Coordination Problem

Government interventionism and the Subprime Crisis

My good friend Jeff Friedman's response to my last entry made me, as usual with challenges from Jeff, think.  I think Jeff is wrong.   The free market side is not without an argument in this case.  I also disagree with Jeff that economists don't study politics, but only theorize politics --- but lets leave that for another time.  But what is the free market argument concerning the current situation?

The argument is not all that unique, though the facts of the situation are.  The focus is on the structure of incentives and the quality and flow of informational signals that economic participants interpret and utlize in the process of economic decision making.

Gerald O'Driscoll published a piece last fall that discusses 'subprime monetary policy' and would be a good place to start in the policy discussion.

What is the best diagnosis of the current situation that you have read?

David Schmidtz to Teach Foundations of Capitalism

For those interested in the issue of liberty from a philosophical perspective Prof. David Schmidtz (U. of Arizona) is a source to go to. He is a very gifted philosopher and has done work in moral theory, philosophy of law, welfare, justice, and what he calls the philosophy of freedom. Between April 22 and May 8, he’ll be teaching Foundations of Capitalism; a one credit class in the Economics Department at GMU. The class will be taught at the Mercatus Center in Arlington (registration is still open). Those interested should sign up while there are still spaces available!

Two of his books, The Limits of Government (1991) and Social Welfare and Individual Responsibility (co-authored with R. E. Goodin in 1998) are often cited as landmarks in the philosophical landscape. I find his short essay The Meanings of Life quite captivating (even though he limits himself to the secular perspective). Therein Schmidtz shows his ability to capture different angles to shed light on the eternal question taking his cues from Robert Nozick and Woody Allen; and even mentioning his impressions after visiting the New Zealand Glow Worm Grotto (which I have also visited myself).

Desperately Seeking Ludwig, F. A., and Milton

Despite rhetorical differences, the most important market oriented thinkers of the 20th century were Ludwig von Mises, F. A. Hayek and Milton Friedman.  During their respective careers they witnessed the rise of socialism, the hegemony of Keynesianism, and the reversal of the laissez faire principle to one that favored state intervention in the economy.  Each of these towering intellectual figures tackled the theoretical and empirical arguments that were responsible for this ascendency of economic statism.  They were forceful minds and articulate spokesman in written and spoken word for the position they put forth to counter the cultural and scientific transformation they were witnessing.

Unfortunately, the pendulum has swung back since 2001 and with the current financial crisis timed with a Presidential election we hear of the instability of unregulated markets and the need for regulation and control once again.  Statism is on the rise again in rhetoric, and this rhetoric will soon be followed by policy action.  With the consequences that we very well may destroy the US economy --- and I am not using the world "destroy" lightly and just for rhetorical flare.

We academics who see our purpose as including not just scientific truth-tracking and quality teaching, but also as being engaged in the policy discourse of our age, believe in the proposition that ideas do indeed have consequences.  A change in ideas, will change the language we use; a change in language, will change the rhetoric; a change in the rhetoric, will change the actions taken; and the change in actions, will result in policy consequnces.  So we who toil in academics invest primarily in the first and perhaps second stage, while journalists and policy makers more or less engage in the third and fourth stages.

Right now the economics profession has not had a clear intellectual leader step forward to challenge the emerging statist hegemony in the wake of our current financial situation.  We are in a state of desparately seeking the next Ludwig, F. A., and Milton.  No disrespect to the great economists amongst us, e.g., Andrei Shleifer, or my colleagues at GMU, e.g., Tyler Cowen and Russ Roberts, but the arguments emerging from these talented men do not have the 'force' of those presented by Mises, Hayek and Friedman. And without that intellectual force, our future in the US is potentially very bleak as statism will crowd out market creativity, and wealth creation.  Where is the next intellectual figure that will explain the impossibility of socialism, why the worst get on top, and why government policies are counter-productive?

How do we find these type of economists and how do we cultivate them?  And without them can we survive the statist onslaught on our economic freedom?

EconTalk Podcast

My podcast with Russ Roberts on After War is posted at EconTalk.  Here is a summary:

Christopher Coyne of West Virginia University and George Mason University's Mercatus Center talks with EconTalk host Russ Roberts about his book, After War: The Political Economy of Exporting Democracy. They talk about the successes and failures of America's attempts to export democracy after a war. In some cases, Japan and Germany, for example, after World War II, American efforts have led to stability and democratic institutions. In many other cases, Cuba, Somalia, and Haiti, for example, and so far, Iraq, American efforts have failed, often repeatedly and have sometimes made things worse. Coyne tries to identify factors that lead to an improved likelihood of success or failure. Ultimately, he concludes that a non-interventionist posture accompanied by unilateral free trade is more likely to benefit citizens under repressive governments.

Marriage as Complementary Consumption Preferences

Sometimes high theory and low reality mesh together just beautifully.  I'm still reading Simmel, who has a wonderful observation about marriage from 1907:  "The declining frequency of marriage which is to be found everywhere in highly civilized cultural circumstances is undoubtedly due, in part, to the fact that highly differentiated people in general have difficulty in finding a completely sympathetic complement to themselves."  Translated, this means that in a modern society where people are "more different" from one another than they were, I would argue, pre-capitalism, it is harder to find a marital partner whose personality and, as Wolfers and Stephenson argue, consumption preferences, are sufficiently complementary to yours to render the person "marriageable."  Thus, we get later and fewer marriages and people seem to be "picky."  So there's the theory.

In Sunday's New York Times Book section, there is an article exploring the way in which a prospective romantic partner’s book preferences (or lack thereof) signal the likely success of the relationship in the highly competitive upscale romance market. If one is seen reading a book that the other person does not think much of, the relationship might be over. Conversely, choosing or saying you read the right books can be an important positive signal.  What is the signal about?  Complementary consumption preferences, or in Simmel's words: "finding a completely sympathetic complement" to oneself. When marital choice is taking place at this level of detailed complementary consumption preferences, we should not be surprised that marriage is taking place later and less frequently. 

This is also a sign that the economic benefits to being married have fallen.  Folks can afford to be this picky because they don't need marriage to survive economically, just to make them happy.  That, I would argue, is a Good Thing.

Quote of the Day - Sociology Division

Thanks to our frequent commenter Brian Pitt (although he doesn't know that I was aware of this until now), I've been shamed into re-reading Georg Simmel's The Philosophy of Money, which I haven't read since grad school.  Of course this time around, I'm looking for what he has to say about the family rather than money per se.  I just started the second half of the book, where he first describes man as "the exchanging animal," which is very Misesian/Buchananesque.  But later on that same page (291), he writes:

"It is surely of deep significance that whatever separates man on the purely factual and psychological level from lower animal species, namely the capacity for objective contemplation, the disregard of the ego with its impulses and conditions in favor of pure objectivity, contributes to the nobles and most enobling result in the historical process:  to build a world that may be acquired without conflict and mutual repression, to possess values whose acquisition and enjoyment by one person does not exclude that of another, but opens the door a thousand times for him to acquire such values as well.... Exchange - which to us appears to be something entirely self-evident - is the first, and its simplicity really wonderful, means for combining justice with changes in ownership."

Now THAT is a nice vision of the catallactic society.

Simmel played a big role in my early work on money and language.

More Headlines You'll Never See

Current headline on CNN.com:

"FBI director pushes for more funding to fight terrorism."

No, really?!  I'm shocked. 

So back to my "headlines you'll never see" meme, I'm waiting for:

"Government Agency Director Says 'We have accomplished our task, please close us down.'"

"Cabinet Secretary Pushes for Reduced Budget as Problems are Deemed Less Urgent."

Feel free to contribute more ideas in the comments.

Good Morning Western Canada!

I'll be on the radio later today on CHQR in Calgary, Alberta, Canada talking about my Wal-Mart/Katrina study from Mercatus.  You can catch the stream here.  I should be on around 1230pm EDT.