The Austrian Economists

What is really behind foreclosures?

Casey Mulligan diagnosis the situation, taking off from this discussion by Stan Liebowitz.

What do you think?  Does this evidence lend more support to the thesis that what the financial situation represents is a credit crunch or a insolvency crisis?

One More Working Paper on Business Cycle Theory

The Mercatus Working Paper series now includes the following, co-authored with Gene Callahan:  "The Role of Ideal Types in Austrian Business Cycle Theory."  An earlier version was presented at the SEA meetings last November, as well as at the Wirth Institute Conference in October.  Gene and I thank a number of commenters at both events as well as referees at Advances in Austrian Economics, where the paper will appear next year, for their suggestions.

Towards a Better Understanding of Pirates --- required reading Mises and Hayek

Sometimes readers on this blog (and elsewhere) over the past few years of pirate fascination have missed the essential lesson of Pete Leeson's The Invisible Hook, which is that the book is about social cooperation and division of labor.  Ricardo's Law of Association in a situation where the conditions for its operation are least likely to emerge (and are constrained by the anti-social activity under discussion).  And in order to understand this, Pete argues, one must engage in economic analysis informed by Ludwig von Mises and F. A. Hayek.  Pete has been explicit about this in his articles, in his book, in his interviews about the book, etc.

My real question is why are so-called "Austrian" readers so slow to pick up on what journalists for the Boston Globe are so easily able to pick up?

Markets vs Government in Development Economics

Bill Easterly links to a recent article by Joe Stiglitz that expresses some concern that the recent financial crisis will lead to developing economies abandoning markets and moving to state-led planning instead.  Easterly is, I think, a bit optimistic in his reading of Stiglitz -- who I think is making an argument for extensively regulated markets, and not free markets, though it is welcomed that he does not advocate socialist planning for developing nations.  And as Easterly points out, that is the "big" debate once again at this critical point in time.

This Sounds About Right --- Macro Policy is More or Less Determined by Politics Rather Than Ideas

Peter Klein links to a review of John Wood's new book, and offers his own commentary about the rationalizing role of macroeconomic theory as opposed to its influencing role.

I am planning on posting more on macroeconomics over the next few days because I just returned from an outstanding History of Economic Society meeting and there was an excellent session on Keynes with Roger Backhouse, Brad Bateman, and David Laidler.

Cap and trade and transitional gains trap

Steve Margolis, via Craig Newmark's blog, raises some very important issues about the new era of responsibility.

Live from UFM It is Larry White!

Presenting an overview of the 1920s.

An Evening at FEE on the "Great Recession of 2008-09"

Readers in the New York City area might be interested in attending a talk I'm giving at the Foundation for Economic Education in July. I'll be the speaker for "An Evening at FEE" on July 18.  My title is: "The Great Recession of 2008-09: Capitalism Hasn't Failed, Government Has (Yet Again)." The event is free for FEE members but $25 for others.

More information is here.

New Working Papers on the Current Recession

Both Pete B. and I were asked to contribute Austrian perspectives to a volume entitled The Meltdown of the World Economy: Alternative Perspectives on the Global Financial Crisis, edited by Steven Kates and published by Edward Elgar Publishing.  Both of our contributions are now up on the Mercatus Center Financial Markets Working Group site as working papers (PDFs).

Horwitz:  "The Microeconomic Foundations of Macroeconomic Disorder: An Austrian Perspective on the Great Recession of 2008"

Boettke and Luther:  "The Ordinary Economics of an Extraordinary Crisis"

Long Live Homo Economicus

An excellent paper on behavioral economics and rational choice.

Non-Tenure Track Professors are VERY Important and Will Be More Important in the Future, But Prepare Yourself So You are Never One of Them

Inside Higher Ed has a nice discussion of the world of professors, and discusses the effectiveness of teaching among the different ranks of professors.  Important point: be an effective teacher of economics (don't be boring like so many of your colleagues) whenever and wherever you are teaching.  Economics is too important a discipline to be taught poorly.

But the bottom line to PhD students, if you excel in school, write clear and interesting articles and perhaps books if you are so inclined, and you will successfully avoid joining the ranks of the "off-track" professoriate.  And for the advancement of Austrian economics, and for your own personal well-being, the  "off-track" professorships are to be avoided in 9 out of 10 situations.

What Monetary Policy Cannot Do

Casey Mulligan discusses Milton Friedman's warning when the Fed is asked to engage in policy that oversteps its role.

We have had recently had a spirited discussion on monetary policy during the "secondary depression" by Steve Horwitz and George Selgin.  I agree with the logic of the position of Steve and George (and Hayek).  But I wonder if under our current set of monetary policy institutions, and the critique that George (and Steve) have made of those institutions in the past that they are capable in practice of pursuing the "secondary depression" policy that Steve and George (and Hayek) are advocating.  What if, due to the "long and variable lag" in monetary policy, the effort to stabilize MV results not in stabilizing MV, but results instead in inflation.  Is the Fed engaging in the odd practice of being a driver who upon discovering they just ran over a pedestrian with their car so they decide to back up over the body in the attempt to undo the damage?

In a world where our monetary policy institutions are imperfect, aren't we asking too much of them to handle the "secondary depression" smoothly?

Could this ultimately be the reason why F. A. Hayek argued beyond a monetary rule and instead for the denationalization of money?  Milton Friedman moved from trusting the policy makers in control of acting on the monetary rule, to advocating that monetary policy be entrusted to a computer.

Again, I understand and agree with the logic of the argument that George and Steve (and Hayek ... and Yeager) are making.  But I wonder about its effective operation in the world under the existing set of monetary policy institutions.  And I would argue (as I believe both of them would agree) that under a free banking regime, the market forces at work would have "automatic stabilizers" that would accomplish through normal market adjustments by banks the monetary "rule" that is impossible to implement in a central banking regime.  So isn't it a mistake to insist that a central banking system engage in monetary policy that would mimic what the market forces would predictably accomplish under free banking?

I am way out on the limb here because monetary theory and policy is not my field of study, so my questions may be very innocent and wrong-headed, and I usually defer to George and Steve (and Larry and Roger) when questions of a macro/money are raised.  But something doesn't seem right to me about entrusting the Fed to manage monetary policy to ease the "secondary depression" when it was Fed errors that contributed to the "depression" in the first place.  We have information and interest-group reasons to suggest that this institutional regime simply cannot do what we are asking it to do.

21st Century Economic Methodology

I recently wrote an essay for a SAGE volume on 21st Century Economic Methodology.  My basic argument is that while the methods of economics are constantly changing, and the applications of economics are continuously debated, the formalistic and positivistic methodology of mid-20th century economics is still uncritically accepted among economists.

James Buchanan taught me that all work is work in progress, and that writing is research (and as Richard Wagner has further explained --- thinking without writing is day-dreaming).  So it has been a pattern of my research life that I keep reading, thinking and writing on a topic after I finished the initial paper that started me on that topic.  I am currently working my way through Harold Kincaid and Don Ross, ed., The Oxford Handbook of Philosophy of Economics (New York: Oxford University Press, 2009).  There is much in the volume that reinforces the main points I make in my essay, but some claims that challenge my depiction of the current state of philosophical affairs in economics.

One of the claims from Kincaid and Ross's introduction is that shifts in philosophy and economics have now evolved to admit that: "some of our best science does not emphasize laws in the philosopher's sense as elegant, context-free, universal generalizations, but instead provides accounts of temporally and spatially restricted context-sensitive causal processes as its end product." Molecular biology is cited as a prime example of such a science. "Expression in a clear language, quantitative where possible, is crucial to good science, but the ideal of a full deductive system of axioms and theorems is often unattainable, and not, as far as one can see, actually sought by many scientific subcommunities that are nevertheless thriving."

Older notions of the philosophy of economics, Kincaid and Ross argue, are giving way to a more nuanced philosophy of science, and that economists are in practice resisting all attempts to restrict inquiry by appeal to familiar metaphysical and epistemological criteria.

My reaction to these claims is complicated.  I would argue that Kincaid and Ross put an appropriate emphasis on the evolving practice of economics (methods), but they underestimate the scientific conventionalism that embeds what it means to be an economist (methodology).

But what I wonder about is their claim that "causal processes" expressed in "clear language" can be counted as scientific within the discipline.  We might want to point to molecular biology (and for over a century many economists from Marshall to Boulding have pointed to biology) as an exemplar of such a science, but this is not the self-image of economists.  Changing that self-image requires more than shifts in the philosophy of science.  In fact, I argue that the difficulties of shifting this self-image are compounded because rather than a philosophical argument (which can be won or loss), the self-image are a by-product of scientific conventionalism.  Economics is what economists do, and what economists do is build parsimonious models and subject them to statistical tests.  Deviations from this methodology of inquiry are viewed with skepticism.  Some individuals can overcome the skepticism, but most cannot.  And even those who deviate, whose works gets a hearing among the elite in the profession, do so because they are perceived as providing insights which can in principle (even if they don't do it) be translated into the model and measure program.  I am not making a normative claim here, just a positive claim about what is in elite professional practice.  To put this another way, can anyone envision a John Bates Clark medal being won in the next decade by a young scholar whose work focuses on "causal processes" that are expressed in "clear language"?  If not, then in what sense is the contemporary methodological practice of economics transforming in the 21st century?

Which Monetary Policy Rule Suffers from the Fatal Conceit?

In the comments on the Keynes and Hayek thread, Nikolaj says of me:

Which is pretty much the same as saying that people are irrationally hoarding. You "do not claim to know how much money people should hold", but somehow you "know" that whatever quantity they hold, if deflation occurs, then it is too much, and banks should supply more, to spur investment. Which is to say, behavior of people to hold more cash and invest and spend less was irrational hoarding, and you, as monetary central planner, knew what was "optimal quantity of money."

My response was to deny that I know better than individuals how much money they "should" hold, and then argued that the point was that whatever quantity they wished to hold at the current price level, it should be supplied.

In thinking about this some more, it strikes me that I could have gone a step farther.  One could make the case that it is those who deny that MV should be stabilized who are really the ones who think they know better how much money people should want to hold.  The difference is that they believe that they know what the optimal nominal money supply is rather than the demand.

Both the defenders of 100% reserves and a Friedman rule are, at least implicitly, insisting that the public's demand for real balances accommodate itself to the nominal supply of money.  In the case of 100% reserves, the money supply is essentially fixed and if the demand for money changes, the adjustments should take place through the price level.  (This is what Rothbard means by saying any supply of money is optimal - he's assuming costless price level adjustments.)  Is this not simply saying to money holders:  "I know you'd like to hold higher real money balances, but we know this nominal money supply is the right amount, given our gold supplies, so tough cookies for you - you'll have to wait out painful price adjustments to have your higher demand for real balances accommodated."  In the case of a Friedman rule, the hubristic claim is that the selected growth rule is optimal no matter the short-run changes in demand.  Here too, the changes in money demand are dismissed and not seen as a reason to change the supply.  Both groups implicitly think they know better how much money the public should want to hold.

From a monetary equilibrium-free banking perspective, this is all very misguided.  Like any other good, markets should supply the quantity of real money balances the public wishes to hold and should avoid painful price level adjustments (both up and down) by doing so through changes in the nominal money supply.

The point is that ME-FBers have no idea what the optimal money supply is other than to say it's whatever the public wishes to hold at the current price level.  We are not pretending to know how much money the public "should" hold, nor are we pretending to know how much we should supply.  What market institutions such as free banking do is to discover how much money people wish to hold and then supply them that amount, I would argue, in a way that minimizes the damages done from the inevitable imperfections of the process.

It is those who would tie the money supply to anything but the demand to hold it who are suffering from the pretense of knowledge or the fatal conceit.

Using the Economic Way of Thinking to Ex Post Rationalize Your Errors

Today's entry:  "The optimal number of lifetime speeding tickets is greater than zero."

One of the great things about being an economist is that you get inner peace by using the EWOT in this way.