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It's hard to know where this gets us, though. Yes, unintended consequences could always be lurking around. Think about fiscal policy. I worry about the unintended consequences of sluggish growth in the public sector relative to the rest of the economy. You have a theory about all that but I'm concerned about some consequences of that that you don't intend.

So we increase spending.

Now you've got a set of unintended consequences to complain to me about.

It doesn't really get you to any conclusion. We all think the other is missing an unintended consequence.

White should read Yeager.

Maybe he would lean something about monetary economics.

This paper "money and credit confused" through and through. Low interest rates are ultra loose money?

And that natural interest rate coordinates saving and investment. It isn't the growth rate of potential output.

Personally I think it's refreshing to see someone at the Fed question their own actions. Especially this line: "the possibility that inflationary expectations are not based primarily on central banker’s statements of good intent."

Many people argue that further Fed action should be attempted because it cannot do much harm. But where is the proof it can do much good?

IMO, monetary policy is asymmetric with far greater ability to dampen inflation and growth than incite it (http://bubblesandbusts.blogspot.com/2012/08/federal-reserve-admits-inability-to.html). The Fed should strongly consider the validity of its chosen models before venturing further into uncharted waters.

The Free Exchange blog has comments appropriate for Daniel and Bill:

"As Thomas Kuhn argued in The Structure of Scientific Revolutions, new ideas are rarely accepted by an establishment that did not create them. Thus the mainstream has decided to either ignore or ridicule those who dared to be right.

"Most recently, we have William White, a brilliant Canadian economist who used to do research at the Bank of England and the BIS before taking over the Economic Development and Review Committee at the OECD. He is not, in other words, a nut who hides in the woods with gold bricks and canned food. Moreover, he (along with his colleague Claudio Borio), presented one of the earliest and most thoughtful warnings of the financial crisis back in 2003."


Government spending that directs money in such a way that it creates capital misallocations that will have to be remedied by another downturn are an "unintended consequence" we should beware of with all government spending -- including spending intended to get us , out of the last mess government spending, artificially low interest rates, and other kinds of economic distortions the government engages in in its unwise attempt to guide the economy, whether that guidance be in good times or in bad.

@Bill Woolsey,

I have no problem with your disagreeing with White. But please don't pretend you are startled by an Austro/Wicksellian analysis. On an Austrian blog. In a fiat money system, bank money is created as credit. This has been understood at least since Henry Thornton's Paper Credit.

McKinney -
Except that what is now the mainstream and the Austrian alternative duked it out Kuhn-style at the same time!

That oughta count for something.

As far as I know nobody said White was a nut. He's getting responses because we know his background. People just disagree with him, that's all.

Daniel, so discuss the points you disagree with. Do you think some of the unintended consequences are bogus? To avoid unintended consequences would mean less monetary stimulus. What unintended consequences do you see in that?

We discuss the points of disagreement all the time. The primary consequence that is unintended from the Austrian perspective. Is putting us back in a recession, and it's unintended because they have a fundamentally different theory - they're looking under their own particular lamp-post.

What I find interesting is that people who point this sort of thing out don't seem to acknowledge that from the other guy's perspective they've got their own lamp-post that they're constrained by.

How would doing nothing put us back in a recession?

Claiming that people are only looking under their own lamp post is the same as saying neither is true.

If truth (that which conforms to reality) isn't possible, why bother? If something is true, then calling it an ideology or "looking under the lamp post" is just bitter grapes.

If the ABCT is an accurate depiction of business cycles, then contradictory theories aren't. White's analysis supports the ABCT.

Many Austrians have written that monetary pumping may have short term benefits, but with longer term adverse consequences that outweigh those benefits. Mainstream econ refuses to acknowledge any intermediate term damage caused by EZ money.

Mainstream econ has two time periods it cares about, the very short run in which government spending and EZ money work wonders, and the very long run in which the only damage EZ money causes is price inflation.

What's wrong with forcing them to look at the damage done in the medium run?

McKinney: well said. i wish i saw your post earlier.

as far as i understand it, the law of unintended consequences suggests that human interventions to fix so called market failure or to engineer specific market outcomes results in a net loss to social welfare.

yes, there may be a temporary initial gain resulting from a given policy intervention, but the second and third round effects of the intervention will prove worse than the initial "problem."

take the Federal Reserve for example. it was established ostensibly to eliminate the recurring panics of the 1800's, which were viewed as harmful to American households. what happened after the establishment of the Fed in 1913? We got a boom/bust cycle of historically unprecedented scope. The roaring 20s and the Great Depression.

Great we got rid of panics, but we artificially created an historically unprecedented boom and bust cycle never before seen on earth.

Austrians look to the cause of the boom as the answer to what went wrong to cause the bust. the cause of the boom clearly was the Fed's ultra loose monetary policy in the 1920s.

Mainstream economics has it that the Fed's mistake wasn't creating the roaring 20s and the stock market bubble that crashed in 1929, but rather the failure to ex post reflate the economy.

you claim that Austrians want to put the economy back in "recession." No, Austrians want to prevent the artificial Boom -bust cycle leading to Depression in the first place. once the boom is set in motion, this leads to a necessary and painful cycle beginning with high growth and asset bubbles, but resulting in bust. this bust is not a "market failure"; it is a failure of well intended human policy intervention.

if we intervene to fix the recession via central bank money printing, we don't magically end up avoiding the economic pain associated with the post bubble bust.

you may think that Bernanke has proven that central banks can prevent a depression with active monetary policy based on the record of the past 3 or 4 years. But, we still don't know the unintended consequences of the Fed's intervention. how will they unwind their balance sheet? many unanswered questions. this historic period is far from over. the law of unintended consequences says that the net effect of Fed intervention will prove self defeating over time -- and end up resulting in a net loss to society. this may come in the form of a lost decade, like Japan has experienced. it may end up in other new bubbles that bust, maybe a new housing bubble or a student loan bubble or a Federal debt crisis ... we don't know how exactly the unintended consequences will play out. but we do know they will play out because we also know there are no free lunches in the world that policy makers can hocus pocus into the economy -- with also triggering the law of unintended consequences.

should we do nothing always? no we should work hard to maximize human liberty and freedom such that individuals are capable of adjusting and adapting to the curve balls that life throws us.

intervening via the Fed to smooth out the bust caused originally by the Fed via an easy money fueled boom is a sure way to the road to serfdom.

Mainstream economics justifies your view of unintended consequences, i.e. we see a problem and we must fix it, otherwise we will be guilty of the unintended consequence of NOT intervening.

This is erroneous logic. we aren't just arguing about your unintended consequences versus mine. We are talking about and arguing that policy interventions aimed at engineering certain macro outcomes (or fixing so called market failures) necessarily lead to a cascade of unintended consequences that result in a net loss to overall social welfare. Hayek described this process of interventions leading to distortions, thus begging more interventions as "the road to serfdom."

if we follow your logic to its bitter end, we end up on Hayek's road to serfdom.

Based on your definition of unintended consequences, any time we see a "problem," (e.g. high unemployment, recession, market failure, negative externalities, pollution, etc) we must aim to fix it, lest we are guilty of letting the unintended consequences of that problem play its way out in the economy and society at large.

this way of thinking doesn't fly.

a free market necessarily entails features that we don't like: pollution, income inequality, business cycles, etc.

These features are not bad per se, any more than a hurricane or an earthquake is a bad or evil feature of the earth's climate or plate tectonic system.

natural disasters are a necessary feature of the natural world we live in, just as income inequality is a necessary feature of the "economy" which itself is a natural sub system of the larger earth system.

if we tried to eliminate earthquakes, we would be guilty of triggering the law of unintended consequences. you would say, well there are unintended consequences in NOT fixing earthquakes. people will die. yes, but earthquakes are a natural feature of plate tectonics without which we wouldn't have intelligent life on earth.

the same law of unintended consequences makes climate engineering doomed to failure. you would argue we have to intervene to save the planet. i say, no we have to unwind the previous interventions that got us where we are such that there is a problem.

the worst thing we can do is add more well intended interventions on top of previous well intended interventions. i suggest that the introduction of central banking facilitated credit growth in excess of what would have naturally occurred without the central bank. excess credit growth has led to excess economic growth ... and therefore to excess pollution and CO2 compared to what we would have had without the central bank printing press. Why should we intervene to fix a problem originally caused by a human designed institution that led to massive distortions -- including (maybe) too much CO2?

global warming is not a market failure, it is a human failure. the market doesn't "do" anything. We blame the market because we don't want to blame ourselves.

it is not accurate to claim that "doing nothing" leads to unintended consequences in the sense that classical liberals and austrians use the term.

we understand based on the law of unintended consequences that to do some policy intervention to fix a so called market failure begs second and third round effects that necessarily lead to a net loss to social welfare despite the well intended policy intervention -- that may or may not even solve the problem.

this is because we understand that the economy is not some artificial mechanism designed by humans but rather it is a natural complex system that spontaneously organizes -- and thus behaves according to non-linear logic.

Boonton,Wasn't the assumption in qsoetiun that experience (for crews) mattered, an assumption not born out by the data. The analyst in qsoetiun then goes on to qsoetiun whether the 7 (?) gunners in the crew of 10 were at all necessary and that it might have been better not to have risked their lives because better more experienced gunners made difference statistically toward survival rates. But you are quite right, that doesn't necessarily warrant the conclusion that faster/lighter for all bombers would be the optimal strategy. Perhaps those gunners made a difference to the attack strategies used by the opposing fighters. Perhaps a mix of light/no-guns and heavier/with-guns planes might have better served. The Japanese Zero vs the American Pacific fighter planes had different strategies toward their plane construction. The Zero was light, very maneuverable, very cheap and had a deadly gun/canon. The American planes were heavier, better built and didn't always have such firepower (but against the Zero did it need it?). I wonder if analysis of different mixes of planes in our (their) arsenals could have lead to a more effective use of men/material there as well.

Like a roller-coaster ride, this novel takes you on a fast trip acosrs several continents so you better buckle up! Firmly based in reality with just the right hint of the future, Unintended Consequences makes you wonder how much of this is happening now and the government just doesn't want you to know about it. Peter Savage is no superman. He's just a regular guy like you and me who gets thrown into a whirlpool of covert ops and international greed and he is forced to survive or die trying. The plot twists and turns keeping you guessing how it will all end. A great read!!!

I had to drag my room mate in here whose been playing the game for a few days srhaigtt.And for the record, lighting trees on fire, where they are, will result in infinite fire.No idea if/how it is possible to make that elsewhere.

For example, you might say that Clive Cussler's Deep Six is a 890L while his Serpant is 870L. Or that Tom Clancy's Clear and Present Danger is a 1270L and Peter Benchley's White Shark is a 2500L. The hieghr the number, the more difficult the book might be to read.

Excellent blog.Yes, central bakerns and their staffs draw salaries they don't make money developing real estate.The United States Founding Fathers were largely farmers. They borrowed heavily to bring crop to market. Huge risks. Guess what? The right to declare bankruptcy is written into the US Constitution!So, is it too much to image that central bakerns don't like inflation that will reduce their pay? Indeed, a steady deflation would help, as central bakerns and their staffs are unlikely to have nominal wage cuts. In Japan, central banker staffers have had a 15 percent wage increase by deflation in the last 20 years, boosting whatever pay raises they to by going up the ladder. Now that seaside home for retirement may be becoming possible .If central bakerns were forced to develop real estate for income, I suggest monetary policy would be steadily expansionary. Perhaps we should force central bakerns to accept pay in the form of REITs, that they have to hold for 20 years.

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