Coordination Problem

The Hayek Love Song

Steven Horwitz

This has been making its way around Facebook and other parts of the Austrian and libertarians online worlds, so I figured it was time to post it here.  There's a small part of me that finds this utterly bizarre, but most of me finds it utterly charming and wonderful.  It's worth noting that the lyrics are actually quite good from a Hayek scholar's perspective (not nearly as sophisticated as "Fear the Boom and Bust" but still good).

The more important thing, though, is that when Pete, Dave and I were in grad school (aside from the fact that smart, talented, committed, and beautiful libertarian women were nearly non-existent), I don't think we ever could have imagined that 25 years later we'd live in a world where Hayek raps and love songs were part of the cultural and intellectual mix.  I am continually inspired by the increasing number of young people passionately committed to Austrian economics, Hayekian social theory, and libertarianism who are using new media to get these ideas across in creative and substantive ways.  Dorian Electra is just the latest, and I'm sure far from the last, in that growing number.

Despite the fact that we've tried to use this blog to emphasize the scholarly conversation in which the work of Mises and Hayek and others sits, we should also recognize the ways in which those ideas have begun to spread into the broader world.  And we should also recognize how that "spread" is reflective of the progress we've made with these ideas, at least with young people.  Videos like this and what John and Russ are doing are exactly what is needed.  Pete's 50 year plan is perhaps ahead of schedule!

 

Freedom Watch and The Freeman

Steven Horwitz

I am back from a lovely week enjoying the bounty of the market in the Caribbean with a nice tan and no worse for the wear from largely ignoring economics while away.  And while I was away, my appearance on the terrific Freedom Watch episode on central banking aired and my piece on why wars don't end recessions (responding to a Krugman column) appeared in the Jan/Feb issue of The Freeman.

Freeman piece is here.   

Freedom Watch episode is below.

EconTalk Podcast on Ludwig von Mises

|Peter Boettke|

Russ Roberts interviewed me on EconTalk about the life, work and continuing relevance of Ludwig von MIses.  I just hope I did justice to the great work of Mises and his heroic life, and thank Russ for the opportunity.

Happy Holidays and Best Wishes for the New Year

 

The Debt Inflation Cycle and the Global Financial Crisis

|Peter Boettke|

This is the title of a new working paper by Chris Coyne and myself.  That abstract reads:

Writing over 230 years ago, Adam Smith noted the ‘juggling trick’ whereby governments hide the extent of their public debt through ‘pretend payments.’ As the fiscal crises around the world illustrate, this juggling trick has run its course. This paper explores the relevance of Smith’s juggling trick in the context of dominant fiscal and monetary policies. It is argued that government spending intended to maintain stability, avoid deflation, and stimulate the economy leads to significant increases in the public debt. This public debt is sustainable for a period of time and can be serviced through ‘pretend payments’ such as subsequent borrowing or the printing of money. However, at some point borrowing is no longer a feasible option as the state’s creditworthiness erodes. The only recourse is the monetarization of the debt which is also unsustainable due to the threat of hyperinflation.

Comments/criticisms welcomed.

Open Apology to Joe Salerno

|Peter Boettke|

I sincerely apologize to Joe Salerno for misrepresenting his views on economics in a commentary on this blog.  It was not my intent to misrepresent Joe's views, nor to even pass a normative judgement in the offending passage.  Instead, I was trying to make a very clear "positive" distinction between our relative positions with respect to the economics profession.  Instead, I botched the sentence and this botching of the English language has been pointed out to me so I need to correct any misunderstanding.

The offending passage reads: "Read the entire post if you care to --- there is an explicit rejection of the "profession" by Rothbard/Hoppe/Salerno as corrupting and intellectually bankrupt. They are explicitly trying to create an alternative culture of economic learning. Salerno has actually written against viewing economics as a vocation."

As I think the context of the passage makes it clear that I was arguing that Salerno is focused on cultivating an alternative culture of economic learning to the "economics profession", and in contrast my focus is myopically on that "profession".  But my last sentence is just blatantly false.  Salerno has a very well carved out position on this as evidence from his essay, "Economics: Vocation or Profession."  And, to be clear to all readers, his position is much closer to Mises's position than mine.  I just disagree with the assessment that working within the profession and focusing on advancement within the profession is at odds with truth seeking and advancing sound economics.

I apologize for any confusion I might have caused with this botched up sentence, and I very sincerely apologize to Joe Salerno for misrepresenting his position.

Learning to Live in a Not-So-Efficient World

|Peter Boettke|

Luigi Zingales has a very interesting paper entitled "Learning to Live With Not-So-Efficient Markets" that he published in Daedalus (Fall 2010).

Compare with my paper "What Happened to Efficient Markets."

Rajan and Zingales are consistently the economists who I find the most insightful throughout the recent policy debates over the Great Recession.  In Rajan's response to Krugman's critique of Fault Lines, he argues that what Krugman fails to realize is how the very policy responses we are choosing are not getting us out of the crisis, but sinking us deeper into it.  It was, Rajan argues, the policy response to the last crisis that created the conditions that caused this crisis.  Zingales's home page at Chicago has a complete collection of his various papers, op-eds, commentary, etc. on the crisis.  As he says in the preface to a collection of those, the past 2 years have been sad years for an economist who believes in the free enterprise system.

Make sure to read Zingales paper on "Capitalism After the Crisis", especially p. 33ff because he explains how free enterprise via very public choice type mechanisms became political capitalism, and that our current crisis is a consequence of political capitalism and the challenges that we economists have to face rhetorically and intellectually because of this.

Ultimately, what I think we are learning (if we care to learn it) from the crisis is the following:

(1) Keynesian responses (fiscal policy) to a perceived Keynesian crisis (aggregate demand failure) creates a Keynesian world of macroeconomic volatility;

(2) A monetarist response (monetary policy) to a perceived Keynesian crisis (aggregate demand failure) creates a Keynesian world of macroeconomic volatility;

(3) A neo-Keynesian synthesis response (fiscal and monetary policy activism) to a perceived Keynesian crisis (aggregate demand failure) creates a Keynesian world of macroeconomic volatility;

(4) 1-3 demonstrate the both the mythology of the Great Moderation as well as our response to the Great Recession has been the opposite of what we should be learning (see Selgin's recent EconTalk podcast for a discussion of the empirical record and the mythology of the Great Moderation).

(5) That the continued political efforts to prevent market corrections to a previous set of policy induced distortions turns those market corrections into an economy wide crisis, which in an interconnected world economy creates a Global Financial crisis.

Therefore, it is time to go back to pre-Keynesian economics and think seriously about the institutional framework (monetary and fiscal) that provides the pre-condition for individuals to realize the gains from trade, the gains from innovation, and create wealth and generalized prosperity.  What we find is that this is about secure private property rights, freedom of contract, free trade, sound money, and fiscal restraint.

See You After Christmas

Steven Horwitz

An early Merry Christmas to all of our readers who celebrate the holiday.  (And a lump of coal to Brad DeLong.)  Tomorrow I'm headed down to the place that Pete would call "the land of your people", namely Miami, from where I will be embarking, along with my whole family, on a week's cruise in the Caribbean.  On the Carnival "Liberty" no less!

There will be no blogging aboard ship.  Not even any commenting.  In a world of sunshine, warm temps, casino gambling, and zero marginal cost food, blogging doesn't make the "to-do" list.  (Reading Deirdre McCloskey does, however.)

Have a great holiday all and carry on the usual bickering in my absence.  And be sure to set your DVRs for 8pm on Tuesday 12/21 to catch me on "Freedom Watch" again, this time in a terrific episode on central banking.  The Judge's closing rant is a classic.

Horwitz on Freedom Watch

Steven Horwitz

Here's my appearance on Freedom Watch this evening. (The embed code was not cooperating.)

Stylized Facts, Public Policy and the "Crack Up Boom"

|Peter Boettke|

When I was an undergraduate perhaps the most repeated lecture of Dr. Hans Sennholz was the one on the various stages of inflation and economic crises.  Even the housewives, Sennholz would declare in his characteristic manner, become aware of the depreciation of the purchasing power of money during the last stage of the inflation.

Sennholz's lectures are embedded in my brain, and I have all his books on my shelves.  But while these resources are there and in fact are part of my "DNA" as an economist, I often do not access them for a variety of reasons.  But as we entered the 2000s, I was drawn back to Sennholz's writings again and again, and his lecturers continually are accessed from deep in my memory to think about the pieces of news concerning the financial crisis we are treated to daily.

Sennholz's The Age of Inflation and Money and Freedom along with Murray Rothbard's What Has Government Done to Our Money are about as readable as any treatment of monetary policy one can read.  And in the context of the broad brush strokes they both paint with, the picture they paint is about as good as you are going to get concerning the destructive consequences of inflation, and the intimate connection between government spending, and government monopoly control over the money supply, and inflation.

But reading Sennholz and Rothbard leads one quickly back to Mises, as both derive their approach from Mises.  In reading Mises I am always struck by how fresh he still reads, and how relevant his analysis of contemporary policy in the first half of the 20th century still is relevant for us at the beginning of the 21st century.  Of course, there is the enduring insights that transcend time and place --- Mises is the master communicator of the inexorable laws of economics.  But he is also full of practical applications of economics to matters of public policy.

One of those issues is his analysis of the "crack up boom" (see Human Action, 426-428).  As I re-read those pages tonight while working on a paper dealing with the financial crisis since 2008, I am left wondering why this explanation hasn't been applied in the discussions we have had on the blog about monetary policy. At the risk of going out on a limb, let me say that I have become convinced that the nominal income targeting position staked out by Scott Sumner (and endorsed in varying degrees by Selgin, White and Horwitz) is mistaking the data that would result from the Mises stages of inflation approach with data that would result in a toy economy were a debt-deflation downward spiral was taking place.  What if what we are seeing is the beginning of a "crack up" boom, rather than a deflationary spiral caused by monetary policy mistakes?  If that is right, then efforts to ease monetary policy to off-set a collapse will not be the solution to our economic woes.  Instead, we need to think through the specifics of the "crack up" boom and the institutional environment within which decisions are being made today.  It is important to point out contra Cowen and Caplan (and others who buy the supposed rational expectations critique of ABCT) that Mises's section on the "crack up" boom is entitled "The Anticipation of Expected Changes in Purchasing Power".  The argument Mises provides is in my reading consistent with a non-mechanical interpretation of rational expectations, and it is consistent with the stylized facts of the credit transmission mechanism locking up while the supply of credit was plentiful.

When I do a google scholar search of "crack up boom", I don't see any discussion about the idea among monetary theorists such as Selgin, White or Horwitz.  There is a discussion among hard money folks on the internet, and in some journal articles by Cochrane, Carden, Salerno and Huelsman.  But the idea isn't even really applied in those writings to address our current situation.  I am wondering why?  Am I reading too much into Mises's discussion of expectations and the demand for money? Doesn't Mises's theory explain the stylized facts of our day in a way that is consistent with economic theory?

Why is the "crack up boom" not discussed more in the journals and on the shelves?