system, turning to Marxism-Leninism as the only viable economic (and political) alternative. When the African National Congress came to power in 1994, it dismantled Apartheid’s system of racial separation, opening up land ownership and labor-market opportunities for all South Africans, but continued to embrace the socialist economic principles that underlie the Apartheid model. As Murray Rothbard pointed out, economic freedom is a better path to racial reconciliation: “Free-market capitalism is a marvelous antidote for racism. In a free market, employers who refuse to hire productive black workers are hurting their own profits and the competitive position of their own company. It is only when the state steps in that the government can socialize the costs of racism and establish an apartheid system.”

photo 1The good news is that there are several libertarian groups in South Africa working to bring about secure property rights, freedom, and peace, including the Mises Institute South Africa, Solidarity, Afrisake, and the Free Market Foundation. I had the pleasure of visiting these groups and their supporters last month during a visit to Johannesburg and Pretoria. To the right is a picture of me with the leadership team of the Mises Institute South Africa. And below is a picture I took of the Mandela house in Soweto, now a museum dedicated to Mandela’s life and the anti-Apartheid movement.


The Place of Austrian Economics in Contemporary Entrepreneurship Research

That’s the title of a new working paper by Per Bylund and me. It’s forthcoming in a special issue of the Review of Austrian Economics devoted to the contributions of Israel Kirzner.

The Place of Austrian Economics in Contemporary Entrepreneurship Research

Peter G. Klein and Per L. Bylund
December 5, 2013

Abstract: We review the place of Austrian economics in contemporary entrepreneurship and management research, focusing on the contributions of Israel Kirzner. We show that Kirzner’s central concept of entrepreneurial discovery has been vastly influential in theoretical and applied work on entrepreneurship, even though Kirzner’s larger research program has not been well understood. We also describe and assess a number of methodological, ontological, and cognitive critiques of the opportunity-discovery approach and review the most important alternatives, including the judgment-based view associated with Knight (1921) and more recent contributors. We conclude that the entrepreneurship and management literatures provide a useful example of how Austrian economics — Kirznerian economics in particular — can play an important role in shaping mainstream discussions, debates, and research programs in the social sciences.

Keynes, Keynes, and More Keynes

The British students demanding more Keynes and Marx have been joined, predictably, by British academics — specifically, the self-described “post Keynesians” who think that mainstream economics isn’t Keynesian enough. Listen to this radical agenda: “The post-Keynesian approach emphasizes the central importance of aggregate demand in the macro-economy, the challenges posed by financial instability in a world of globalized capital flows, the impact of inequality on economic growth, and the effect of uncertainty on expectations.” Gosh, they’re right: mainstream macroeconomists — not to mention journalists and policymakers — hardly ever mention aggregate demand, do they? Nor do the standard textbooks ever talk about financial panics, inequality, or uncertainty. Indeed, as we all know, mainstream economics teaches that free markets are best, and there is no need for any government intervention, especially in the monetary system.

As I noted in the post linked above, I think the Post Keynesians are upset that the economics profession is only, say, 75% Keynesian. For them, anything less than 100% shows disrespect to the Greatest Economist.

Solution to the Economic Crisis? More Keynes and Marx

I’ve previously discussed attempts to blame the accounting scandals of the early 2000s on the teaching of transaction cost economics and agency theory. By describing the hazards of opportunistic behavior and shirking, professors were allegedly encouraging students to be opportunistic and to shirk. Then we were told that business schools teach “a particular brand of free-market ideology” — the view that “the market always ‘gets prices right’ and “[a]n individual’s worth can be reduced to one’s worth in the market” — and that this ideology was partly responsible for the financial crisis. (My initial reaction: Where to I sign up for these courses?!)

The Guardian reports now on a movement in the UK to address “the crisis in economics teaching, which critics say has remained largely unchanged since the 2008 financial crash despite the failure of many in the profession to spot the looming credit crunch and worst recession for 100 years.” If you think this refers to a movement to discredit orthodox Keynesianism, which dominates monetary theory and practice in all countries, and its view that discretionary fiscal and (especially) monetary policy are needed to steer the economy on a smooth course, with particular attention to asset markets where prices must be rising at all times, you’d be wrong. No, the reformers are calling for “economics courses to embrace the teachings of Marx and Keynes to undermine the dominance of neoclassical free-market theories.” To their credit, the reformers appear also to want more attention to economic history and the history of economic thought, which is all to the good. But the reformers’ basic premise seems to be that mainstream economics is too friendly toward the free market, and that this has left students unprepared to understand the “post-2008″ world.

To a non-Keyensian and non-Marixian like me, these arguments seem to come from a bizarro world where the sky is green, water runs uphill, and Janet Yellen is seven feet tall. It’s true that most economists reject economy-wide central planning, but the vast majority endorse some version of Keynesian economic policy complete with activist fiscal and monetary interventions, substantial regulation of markets (especially financial markets), fiat money under the control of a central bank, social policy to encourage home ownership, and all the rest. I’ve pointed many times to research on the social and political views of economists, who lean “left” by a ratio of about 2.5 to 1 — yes, nothing like the sociologists’ zillion to 1, but hardly evidence for a rigid, free-market orthodoxy. I note that the reformers described in the Guardian piece never, ever offer any kind of empirical evidence on the views of economists, the content of economics courses, or the influence of economics courses on economic policy. They simply assert that they don’t like this or that economic theory or pedagogy, which somehow contributed to this or that economic problem. They seem blissfully unaware of the possibility that their own policy preferences might actually be favored in the textbooks and classrooms, and might have just a teeny bit to do with bad economic policies.

I’m reminded of Sheldon Richman’s pithy summary: “No matter how much the government controls the economic system, any problem will be blamed on whatever small zone of freedom that remains.”

[Posted originally at Organizations and Markets]

Unintentionally Hilarious Monetary Quote of the Day

From a Chicago Fed paper on crypto-currencies:

Although some of the enthusiasm for bitcoin is driven by a distrust of state-issued currency, it is hard to imagine a world where the main currency is based on an extremely complex code understood by only a few and controlled by even fewer, without accountability, arbitration, or recourse.

HT: ZeroHedge, via Tom DiLorenzo.

Easy Money and Asset Bubbles

Central to the Austrian understanding of business cycles is the idea that monetary expansion — in Wicksellian terms, money printing that pushes interest rates below their “natural” levels — leads to overinvestment in long-term, capital-intensive projects and long-lived, durable assets (and underinvestment in other types of projects, hence the more general term “malinvestment”). As one example, Austrians interpret asset price bubbles — such as the US housing price bubble of the 1990s and 2000s, the tech bubble of the 1990s, the farmland bubble that may now be going on — as the result, at least partly, of loose monetary policy coming from the central bank. In contrast, some financial economists, such as Laureate Fama, deny that bubbles exist (or can even be defined), while others, such as Laureate Shiller, see bubbles as endemic but unrelated to government policy, resulting simply from irrationality on the part of market participants.

Michael Bordo and John Landon-Lane have released two new working papers on monetary policy and asset price bubbles, “Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence,” and “What Explains House Price Booms?: History and Empirical Evidence.” (Both are gated by NBER, unfortunately, but there may be ungated copies floating around.) These are technical, time-series econometrics papers, but in both cases, the conclusions are straightforward: easy money is a main cause of asset price bubbles. Other factors are also important, particularly regarding the recent US housing bubble (I suspect that housing regulation shows up in their residual terms), but the link between monetary policy and bubbles is very clear. To be sure, Bordo and Landon-Lane don’t define easy money in exactly the Austrian-Wicksellian way, which references natural rates (the rates that reflect the time preferences of borrowers and savers), but as interest rates below (or money growth rates above) the targets set by policymakers. Still, the general recognition that bubbles are not random, or endogenous to financial markets, but connected to specific government policies designed to stimulate the economy, is a very important result that will hopefully influence current economic policy debates.

[Posted originally at Organizations and Markets]

Anti-Semitism and the Early Austrian School

An important new working paper by Hansjoerg Klausinger, “Academic Anti-Semitism and the Austrian School: Vienna, 1918–1945.” Here’s the abstract:

The theme of academic anti-Semitism has been much discussed recently in histories of the interwar period of the University of Vienna, in particular its Faculty of Law and Policy Sciences. This paper complements these studies by focusing in this regard on the economics chairs at this faculty and, more generally, on the fate of the younger generation of the Austrian school of economics. After some introductory remarks the paper concentrates on three case studies: the neglect of Mises in all three appointments of economics chairs in the 1920s; the anti-Semitic overtones in the conflict between Hans Mayer and Othmar Spann, both professors for economics at the faculty; and on anti-Semitism as a determinant of success or failure in academia, and consequently of the emigration of Austrian economists. Finally, we have a short look at the development of economics at the University of Vienna during and after the Nazi regime.

My Question for Simon Johnson

As Bob Higgs has tirelessly reminded us, regime uncertainty — doubt about the security of person and property — retards investment and delays recovery from economic downturns. FDR’s constantly changing economic policies help explain why it took the US so long to recover from the Great Depression, and the inconsistent bailout, subsidy, and regulatory regimes of the Bush and Obama Administrations continue to harm the economy today.

Bob points out that that regime uncertainty is distinct from “policy uncertainty,” as that term is typically used today to describe changes in fiscal or monetary policy within a particular legal regime. This kind of policy uncertainty is getting increasing attention in the mainstream press — not in reference to things like Obamacare, but to proposed reductions in government borrowing and spending. For example, Simon Johnson, the IMF’s former chief economist, writes in today’s New York Times that Congressional debates about the non-shutdown and raising the debt ceiling have created uncertainty that is damaging the economy. “If people really believe that the government could default on its debts or otherwise not make payments to which it is committed, that introduces a huge element of uncertainty into many economic calculations. When you are less certain about what is going to happen tomorrow, you tend to postpone big irreversible decisions – like buying a new car or building a factory.”

Here’s my question for Johnson: Imagine a set of government policies deeply harmful to the economy — in this case, the continued monetary and fiscal stimulus from the Fed and Treasury that is perpetuating the malinvestment responsible for the recession. Which is worse, a belief that these bad policies will continue ad infinitum, giving people incentives to make bad economic decisions, or uncertainty about whether the bad policies will remain in place, possibly discouraging people from making the bad decisions?


Murray and Me in the NYT

Bruce Bartlett is shocked to discover that a few economists, Murray Rothbard and myself included, are not default alarmists. His latest New York Times column is a strangely disjointed, hackneyed piece that simply lists people who have doubted the conventional wisdom that America Must Not Default at All Costs. Bartlett lumps together serious critics such as Rothbard, Ron Paul, James Buchanan, and Niall Ferguson with less serious people like Pat Robertson, Newt Gingrich, and Pat Buchanan, hoping to establish guilt by association. Naturally, he doesn’t offer any analysis or commentary. But he does quote Rothbard and, thankfully, his editors made him put in links to the originals so readers can check for themselves.

In 1992, the libertarian economist Murray Rothbard wrote an essay supporting debt repudiation, saying, “Why should we, struggling American citizens of today, be bound by debts created by a past ruling elite who contracted these debts at our expense?”

Just last year, the Rothbard essay was reprinted on the Web site of the Ludwig von Mises Institute, where Tea Party ideas often originate. A companion Web site run by Llewellyn H. Rockwell Jr., the president of the Mises Institute, often publishes articles advocating debt default by the economist Gary North and others. Just last week, it reprinted a 2011 essay by the University of Missouri economist Peter G. Klein saying that a Treasury default is no big deal.

That’s not exactly what I wrote but hey, at least he spelled my name correctly.