Coordination Problem

Wartime Prosperity Revisited

Steven Horwitz

Some of our long-time regulars may remember this post from February 2011 where I talked about a paper one of my students was working on looking at primary source material as evidence for Bob Higgs's argument that World War II did not get us out of the Great Depression.  Bob argues that wartime macroeconmic data is highly misleading for a variety of reasons, including price controls, and that if we correct the aggregates, we see a much less rosy picture of the war's effect on the American economy.

Mike McPhillips and I have now completed the paper that I hinted at in that post and I found out today that it was accepted for publication in The Independent Review, in the Winter 2013 issue.  It is titled "The Reality of the Wartime Economy:   More Historical Evidence on Whether World War Il Ended the Great Depression."  I have posted a copy to SSRN, which can be found here.  Mike did terrific work on this and I'm happy to see it published somewhere that will get read by more than just professional economists.

Peter Lewin on Uncertainty

Steven Horwitz

Here's the good Professor Lewin talking about Austrians and uncertainty courtesy of the Legatum Institute.

 

Keynesians stories do not imply Keynesian policies.

|Peter Lewin|

In a recent WSJ opinion piece, Jeffrey Liebman, a professor of public policy at Harvard’s Kennedy School of Government, articulated the current establishment understanding of the economic situation and the policies needed to deal with it. It is unabashed, one might say, simplistic, Keynesianism. Yet it represents a large and powerful consensus position. All the bad things that have happened to the economy are the spontaneous result of malfunctions in the market system – a system that has been insufficiently regulated and supported. The President proposed a reasonable and necessary jobs program and the Congress blocked it. Sensible people, Republicans and Democrats, know in their hearts this is true and need to get behind the president and support his spending-stimulus programs. (This is a very liberal interpretation – you can read the original for details).

The interesting thing for me is not so much the extent of the buy-in to this nonsense, as it is how they get there. I have always maintained that there is a sophisticated Keynesian story to be told, but it doesn’t get you Keynesian policy prescriptions unless you make some very unreasonable assumptions.

The essential element on which this turns is behavior in disequilibrium. There is no good theory of this. Yet all real behavior occurs in disequilibrium, in a situation in which different people have different expectations (including expectations about what things are worth), a situation in which their actions are bound to be inconsistent. Errors are inevitable. Do they on balance tend to get eliminated by feedback in the form of price (and other)  signals? What does “tend to get eliminated” even mean? What does this mean for the employment of resources?

To be more specifically Keynesian, imagine a situation in which, because of irrational exuberance, there is overinvestment in some sector that goes bad. The result is a precipitous fall in consumer spending as people reassess their wealth situations – revalue their assets and their net worth. There is contagion. The decline in spending precipitates quantity adjustments. Instead of prices falling rapidly to counteract the decline in spending (which would mean people made swift decisions to reduce prices), producers cut back on production and employment and so it goes. As John Hicks put it, this is a fix-price rather than a flex-price world.

I have no doubt that there are elements of truth in this. The world is neither completely fix-price nor flex-price, but is a bit of both, and sometimes more of one than the other depending on the circumstances. So what? So, what does this mean for economic stability? Does it mean that the market system is, therefore, habitually unstable, poised on a cliff’s edge in danger of being tipped over by the barest of bad speculative bubbles? Or is it rather a robust system, embedded in a set of multiple complex institutional networks that can deal with, and profit from, the inevitable errors that are made? Theoretical models can be created to support both stories, and, therefore, the matter is at bottom not a theoretical (logical) one. It is fundamentally empirical. I believe that we “know” from experience that the market system is robust and stable. But if people behaved differently, more erratically and if institutions did not provide the anchors that they do, the market system would be more unstable than it is. So what, again?

That the market economy is inherently prone to cyclical swings is, at best, a necessary condition for policy-intervention to stabilize it. It is not sufficient, not nearly. For sufficiency one needs to show that somehow macroeconomic policy-makers know enough to mitigate the cycles, rather than exacerbating them; and further that they can be trusted to do so. That is to say, pretty much all of the Keynesian policy prescriptions fail to come to grips with the familiar knowledge and incentive problems – with the central ideas of modern Austrian and Public Choice approaches. While the Post-Keynesians and Austrians may share the conviction that economic agents face unavoidable uncertainty, the latter see no reason to exempt policy-makers from that uncertainty. Why should policy-makers know any more about the future than the agents in the field? And why should we trust them to want to mitigate the cycle, rather than exacerbate it to their advantage?

 

Why We Need the Liberal Arts

|Peter Boettke|

 

What do you think?

Scholarship & A Free Society: A Report

|Peter Boettke|

My friend, and academic role model I aspire to emulate, Michael Munger has called me out in the social media for being "lame" for not following up with periodic posts about this Institute for Humane Studies seminar.  I have been trying to be pithy in my reporting on Facebook and Twitter, but Mike is right, I did say I would post here.  So I plead guilty and am now trying to rectify the matter.  But since I am tryng to also learn from Tyler Cowen, who has told me on multiple ocassions that there are great returns for pithiness than my usual long-winded rambles, I will try to put the posts in bullet form.

> listening at the moment to Antony Davies talk about unlearning errors through experiments in the classroom.  He is doing a great teaching experiment on minimum wage laws.  

> the lectures so far by David Schmidtz on Adam Smith and Freedom, Michael Moses on globalization and culture, Steve Davies on the modern history of classical liberalism, Jacob Levy on liberal pluralism, and Virgil Storr on defending the market have been very clear and informative.  I learn so much when I sit back and listen and take notes to follow up with new suggestions for reading, or re-reading older texts in the new light that came from the lecture.

> Bryan Caplan's lecture on education was provocative and I heard was still being discussed late into the night last night at the toga party (I wasn't invited, Mike would have been!)

> I have discussed students presentations on regime uncertainty, on institutional stickiness, and on the relationship between microfinance in developing countries and the spread of women's rights in the respective societies.  All the papers were presented in a clear and engaging style by the authors, and the projects all have potential to be published (1 already has been accepted).  I have a few more student papers to discuss before the end of the seminar.

> informal discussions with students have been fascinating as I have had the chance to learn from future lawyers, historians, political theorists, sociologists, but also classicists and an archeologist.  There are also at least two geographers here who are doing fascinating work.  How cool is that?

> there is a strong group of students here interested in Austrian economics as a progressive research program in political economy and I am always so excited when I learn of these young people getting interested in these ideas and the "movements" being established around the world to support these programs.

> I have learned repeatedly how lame I truly am when it comes to technology --- I did not know you can actually autograph an e-book, but now I know you can, and not just sign, but personalize.

Anyway, that is my report for the first half of the conference at Towson.  And Mike, the weather has been fine, the students are very smart, the beds are not as comfortable as they first appeared to be, and the IHS staff has been as gracious and committed as always.  My goal for the second half of the seminar, however, is to talk more to Kevin and see how he thinks it is going.

 

A Quick Contest For Undergraduates

Steven Horwitz

Attention undergraduates: Here is an opportunity for you to get published. Take a look at today's Doonesbury as it's chock full of bad economics. I would like to have a contest to see which undergraduate can produce the best response to that comic pointing out those fallacies without defending Romney. The winner (if one is good enough) will see his or her response appear as this week's Freeman column with me as co-author. You will also get $50. It should be between 500 and 750 words and accessible to a broad audience. Send your entries to me at shorwitz@stlawu.edu, subject: Doonesbury. *DEADLINE is 3:00pm EDT on Tuesday*. UNDERGRADUATES ONLY please.

Yes, I'm totally serious.

Hello Mother, Hello Father*: Summer Camp 2012

|Peter Boettke|

I have been continuously attending summer camps since 1973, when I attended my first weeklong basketball camp.  I first attended basketball camp, then worked basketball camp, then worked tennis camp, then attended economics camp, then worked economics camp.  Since 1990, I have worked at least 1 summer camp for economics every summer, and some summers I have worked 3 or 4.  This week is actually my second week-long camp this summer, and I will work a 3rd one at FEE in August.

I just checked into my dorm room for IHS's Scholarship and a Free Society at Towson University.  I will post some reactions through the week.

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*For the young guns, that is a title to a song about summer camp made famous in the 1960s.

Lin Ostrom on "The Future of the Commons: Beyond Market Failure and Government Regulation."

|Peter Boettke|

Earlier this spring, on March 29th, Lin Ostrom presented the 21st Hayek Memorial Lecture for the Institute of Economic Affairs.

IEA Hayek Memorial Lecture: Prof Elinor Ostrom speaks on market failure and government regulation from Institute of Economic Affairs on Vimeo.

 

Hard-Nosed Positive Analysis, Imaginative Normative Thinking About Institutional Innovation

|Peter Boettke|

James Buchanan on William Niskanen and the problem of discriminatory democracy.

Discussion on Austrian Economics at "Critical Thinking Applied"

Steven Horwitz

Over at the "Critical Thinking Applied" blog, one of whose contributors is my friend Jeff Ellis, I have a guest post this morning responding to an earlier post discussing my work and Austrian economics more generally.  As one would expect from a blog whose motto is "Towards a more reasoned and civil discourse," the discussion is reasoned and civil.  Feel free to pop on over and continue that civility.  Most of the discussion is on macro as the original post was inspired by the author having read my piece on Hayek and Keynes on capital.