Coordination Problem

The Ultimate Blog… from Space

As you may know, Anousheh Ansari, who is behind the XPrize Foundation (which aims at helping develop private space travel and exploration), is currently orbiting around the earth in the International Space Station (ISS). She has a blog in which she describes what life onboard a space station is like, including what she sees, eats, and the difficulty to brush teeth and wash hair (because water doesn’t flow).

The Low Hanging Fruit of Public Policy

Anyone who has heard me give a policy talk in the past three years will have heard reference to Richard Epstein's Free Markets Under Seige: Cartels, Politics and Social Welfare (published by IEA in 2003).  There can be little doubt that with the aging of Milton Friedman and James Buchanan, and the untimely passing of Robert Nozick, that the leading intellectual/scholar of classical liberialism is Richard Epstein.  In Epstein we have a high powered mind, who can write eloquently, and is exceedingly relevant in his work on a wide variety of levels and topics.  Students should take note of three things with Epstein: (a) he doesn't pull punches even on controversial issues, such as his work on discrimination law, (b) he thoroughly researches his topics and writes clearly and forcefully, and (c) he is continuously engaged with the intellectual world and amazingly productive.

In this particular book, Epstein emphasizes something which sometimes gets lost in the scholarly game.  Most public policy discussions are really about basic economics.  If we just got rid of the policies that cut against basic economics, then the lives of millions would be improved around the globe.  And when I say basic economics, I mean the most basic things --- like price controls on food products, or restrictions on trade, or regulations on entry.  We haven't begun to get into the refinements of monetary or fiscal policy.  Just the first few weeks of Econ 101 and yet we see policies throughout the world that prove to be detrimental to the lives of so many continue to be implemented by governments (both left and right, and democratic and non-democratic).  If only we could pick off the low hanging fruit of public policy, then much misery would be avoided.

Larry White over at Division of Labor gives an excellent discussion of just the sort of policies I am talking about in his discussion of price controls and bread in Zimbabwe.

A Visual Representation of the US Federal Budget

If you don't already know it, you must look at this site (click on “view the graph”), which provides a complete graphic representation of US Federal Funding. All the agencies are represented with their FY2007 appropriations. On the left-hand side is military funding and on the right-hand side is non-military funding. It is mind-boggling!

The total Federal budget this year is $983 billion (what is called the “Federal discretionary spending budget”) of which 64% is spent on the military. The graph contains a lot of information, including the yearly variation with FY06 as the baseline.

Check the budgets of the various agencies, it is very interesting. For instance, the Department of Agriculture receives $19.717 billion this year (a bit less than the entire budget of the New Zealand government) and food subsidies are increasing by 5% to $16.623 billion (and this is not part of the DOA's budget). The Federal government spends $2.178 billion on rural development, $563 million on labor statistics, $3.978 billion on “exploration systems” in space, and $722 million on the Andean Counterdrug Initiative. It also spends $3.846 billion on the US Postal service, $906 million insuring the well-functioning of competition and markets (the SEC), and $278 million on flood control on the Mississippi River. $1.545 billion are spent on the Food and Drug Administration, while the Supreme Court receives a budget of $76 million. The most important institution in the US is very cheap to run, which goes to show that a small state would be very inexpensive.

Varied Reiterations... Lachmann vs. Nozick redux

Commenting on developments in neuroeconomics, Greg Mankiw concludes that despite all the fuss economics is still fundamentally about large scale phenomena like inflation and unemployment that we  economists have not yet completely mastered.  But as far as microfoundations are concerned, Mankiw sides with David Laibson and suggests that we will have to start at the neuron and build up from there.

The discussion reminds me of the debate that took place on April 6, 1976 at the Austrian Colloquium at NYU (an account by Don Lavoie can be found in The Austrian Economics Newsletter, 1 (2) 1978 --- available at Mises.org).  Robert Nozick (personally the sharpest individual I have ever met) presented his paper criticizing Austrian methodology to the colloquium.  Nozick argued that if the critique of aggregation that Austrian methodological individualism insisted on was valid, then why stop at the level of the individual.  Instead, reduce human action to the cell and molecules that explain the action.  Nozick thought he had pushed the Austrian economists into a reducto ad absurdum with regard to the critique of aggregation.

Ludwig Lachmann (among the most insightful thinkers I have ever met) responded back to Nozick that his understanding of intellectual challenge of the science of human action was flawed.  It is not predictive power that is being sought, but understanding the meaning of purposive human action.  Reduction to the neuron, in other words, will at best explain how the mind forms purposes, but it will do little to help us understand the interaction of purposive human actors.  Austrian economists, Lachmann insisted, are methodological individualist because it is only at the level of the individual that we can attribute meaning to human action.

One of James Buchanan's pet phrases he used in class all the time was "It takes varied reiterations to force alien concepts upon reluctant minds."  If you think about it, most of the debates that take place in economics and political economy are nothing really new.  Perhaps new language and new techniques are introduced to address the issue, but more often than not the fundamental issue at stake is something that has been debated before by economists and philosophers.  Such is the case, I would contend, with the search for microfoundations in economics via neuroeconomics.  The relevant argument in economics is the one Lachmann provided to meet Nozick's critique. 

The Whig Theory of the history of ideas that suggests that the growth of knowledge is a linear progression toward greater truth, must be countered with a Contra-Whig Theory that sees how knowledge can be lost in the scientific quest and that we can head down intellectual dead-ends and have to back-track and rebuild the path forward.  This is especially true in the policy sciences where the inferiority complex with respect to the natural sciences makes those who practice them vulnerable to technique feitshism and where the quest for political power and influence can ofter undermine the quest for conceputal understanding and truth seeking.

The Changing Nature of Economics

The New Economist has a link to John Davis's recent paper on the changing nature of economic discourse. Thanks to Tyler Cowen for the pointer.

Davis argues that "recent economics" is decidely moving away from the neoclassical hegemony and that a new era of economic pluralism is upon us.  Davis's paper is worth reading for all Austrian economists.  In my experience, many who are inspired by the Austrian economists are confused about the current state of the debates among economists.  They fall into one of two categories. First, some want to insist on the apriori status of economic laws and view their main target as the German Historical School of the late 19th century or the American Institutionalist School of the early 20th.  Second, others want to battle with the General Competitive Equilibrium Theory of the 1960s and 1970s and stress the process versus end-state perspective.

Let me be clear, in my mind there is absolutely nothing wrong with these two intellectual positions except that they reflect a failure to understand where the argument in the discipline of economics currently resides.

In a paper I wrote with Chris and Pete, "Man as Machine: The Plight of 20th Century Economics" we detail the trajectory that economic argument has taken.  What Davis refers to as "recent economics" we refer to as "formalistic historicism."   The relevant point for Austrian economists is that they have not seriously engaged these new developments, yet that is the world that our current graduates are entering in terms of economic discourse.  If we are to train economist to take their place in this intellectual universe, then they better understand the terms of the debate and what is at stake.  However, important apriorism and market process analysis are (and I believe we cannot do sound economics without either) the critical issue is that to be relevant to the conversation today --- in both the academic world and the way academic arguments are filtering into public policy discussions --- they must be conversant in these different developments in theory and empirical economics.

So read Davis's paper and get your head around the new pluralism being ushered in by game theory, experimental economics, neuroeconomics, evolutionary economics, behavioral economics, and non-linear complexity economics.  Perhaps it is the new opportunity for intellectual growth and evidence of maturity of the discpline (as the New Economist spins it), or it is an example of how thinkers can be led into bedlum when technique substitutes for substantive propositions (as I might be inclined to conclude).  Either way, you ignore these developments at the risk of being completely irrelevant and uninformed about the state of the current conversations among economists.  And to my mind the last thing we want is Austrian economists that are completely irrelevant!

Does Anyone Think Gas Prices Are Going to Dive?

The Seattle Times reported yesterday that Philip Verleger, a noted energy consultant, said that gas prices are poised for a dramatic plunge.

Here is the reasoning. Gas prices have soared in the last two years because of the expectation that demand would increase (with especially China and India) while at the same time supply would reduce (because of the conflicts in the Middle-East and other problems). While these expectations were driving the future prices of oil to the stratosphere, some started increasing their inventories and they are now approaching 1990 levels (which is much higher than what we had a year ago). As a result, the supply curve of oil is now moving again to the right. Moreover, some of the tensions that led to lower supply expectations are easing (e.g., there was no big hurricane over the summer). The consequence of all this is that gas prices may ease dramatically in the next few months and perhaps even dive down to $15 a barrel ($1.15 per gallon in the US!). If the coming winter in the Northern hemisphere is mild, this is almost a sure thing says the article...

What’s interesting in this story is the economic reasoning that specialists of the oil market use to foresee its future. Verleger could be right, let’s see what happens in six months.

Empires with Expiration Dates

Deepak Lal, one of the most insightful classical liberal writers over the past quarter century as evidenced by such books as Unintended Consequences and Reviving the Invisible Hand, also published In Praise of Empires. 

Perhaps the most important thinker defending the role of empires in creating the modern world is Niall Ferguson.  Ferguson argues in the most recent issue of Foreign Policy that while empires might drive history, over the past century they have only had a fleeting existence.

Mind Games --- Neuroeconomics Again

John Cassidy discusses neuroeconomics in The New Yorker. 

An(other) Unintended Consequence of the War on Terror

The Christian Science Monitor (see here) has an interesting article explaining why British cellists (and other British musicians) cannot fly anymore. As you may have guessed, the reason is that they can’t carry their instruments onboard aircrafts as a safety measure. This makes their lives very complicated and difficult. One would think that cellos and violins are potentially less dangerous than a computer, but this doesn’t seem to be the view point of safety authorities.

The Truth about In-Flight Announcements

The Economist this week has a very interesting and entertaining article on what a truthful in-flight safety announcement would sound like (see here). We all have heard hundreds of times the safety announcement at the beginning of a flight. I often pay no attention to it, although I sometimes wonder if I have missed something new and crucial. But really, it is always about the same thing. What is annoying is not so much that it is repeated in every flight (they have to do so in order to inform passengers including those that have never flown before), but that a lot of it is rather misleading.

My favorite one is the life-jacket under the seat. As anyone who has done some sailing knows—especially blue-water sailing in the Pacific or the Atlantic Ocean—the chances for anyone to survive more than a few minutes in these waters without a special wet-suit (such as the one they wear during the Volvo Ocean Race but even then that’s not enough—check out what they wear here) is ZERO. So when you look at the life-jacket they give you, it would be completely useless in case of a water landing. Moreover, as The Economist points out, in the history of aviation, “the number of wide-bodied aircraft that have made successful landings on water is zero.” While this does not mean that none could occur in the future, the chances of a successful water landing are probably super small, which adds to the minuscule chances of surviving in the water with your super tiny life-jacket (even if the detachable inflatable slides operate).

Another myth that The Economist debunks is that of cell phones. They have no effect on the aircraft’s navigation systems. This is what I heard from some pilot too. As The Economist puts it: “if [cell phones] were really dangerous we would not allow them on board at all, if you think about it.”

The really important part of safety on board aircrafts is the seat-belt. Turbulence can cause physical harm and it is important to keep the seat belt fastened at all times. The announcement aboard Veritas Airways in The Economist says: “This is to protect you from the risk of clear-air turbulence, a rare but extremely nasty form of disturbance that can cause severe injury.” I have never experienced such a bad form of turbulence, but during my recent trip back from Auckland-NZ, the plane was hit by a lightning. While it didn’t jolt the plane, I know of cases where lightning has created severe jolting of the aircraft. And in those cases, you want to have your seat-belt on…