Author Archive for Peter G. Klein – Page 2

More on Grad School

I appreciate Walter’s useful advice on surviving graduate school as an Austrian economist or libertarian or both. (I’ve also discussed graduate school strategies, and more general career issues, at Mises University; here is a talk from 2010.) I do have one disagreement, however. Walter writes: “Don’t take any part time jobs; don’t be anyone’s research assistant. Don’t be a teaching assistant. Don’t teach any courses. Just study to pass your courses with the best marks possible, and pass your oral or comprehensive exams.”

There are two problems with this. First, it is difficult to get a tenure-track position at a college or university without any teaching experience. I agree with Walter that grad students should not do a lot of teaching, either as primary instructors or teaching assistants, because this interferes with the dissertation. But having some teaching experience, and good student evaluations, can help on the job market.

master-and-apprentice

Second, working as a professor’s research assistant usually leads to a better dissertation. Academic research is difficult and, like other skilled crafts, is often best learned through an apprenticeship model. You cannot learn how to be a good researcher just by listening to lectures and reading articles and books. You learn from experience. By working with a professor — hopefully on an article — you see how the sausage is made. You learn to formulate research questions, to evaluate existing literature, to collect and analyze data if appropriate, to write up results, and to deal with journal editors and reviewers. Moreover, students who don’t already have a dissertation topic can often find one as a spin-off of a professor’s existing project. Of course, grunt work — e.g., entering data into a spreadsheet — should be avoided if possible. But assisting a more experienced researcher is usually the best way to learn the craft.

Austrian Economics and the Firm

FK_2002_coverNicolai Foss and I have worked on many projects together, including our 2012 book Organizing Entrepreneurial Judgment. Foss is an eminent scholar whose expertise ranges from strategic management and entrepreneurship to Austrian capital theory, human resource management, business model innovation, and many other subjects. (Here is his 2012 Hayek Lecture at the AERC.)

One of our earliest collaborations was a 1998 conference in Copenhagen on Austrian economics and the firm. The conference proceedings were published in 2002 by Edward Elgar as Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization. As the blurb says: “While characteristically ‘Austrian’ themes such as entrepreneurship, economic calculation, tacit knowledge and the temporal structure of capital are clearly relevant to the business firm, Austrian economists have said relatively little about management, organization, and strategy. This innovative book features 12 chapters that all seek to advance the understanding of these issues by drawing on Austrian ideas.”

The book is unfortunately rather pricey, but Elgar has just added it to Elgar Online, so that the front matter, introduction, and index are available as free downloads. Some readers will have access to the full text via university or commercial libraries.

Rogoff on the Advantages of Paper Currency

Ken Rogoff offers a series of powerful arguments in favor of retaining paper currency. (Of course the feasible alternative, for Rogoff, is not commodity money, but 100% fiat electronic currency.) In particular, the widespread use of paper currency (1) makes it hard for central banks to push interest rates below zero (they would have to rely on some weird scheme for taxing currency, a la Silvio Gesell), and (2) allows people to conduct transactions securely and privately, without monitoring and expropriation by the state.

However, as Rogoff points out, there are important drawbacks of retaining paper currency. (3) The anonymity of paper money makes it popular, and strong demand for money gives the central bank plenty of opportunity to expropriate wealth through seigniorage. Moreover, (4) if a government were to eliminate its own paper currency, people might start using other forms of non-traceable money (Rogoff mentions paper currency issued by foreign central banks, but private commodity or even private fiat currency is another, far more attractive, alternative). As long as people are reasonably satisfied with the government’s currency, they are less likely to develop alternatives. Replacing government-issued fiat paper money with government-issued fiat electronic money might help push people toward superior, private solutions.

Oh, wait, I got that backwards. Rogoff mentions (1) and (2) as costs of keeping paper currency, (3) and (4) as benefits. If you reverse the signs, his analysis is quite insightful.

Stanley Fischer Joins the Echo Chamber

fischer_1918777cThe Senate has confirmed Stanley Fischer to the Federal Reserve Board of Governors, where he will soon become the Fed’s #2 official as Vice Chair. Fischer is an eminent mainstream macroeconomist and former Governor of the Bank of Israel (he was also chief economist at the World Bank and a top official of the IMF). His monetary policy views are largely indistinguishable from those of Ben Bernanke and Janet Yellen. He strongly favors the current Fed policy of keeping short-term interest rates near zero while gradually reducing the Fed’s bond purchases (“quantitative easing”). He is a bit more moderate than Bernanke and Yellen on so-called forward guidance, a euphemism for the Fed’s attempt to manipulate investors by announcing its supposed long-term plans in advance. But his overall understanding of how the economy works, the theories and models that lie behind his thinking, and his general policy views, are more or less the same as Bernanke’s and Yellen’s. (Not too surprising as he was Bernanke’s PhD supervisor at MIT.)

The Board of Governors, as described in official Fed publications, “supervises and regulates the operations of the Federal Reserve Banks, exercises broad responsibility in the nation’s payments system, and administers most of the nation’s laws regarding consumer credit protection.” (The Federal Open Market Committee, which conducts monetary policy, includes the Board plus the presidents of the regional Fed banks.) The Board performs these duties by conducting “thorough analysis of domestic and international financial and economic developments.” However, unlike effective governing boards at private institutions, diversity of opinion is not welcome on the Board of Governors.

A basic principle of good organizational governance is that board members should have a variety of backgrounds, areas of expertise, theoretical or philosophical perspectives, and experiences. The board as a whole can then analyze issues from different points of view, pooling complementary sets of knowledge and skills to get a balanced and holistic perspective on problems and their possible solutions. If the Fed is supposed to provide “scientific,” politically neutral analysis and administration, wouldn’t you expect some diversity on the Board?

Of course, I’m not expecting the Fed to appoint an Austrian economist as Governor. But there are a number of plausible, politically feasible candidates who would have provided balance to Yellen’s somewhat extreme views. John Taylor is the most obvious candidate, along with Glenn Hubbard or even Larry Summers. (OK, maybe Summers is too controversial, politically, and Hubbard was chided for not disclosing all his consulting contracts — though Fischer’s three-year tenure as Vice Chairman of Citigroup didn’t seem to hurt his nomination.) Instead, the Board will add Stanley Fischer to its echo chamber.

Gabriel Kolko (1932-2014)

41YNNuF0igL._SY344_BO1,204,203,200_Gabriel Kolko, the influential New Left historian whose Railroads and Regulation (1965) and The Triumph of Conservatism (1963) offered a radical challenge to the prevailing, “public interest” account of business regulation, died yesterday. Murray Rothbard admired Kolko and helped popularize Kolko’s view that “progressive” regulations were nearly always the joint work of protectionist business leaders and self-aggrandizing politicians. As Rothbard wrote in “Left and Right”:

Orthodox historians have always treated the Progressive period (roughly 1900-1916) as a time when free-market capitalism was becoming increasingly “monopolistic”; in reaction to this reign of monopoly and big business, so the story runs, altruistic intellectuals and far-seeing politicians turned to intervention by the government to reform and regulate these evils. Kolko’s great work demonstrates that the reality was almost precisely the opposite of this myth. Despite the wave of mergers and trusts formed around the turn of the century, Kolko reveals, the forces of competition on the free market rapidly vitiated and dissolved these attempts at stabilizing and perpetuating the economic power of big business interests. It was precisely in reaction to their impending defeat at the hands of the competitive storms of the market that business turned, increasingly after the 1900′s, to the federal government for aid and protection. In short, the intervention by the federal government was designed, not to curb big business monopoly for the sake of the public weal, but to create monopolies that big business (as well as trade associations smaller business) had not been able to establish amidst the competitive gales of the free market. Both Left and Right have been persistently misled by the notion that intervention by the government is ipso facto leftish and anti-business. Hence the mythology of the New-Fair Deal-as-Red that is endemic on the Right. Both the big businessmen, led by the Morgan interests, and Professor Kolko almost uniquely in the academic world, have realized that monopoly privilege can only be created by the State and not as a result of free market operations.

Mainstream Macroeconomists Grapple with Hayek and Keynes

hayek-vs-keynesA new NBER Working Paper by Paul Beaudry, Dana Galizia, Franck Portier uses a contemporary modeling technique (a kind of decentralized trading model popularized by Robert Lucas) to compare “Hayekian” and “Keynesian” accounts of the business cycle. The authors have only a cursory understanding of the Austrian literature — despite the title, “Reconciling Hayek’s and Keynes Views of Recessions,” the paper contains no references to anything written by Hayek or Keynes — but is interesting nonetheless.

The authors apparently got their understanding of Hayek from Nicholas Wapshott’s wildly inaccurate book Keynes Hayek: The Clash that Defined Modern Economics, so they characterize malinvestment as overinvestment (“capital over-accumulation”), reduce Hayek’s complex and subtle views to “liquidationism,” and so on. Still, the authors are trying to get at the fundamental idea that capital structure matters, and that the bust is somehow related to actions taken during the preceding boom. In this sense they depart from most modern macroeconomic treatments. Also, before introducing their model, they include a section with “Some motivating facts,” pointing out that their measure of capital over-accumulation (cumulative investment over 10 years divided by total factor productivity and detrended) is positively correlated with recession depth and length of recovery for the US postwar period. Their model includes both consumption goods and durable investment goods and it is possible for agents to have “too much” of the durable good (so that “liquidation” can be beneficial). In other words, the authors recognize the drawbacks of conventional Keynesian models in output and employment are systematically (and simplistically) driven by aggregate demand, with no role for capital and production and no possibility of capital misallocation.

In other words, while the paper doesn’t particularly advance the Austrian understanding of the business cycle, the fact that the authors are thinking along these lines (and disseminating their thoughts through the NBER working paper series) tells us there may be some hope for modern macroeconomics.

Here is the abstract for those who want the gory details:

Reconciling Hayek’s and Keynes Views of Recessions
Paul Beaudry, Dana Galizia, Franck Portier
NBER Working Paper No. 20101, May 2014

Recessions often happen after periods of rapid accumulation of houses, consumer durables and business capital. This observation has led some economists, most notably Friedrich Hayek, to conclude that recessions mainly reflect periods of needed liquidation resulting from past over-investment. According to the main proponents of this view, government spending should not be used to mitigate such a liquidation process, as doing so would simply result in a needed adjustment being postponed. In contrast, ever since the work of Keynes, many economists have viewed recessions as periods of deficient demand that should be countered by activist fiscal policy. In this paper we reexamine the liquidation perspective of recessions in a setup where prices are flexible but where not all trades are coordinated by centralized markets. We show why and how liquidations can produce periods where the economy functions particularly inefficiently, with many socially desirable trades between individuals remaining unexploited when the economy inherits too many capital goods. In this sense, our model illustrates how liquidations can cause recessions characterized by deficient aggregate demand and accordingly suggests that Keynes’ and Hayek’s views of recessions may be much more closely linked than previously recognized. In our framework, interventions aimed at stimulating aggregate demand face the trade-off emphasized by Hayek whereby current stimulus mainly postpones the adjustment process and therefore prolongs the recessions. However, when examining this trade-off, we find that some stimulative policies may nevertheless remain desirable even if they postpone a recovery.

Happy Birthday, Hayek!

Today is F. A. Hayek’s birthday (and, incidentally, mine). Hayek, the eminent economist and social theorist who was Mises’s younger colleague, Keynes’s great opponent, and 1974 Nobel Laureate, would have been 115 today.

Here is my entry on Hayek for the 1999 volume Fifteen Great Austrian Economists. Below is a short tribute video. And check out the Hayek items in the Mises Store.

A Note on “Human Capital”

BGCTC601Like Peter LewinWalter BlockMario Rizzo, and Peter Boettke, I greatly admire the late Gary Becker, a pioneer in many areas of economics and sociology, a strong proponent of economic and personal freedom, and by all accounts a terrific teacher, mentor, and colleague. But I confess that I have always had qualms about the concept of “human capital,” along with the analogous constructs of social capital, knowledge capital, reputation capital, and so on. These are metaphors for capital in the narrow sense, and I worry that the widespread use of “capital” to denote anything valuable and long-lived obscures important issues about actual, physical capital that can be divided up, measured, priced, and exchanged. Witness the confusion over “capital” as Thomas Piketty uses the term. Here is something I wrote before:

[O]ne of my pet peeves [is] the expansive use of “capital” to describe any ill-defined substance that accumulates and has value. Hence knowledge, experience, and skills become “human capital” or “knowledge capital”; relationships become “social capital”; brand names become “reputation capital”; and so on. I fear this terminology obfuscates more than it clarifies.

I don’t mind using these terms in a loose, colloquial sense: By going to school I’m investing in human capital or diversifying my stock of human capital; if this gets me a high-paying job I’m earning a good return on my human capital; as I get old I forget new things, so my human capital is depreciating rapidly; and so on.

But we shouldn’t take these metaphors too literally. In economic theory capital refers either to financial capital or to a stock of heterogeneous alienable assets, goods that can be exchanged in markets and analyzed using price theory. Their rental prices are determined by marginal revenue products and their purchase prices are given by the present discounted value of these future rents. Knowledge is not, strictly speaking, capital, because it is not traded in markets does not have a rental or purchase price. What markets trade and price is labor services, and it is impossible to decompose the payments to labor (wages) into separate “effort” and “rental return on human capital” components. Some labor services command a higher market price than others because they have a higher marginal revenue product. Some of this wage premium may be due to intelligence or experience, some due to complementarities with other human or nonhuman assets, some due to hard work, and so on. But these are all determinants of the MRP, and hence the wage, not different kinds of factor returns.

Moreover, the entrepreneur needs cardinal numbers to compute the value of his capital stock, to know if it is increasing or decreasing in value, and so on. I can’t measure my stock of human capital, I don’t know for sure if it is increasing or decreasing over time, I can’t calculate the ROI of a specific human-capital investment, etc., because there are no prices and no measurable units. Knowledge may be “like capital,” in the sense that it lasts, that you can add to it, that you benefit from it, etc., but it isn’t literally a capital good like a machine or a refrigerator.

If we think going to school is valuable and increases lifetime earnings, why don’t we just say, “going to school is valuable and increases lifetime earnings,” rather than, “there is a positive return on investments in human capital”? Is there a good reason to prefer the latter, besides scientism?

Rothbard, Lachmann, Kirzner, 1974

Richard Ebeling shares this great picture of Murray Rothbard, Ludwig Lachmann, and Israel Kirzner at the beginning of the South Royalton conference in 1974.

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Essentialism in Economics and Art

download (1)Menger’s causal, realist approach to economics has been described as essentialist. Rather than building artificial models that mimic some attributes or outcomes of an economic process, Menger wanted to understand the essential characteristics of phenomena like value, price, and exchange. As Menger explained to his contemporary Léon Walras, the Austrians “do not simply study quantitative relationships but also the nature [or essence] of economic phenomena.” Abstract models that miss these essential features — even if useful for prediction — do not give the insight needed to understand how economies work, what entrepreneurs do, how government intervention affects outcomes, and so on.

I was reminded of the contrast between Menger and Walras when reading about Henri Matisse and Pablo Picasso, the great twentieth-century pioneers of abstract art. Both painters sought to go beyond traditional, representational forms of visual art, but they tackled the problem in different ways. As Jack D. Flam writes in his 2003 book Matisse and Picasso: The Story of Their Rivalry and Friendship:

Picasso characterized the arbitrariness of representation in his Cubist paintings as resulting from his desire for “a greater plasticity.” Rendering an object as a square or a cube, he said, was not a negation, for “reality was no longer in the object. Reality was in the painting. When the Cubist painter said to himself, ‘I will paint a bowl,’ he set out to do it with the full realization that a bowl in a painting has nothing to do with a bowl in real life.” Matisse, too, was making a distinction between real things and painted things, and fully understood that the two could not be confused. But for Matisse, a painting should evoke the essence of the things it was representing, rather than substitute a completely new and different reality for them. In contract to Picasso’s monochromatic, geometric, and difficult-to-read pictures, Matisse’s paintings were brightly colored, based on organic rhythms, and clearly legible. For all their expressive distortions, they did not have to be “read” in terms of some special language or code.

Menger’s essentialism is concisely described in Larry White’s monograph The Methodology of the Austrian School Economists and treated more fully in Menger’s 1883 book Investigations Into the Method of the Social Sciences. For more on economics and art, see Paul Cantor’s insightful lecture series, “Commerce and Culture” (here and here).

Piketty and Capital

piketty_0Further to Hunter’s remarks: Piketty understands “capital” as a homogeneous, liquid pool of funds, not a heterogeneous stock of capital assets. This is not merely a terminological issue, as those familiar with the debates on capital theory from the 1930s and 1940s are well aware. Piketty’s approach focuses on the quantity of capital and, more importantly, the rate of return on capital. But these concepts make little sense from the perspective of Austrian capital theory, which emphasizes the complexity, variety, and quality of the economy’s capital structure. There is no way to measure the quantity of capital, nor would such a number be meaningful. The value of heterogeneous capital goods depends on their place in an entrepreneur’s subjective production plan. Production is fraught with uncertainty. Entrepreneurs acquire, deploy, combine, and recombine capital goods in anticipation of profit, but there is no such thing as a “rate of return on invested capital.”

Profits are amounts, not rates. The old notion of capital as a pool of funds that generates a rate of return automatically, just by existing, is incomprehensible from the perspective of modern production theory. Robert Solow, in a glowing review of Piketty’s book, states: “The key thing about wealth in a capitalist economy is that it reproduces itself and usually earns a positive net return.” But this is nonsense from the point of view of microeconomics, entrepreneurship, uncertainty, innovation, strategy, etc.

Much of the excitement around Piketty’s work deals with his estimate of the long-term rate of return on capital, and how this compares to the long-term rate of economic growth. I hear from third parties that Piketty’s calculations (the early work was done with Emmanuel Saez) are thorough and careful, and I have no reason to doubt the empirical part of the book. But it seems like a pointless exercise to me — I don’t know what the underlying constructs even mean.

Of course, there are many other issues related to the interpretation of these data and what they mean for social mobility, fairness, etc. For example, there may be much more vertical movement than Piketty’s admirers admit — few people remain in one part of the income distribution all their lives. And most Americans are capitalists, with some of their financial wealth invested in equities through their retirement portfolios. So the link between (say) stock-market performance, rents on land and natural resources, and interest returns and the distribution of financial wealth among individuals is complicated.

Austrian Research at the University of Angers

PeterPhilippGuidoThe University of Angers, France has become an excellent place for doctoral work in Austrian economics, thanks to the leadership of Guido Hülsmann. Several top younger Austrian scholars such as Eduard Braun, Amadeus Gabriel, and Matt McCaffrey ‎– all former Mises Summer Fellows — received their PhDs under Professor Hülsmann’s supervision. Senior scholars such as Jeff Herbener, Shawn Ritenour, and myself are frequent visitors.

This week I was privileged to participate in a research seminar at the University’s GRANEM research center, along with Hülsmann and Philipp Bagus‎ of Rey Juan Carlos University in Madrid, on financial markets and institutions. Bagus presented a paper on the government bailout of the Spanish banks, and I presented a paper on the US private equity sector and it’s relationship to entrepreneurship, with Hülsmann as moderator and discussant.

Look for more exciting activities at Angers in the years to come.

The Leveraging of Corporate America

11943189016_6a1208edca_bA new NBER paper documents a strong, secular increase in US corporate borrowing during the Keynesian era.

Unregulated U.S. corporations dramatically increased their debt usage over the past century. Aggregate leverage – low and stable before 1945 – more than tripled between 1945 and 1970 from 11% to 35%, eventually reaching 47% by the early 1990s. The median firm in 1946 had no debt, but by 1970 had a leverage ratio of 31%. This increase occurred in all unregulated industries and affected firms of all sizes.

Not surprisingly, this change reflects government policy:

Changing firm characteristics are unable to account for this increase. Rather, changes in government borrowing, macroeconomic uncertainty, and financial sector development play a more prominent role.

Further evidence for the long-term lengthening of the economy’s capital structure, not from technological improvement, but from the government’s policy of always keeping interest rates below their market levels.

More Trouble for Behavioral Economics

Behavioral economics and its close cousin, neuroeconomics, have been all the rage in the last few decades. Behavioral economists claim to go beyond the naive assumptions of neoclassical economics by taking psychology (and neurophysiology) seriously, using laboratory experiments, brain scans, and other techniques to study how economic actors “really” behave under various circumstances. While some Austrians have embraced behavioral approaches, most have tended to dismiss the field, viewing behavioral economics as psychology, not economics. I find behavioral economics an ad hoc mixture of occasionally interesting psychological insights and naive policy recommendations that fit the authors’ particular ideological views (e.g., “soft paternalism”). More important, it’s hard to identify any important substantive contributions coming out of the behavioral literature; hardly anything seems both new and true. (Some neoclassical economists feel this way too.)

A recent NBER paper (gated, unfortunately) points to an important problem in the empirical literature on behavioral responses to stimuli. Economists Rajshri Jayaraman, Debraj Ray, and Francis de Vericourt studied an Indian tea plantation that changed its employment contract, from an output-based system with wages tied to individual performance to a “softer,” more equitable system with higher guaranteed minimum payments to all and weaker performance incentives. Initially, the plantation’s output increased, seemingly supporting the behavioralist claim that strong incentive plans make workers unhappy and lower productivity. However, after the first few months, this effect completely disappears, and worker behavior is entirely explained by a conventional economic model in which workers respond to financial incentives. As the authors put it, using more technical academic language: “an entirely standard model with no behavioral or dynamic features that we estimate off the pre-change data, fits the observations four months after the contract change remarkably well. While not an unequivocal indictment of the recent emphasis on ‘behavioral economics,’ the findings suggest that non-standard responses may be ephemeral, especially in employment contexts in which the baseline relationship is delineated by financial considerations in the first place.”

In my reading, the authors have found what used to be called a “Hawthorne effect,” a temporary response by employees to any change in management practice, workplace conditions, the employment contract, etc. Trying something new, whatever it is, can have a positive effect, but only temporarily.

I think the authors have identified a more fundamental problem with the behavioral social-science literature, namely that the empirical studies typically cover a very short time horizon, so that it is difficult to distinguish transitory from more permanent effects. Many behavioral researchers begin with strong prior beliefs about what they expect to find and, once they think they find it, they stop looking.

Dishonesty and Selection into Government Service

Dick Langlois points us to an interesting NBER paper on self-selection into government service, the results of which will surprise few readers of this blog:

In this paper, we demonstrate that university students who cheat on a simple task in a laboratory setting are more likely to state a preference for entering public service. Importantly, we also show that cheating on this task is predictive of corrupt behavior by real government workers, implying that this measure captures a meaningful propensity towards corruption. Students who demonstrate lower levels of prosocial preferences in the laboratory games are also more likely to prefer to enter the government, while outcomes on explicit, two-player games to measure cheating and attitudinal measures of corruption do not systematically predict job preferences. We find that a screening process that chooses the highest ability applicants would not alter the average propensity for corruption among the applicant pool. Our findings imply that differential selection into government may contribute, in part, to corruption. They also emphasize that screening characteristics other than ability may be useful in reducing corruption, but caution that more explicit measures may offer little predictive power.

The (Austrian) Economist as Public Intellectual

RothbardTurgotNicholas Kristof writes in the Sunday New York Times about the decline of the public intellectual. “Some of the smartest thinkers on problems at home and around the world are university professors, but most of them just don’t matter in today’s great debates.” As Kristof rightly points out, in many academic disciplines, career success comes exclusively from publications in peer-reviewed journals. Writing and speaking for a popular  audience, trying to influence journalists or policymakers, and even using blogs and social media are seen as distractions at best, pandering at worst. I once had a colleague who, as a junior professor, got an opinion piece published in the Wall Street Journal. “There goes his shot at tenure!” was the snarky reply from the senior faculty.

Of course, the great scholars of the Austrian tradition never took this position. Carl Menger started his career as a financial journalist and, after achieving international fame with his Principles of Economics, took a position as tutor to the Austro-Hungarian Crown Prince. Böhm-Bawerk was not only an eminent scholar but a vigorous participant in public debates and three-time minister of finance in the Austro-Hungarian empire. Mises spent most of his career as chief economist for the Vienna Chamber of Commerce, where he spent his days advising businessmen and government officials, his nights and weekends producing his seminal academic articles and books. Murray Rothbard, besides contributing original  theoretical and empirical works in economic theory, the philosophy of science, political economy, and US economic history, was a prolific writer of popular articles and books, a frequent speaker, and a tireless organizer for popular as well as scholarly causes.

The Mises Institute has, since its founding in 1982, pursued a three-way mission emphasizing academic research, teaching, and public outreach. Our faculty include top established and emerging scholars in Austrian economics who are working to develop, integrate, and advance the great tradition established by Menger. They publish in our Quarterly Journal of Austrian Economics and other peer-reviewed journals, present and discuss their work at our Austrian Economics Research Conference and other professional meetings, and otherwise keep the Austrian tradition healthy and strong. But our scholars also contribute to our Mises Daily series, they speak at our outreach conferences, and otherwise work to make the lessons of the Austrian school accessible and relevant to the problems and issues of our day. You can also find their work on our blog, on the Mises View, and wherever else good ideas are discussed. Scholarship is central to our mission, but so is relevance. Perhaps Kristof’s lament will spur other academics to do likewise and embrace the role of public intellectual.

Hydraulic Keynesianism Lives

I believe it was Alan Coddington who coined the term “hydraulic Keynesianism” to describe the typical macroeconomics textbooks of the 1950s, “conceiving the economy at the aggregate level in terms of disembodied and homogeneous flows.” The term also has a great visual quality, bringing forth an image of the economy as a giant machine with pumps and tubes and dials and levers, carefully controlled by wise government planners. (Such a machine was actually built by Bill Phillips of Phillips Curve fame.)

Apparently the Atlanta Fed has produced an educational video, “Money as Communication,” solemnly explaining the vital role of the Federal Reserve System in maintaining price stability. Mike Shedlock provides an amusing point-by-point commentary on the video, which surely ranks among  the best of government propaganda films. I especially liked the image below, taken from the video, which neatly encapsulates the Fed’s view of its own role in the economic system.

price stability

The woman at the keyboard has the wrong hair color to be Janet Yellen, and the man in the middle has too much hair to be Ben Bernanke, but I’m sure the intended audience — schoolchildren and New York Times reporters — will get the idea.

Report from the ASSA Conference

I attended this year’s ASSA conference in Philadelphia. The big story for most attendees was the weather, with a big winter storm leading to delayed and cancelled flights and trains, missed connections, and a slight damper on enthusiasm. It is a huge conference with several thousand participants and hundreds of sessions, panels, receptions, and other events. As you can imagine, with that much activity, the activities included the good, the bad, and the ugly. For most attendees the highlights were probably the speeches by Bernanke and current AEA president Claudia Goldin and lively give-and-take between Larry Summers and John Taylor. (My sympathies lie with Taylor.) I presented a paper on university business incubators, showing that their contributions to innovation and entrepreneurship may be more modest than advertised. Many Austrian economists attend the conference but the Austrian school is not, unfortunately, well represented on the program.

Much of the conference activities take place behind the scenes, as hundreds of colleges and universities interview huge numbers of job-market candidates in hotel suites, lounges, and cattle pens. (Just kidding about the last.) It’s a well-organized market about which much has been written (the AEA even tries to incorporate some economic theory into its market design). The overall experience for students (and recruiters) is highly variable (though not, apparently, as bad as with the Modern Language Association).

I met several young Austrian economists who are looking for jobs, or have recently secured them and are moving their way along the tenure track. This is all to the good, of course. However, I’ve noticed a disturbing trend in recent years, in which young Austrians seem less interested in the substance of their work than in how it will be received; their emphasis is on “playing the game” rather than seeking the truth. You also hear this said of the movement as a whole; unless Austrians get better at playing the game, our movement is in trouble. I’m reminded of Joe Salerno’s distinction between “professional” and “vocational” economists. Of course, Austrians seeking careers in academia need jobs and should be encouraged to follow the appropriate professional steps to market and distribute their work, to improve their teaching, and to maximize their chances at professional success. But we do not measure the health of our movement solely by PhDs granted, positions secured, or articles published.

Hayek and the Mont Pèlerin Society

Friedrich_Hayek_portraitTwo items of note:

1. Ross Emmett’s EH.Net review of The Great Persuasion: Reinventing Free Markets since the Depression by Angus Burgin (Harvard, 2012), which focuses extensively on Hayek and the Mont Pèlerin Society. Ross calls it  ”a subtle and nuanced history,” much better than recent similar books by Stedman Jones (2012) and Mirowski and Plehwe (2009).

2. A piece in National Affairs on Irving Kristol and Gertrude Himmelfarb which discusses Himmelfarb’s interactions with Hayek in London in the 1930s (HT: Nicolai Foss). “Himmelfarb and Hayek discussed, among other intellectual topics, his forthcoming launch of ‘an international Acton Society to promote the ideals of liberty and morality,’ which became the Mont Pelerin Society. . . . Himmelfarb admired Hayek for having linked Acton to Adam Smith and the ‘Manchester school.’ . . . [S]he recapped Hayek’s 1945 lecture at University College Dublin, in which he differentiated between the ‘true individualists’ of the Anglo-Scottish Enlightenment and the ‘false individualists’ of the Continental Enlightenment. . . . This sharp distinction between the two Enlightenments would later prove fundamental to both Himmelfarb’s and Kristol’s own work.”

Mendacious NYT Reporter Smears Economists on Speculation

Thanks to Felix Salmon for quoting me in his take-down of this embarrassing NYT piece on Craig Pirrong and Scott Irwin, two well-known economists who study commodity-market speculation. Basically, the reporter dislikes speculation (which he clearly doesn’t understand), so he assumes any expert with a different view must be a hired gun for various commodity-market firms and groups. The result is a preposterous article riddled with “jaw-on-the-floor” errors, mendaciously edited so the unfounded accusations come first, and the self-contradictions revealed only at the end of the piece. (E.g., the professors are paid consultants for these groups — oh, but they say the opposite of what these groups want, and are actually paid to work on entirely different things.)

As one commentator on my blog described it: “NYT reporter dutifully caters to its dwindling readership’s biases in an attempt to sell newspapers.”