Coordination Problem

Critique of the Fed in The New Republic

I just came across this nice little piece by Alvaro Vargas Llosa in The New Republic.  Vargas Llosa uses the Liberty Dollar raid to ask why we need a central bank in the first place.  The comments are pretty vigorous, with what appear to be a good number of Ron Paul supporters who know enough about Austrian monetary writings to be dangerous. 

The biggest confusion among the commenters is not distinguishing between "free banking" and a 100% reserve gold standard.  Some of those defending getting rid of the Fed make the usual weak arguments that "any supply of money is sufficient" as long as prices are free to move.  As I've asked before, why doesn't that mean inflation is harmless?  If we can't have too little money because prices can always "just" adjust downward, how is it that we can have too much if prices will always "just" adjust upward in a free economy?

The other confusion is blaming Vargas Llosa for being inconsistent in arguing that inflation was responsible for the crash in 1929 but that the Fed's allowing the money supply to fall dramatically in the early 30s was responsible for turning a crash into an extended depression.  That's not inconsistent if you approach it with a monetary equilibrium perspective where the goal is to keep the supply of money equal to the demand to hold it at the current price level.  In that view, not all expansions of the money supply are inflationary, and especially not when the supply has fallen 30% in a few short years, requiring a reflation.  Such a view is compatible with inflation in the 1920s causing the crash and deflation in the 30s making it worse.

In any case, it's good to see a moderate-to-liberal magazine like The New Republic take up this issue.  As I recently argued, the left ought to take the critique of central banking more seriously.

Austrian Economics + Anthropology = Understanding of the Social World

I came to study Austrian economics at GMU in 1984 because of Don Lavoie.  I read Don's work on the problems with socialism in the Journal of Libertarian Studies and I wanted to study the debate between socialism and capitalism in depth and he seemed to be the guy to work with.  I also was familiar with Tom DiLorenzo's articles in The Freeman on public policy and economic freedom and I had read Karen Vaughn's  John Locke: Economist and Social Scientist (Chicago, 1982). And, of course, as I was making my decision on the one hand between graduate schools (Auburn, NYU, Rutgers and GMU) and on the other between law school, graduate school, or stay working as a tennis pro, two major factors pushed in favor of GMU.  First, Rosemary and I visited NY, and though both of us had been all over Manhattan as kids from NJ, the idea of living in the city was intimidating.  Second, the Center for Study of Public Choice was moving from VPI to GMU and with that GMU's place as THE place to study Austrian economics (at the Center for the Study of Market Processes with Lavoie) and free market economics in general was solidified.

This didn't prevent my first impression of GMU being somewhat negative due to the physical plant at the time and the seemingly vanilla aspects of Fairfax.  But we all must make sacrifices for our science.

So I showed up in 1984 to start graduate studies and what throws me completely for a loop is that I don't understand a single thing the faculty and students are talking about with respect to Austrian economics.  The same names were being talked about that Dr. Sennholz stressed, but the topics were far removed from the GCC conversation --- even among the "graduate" students from Latin America and France that populated Sennholz's Wednesday evening seminar.  I should say some new names were introduced to me as well by the Austrians at GMU, especially those of Shackle, Loasby, Richardson, etc.  Thankfully Richard Ebeling came to campus the 3rd week I was there to discuss Mises and the Gold Standard, and about that same time Roy Cordato and Karen Palasek started a reading group among the students on the Ed Dolan, ed., Foundations of Modern Austrian Economics.  After that my adjustment to GMU went very smoothly and I started to feel quite at home in the conversations -- even about the extreme subjectivism of Shackle or the equilibrium/disequilibrium debate between Kirzner and Lachmann.

Progressive Libertarianism and Ron Paul

I offer some critical thoughts on the Ron Paul campaign over at Liberty and Power.  Comments over there please.

Between the Covers with After War

Here is a short interview I did with National Review Online.  Here is the description:

Christopher Coyne, author of After War: The Political Economy of Exporting Democracy, tells John J. Miller that reconstruction is all about incentives: “what occupiers are attempting to do is establish a set of rules that create incentives for people to prefer a liberal democracy as compared to any of the available alternatives.”

Marriage and the State in the New York Times

As David Boaz and Jesse Walker have already noted, there's a terrific op-ed in today's New York Times by the well-known historian of marriage Stephanie Coontz arguing for the separation of marriage and the state. I have been writing and teaching on family issues for a number of years and have used several books of Coontz's in class and in my research.  Her most recent book Marriage:  A History is especially good.  She is no classical liberal, but her history of marriage hints at a story about the ways in which the development and expansion of capitalism made possible modern marriage and modern family arrangements, including and especially the liberation of women in a variety of ways.  I have offered a short, non-scholarly account of such a story in my "Capitalism and the Family" article in a recent issue of The Freeman. I also have a working paper, which I presented a couple of weeks ago at Pete's workshop at GMU, called "Markets, Maslow, and the Evolution of the Modern Family" that also addresses some of the same issues. Those interested in how Austrian economics might be applied to the context of the family might wish to read my paper co-authored with Peter Lewin, entitled Heterogeneous Human Capital, Uncertainty,   and the Structure of Plans:  A Market Process Approach to Marriage and Divorce that will appear in the Review of Austrian Economics early in 2008.

Walter Block in Business Week

A great list for undergraduate reading in economics is provided in the April 2006 edition of Business Week.  Walter Block's Defending the Undefendable is listed along with Rand's Atlas Shrugged, Friedman's Capitalism and Freedom, Hayek's The Road to Serfdom and Mill's On Liberty.  Defending the Undefendable was (is) one of my favorite books to show how the logic of economic analysis often leads us to counter-intuitive results and in doing so provides a consequentialist defense of "anything that's peaceful."  Walter wrote that book in the 1970s and it still have great relevance today.

Next week in my PPE workshop, Jim Leitzel of Univeristy of Chicago and the blog-spot Vice Squad, will be discussing his work on Regulating Vice.  Jim's work doesn't have the same punch as Walter's does, but is a very subtle and sophisticated treatment of the issues and basically concludes that most of our efforts to control what some consider unsavory behavior are ineffective and counter-productive.

You Should Read "After War"

Over the holiday weekend, I read co-blogger Chris's new book After War, which is just terrific (thanks for the copy Pete and Chris).  The book is very clearly written and very accessible to the non-specialist, not to mention that it offers an excellent political economy analysis of post-war reconstruction.  Chris uses tools from across economics and political science to argue why attempts at such reconstruction are normally likely to fail.  His last chapter provides an alternative vision of US foreign policy, where free trade in goods, services, and ideas (unilaterally if necessary) is the path to economic growth and democratization, rather than military intervention, occupation, and/or reconstruction. That last chapter cries out for further work by other scholars in the classical liberal tradition.

If you're in DC, be sure to check out Chris's book forum at Cato today .

Congrats Chris!

The Difficulty of Reforming France and Why Nicolas Sarkozy Doesn’t Get It

The current policy scene in France is most interesting. President Sarkozy was elected in May promising to introduce extensive reforms, putting the French back to work, and achieving GDP growth rate of more than 3% per annum (in real terms, I believe). But is Sarkozy’s plan going in the right direction?

A few months ago, I thought Sarkozy had good ideas but poor implementation knowledge. Now I am not sure anymore that he has good ideas. He may speak of policy reforms but for now he has tried to implement the wrong ideas in the wrong way. Let’s have a look at what he and his government have done in the first six months of his presidency.

Sarkozy has been extremely busy on the foreign policy front, which makes sense since foreign policy is the domain of the French President. He has helped in the liberation of hostages, has traveled to the US many times (including to talk to Congress), and has been to China and many other countries. The France-US relations are at their best in years.

As far as domestic policy is concerned, things are not so rosy. The election package contained a lot of promises for reform. The problem is that many of these promises are wrongheaded because they are not urgent. And what is urgent is barely discussed. In my view, France needs the following changes:

• A tax reform that would dramatically reduce the marginal tax rates for everyone, especially that of the most productive income classes. So introducing a top marginal tax rate below 30% for example would be start, with the goal of reducing it over time towards 20% (and less). Taxation on corporation should be aligned with personal income taxation so as to make the tax system as “neutral” as possible. Many taxes should be removed such as the tax on wealth.
• A labor code reform to make it easier to hire and fire people. This would include reductions in payroll taxation.
• A reduction of the government involvement in business. This entails continuing privatizing government-owned corporations in domains such as energy, transport, etc. It also means introducing competition in domains where it has been limited or absent, such as education (it also means increasing competition in health and other areas where the government is a heavy player). Last, it means removing (or at least reducing) subsidies to all, including farmers, in order to create a level playing field.
• A reduction in the size and scope of government, which includes a reduction in the number of government employees. This is in order to achieve the goals of (a) reducing the burden of public spending in the French economy and (b) reducing the size of the public debt. At the end of the day, we have no example of high-growth countries with high public spending.
• Pension reform to allow young people to escape the fate of an inverted age pyramid.

Any government in France who would take these five goals seriously would eventually succeed at turning the country around and help the economy grow beyond the stated goal of 3%. So in light of this, what have Sarkozy and his Prime Minister done so far?

Guest Blogger - Dan D'Amico on "The Use of Knowledge in Proportionate Punishment"

Per a suggestion from the comments, we're happy to offer Dan D'Amico an opportunity to discuss his work that won him the Don Lavoie Memorial Graduate Student Paper Competition from the Society for the Development of Austrian Economics.  Dan's remarks are below, and he will join us in the comments section.  We have extended a similar offer to Claudia Williamson, the other prize winner, to post about her work.  We hope she will take us up on that, and if she does, we'll have that next week.

It's also our plan to make the opportunity to guest-blog part of the Lavoie Essay Contest each year.

Now to Dan:

At Professor Horwitz's request, I wrote this post as an update to my Lavoie contest essay. My original paper entitled "The Use of Knowledge  in the Criminal Justice System," was an attempt to outline points of decision making within the criminal justice system where  central-planning inhibits the transmission of knowledge between suppliers and demanders. When police, courts, and prisons are provided  by central-planning they uphold the emergence of prices. Without market prices there is no insight into the local knowledge about the problems of crime and the harm that it causes. Furthermore, the absence of knowledge in earlier production nodes causes discord in later stages as well. For example, prisons rely upon good court  decisions, and courts rely upon effective police forces; for criminal justice to function well as a wide variety of institutional goods and services, knowledge must be revealed, detected and responded to, in each stage of production. I still believe that this approach was a useful one and needs more attention, so I plan to return to that draft and improve its structure and clarity.

Now the paper has radically changed form from the previous draft. It is more specifically focused on the topic of proportionate punishment. Proportionality is a philosophical standard of evaluating punishment norms – "a punishment should fit the crime." I argue that the popularly accepted insights of proportionate punishment assume the  state as the sole provider of punishment services, and in doing so they assume a state-central-planner to possess a degree of knowledge that it is impossible to possess. I assume that the moral and normative arguments in favor of proportionate punishment are sound, and then I explain that even if the philosophical arguments for proportionality were universally accepted, the central-authority would still lack the  real knowledge of individuals' tastes, preferences, evaluations, and abilities to provide proportionate punishment. Providing punishment like any other provision of goods and services on the market is a task of social coordination and therefore confronts knowledge problems. Furthermore the decision making process requires a mechanism to update and improve itself in order to maintain proportionality in changing  social environments and crime rates.

The updated draft can be found here.   Any comments or suggestions would be most appreciated.  Once again I'd like to congratulate Claudia Williamson for also winning the Lavoie contest and say thank you to  the SDAE and the Lavoie Prize committee.

The Page 99 Test for After War

"Open the book to page ninety-nine and read, and the quality of the whole will be revealed to you." --Ford Madox Ford

Here is the page 99 test for After War.

Here is the information for my Cato book forum on Monday, November 26.