Coordination Problem

Best Wishes for 2007

Happy New Year to everyone who stops by The Austrian Economists and Best Wishes for a Joyful and Productive 2007.

For the aspiring economists among you, I hope your studies go well and that you work hard at the craft of becoming an articulate economist both in terms of speaking and writing.  Here is a good link from the philosopher Michael Huemer on writing that might prove to be a helpful guide.  My favoite line of Huemer's is: "The purpose of (non-fiction) writing is to communicate.  It is not to make art or to impress the reader with your sophistication."

On the same topic Deirdre McCloskey gave the following great advice in her work Economical Writing on taking criticisms ---- by definition if a reader says your argument is unclear, it is unclear.  Work hard (write, and rewrite, and then rewrite again) to make your point clear to your readers.

The bottom-line, if as an economist you can learn to speak eloquently and write clearly so you can communicate effectively to your audience, and you combine that with a strong work ethic, then 2007 and beyond will indeed by productive and joyful, and the future of Austrian economics will be very bright.

Two Recommended Websites for Holiday Reading

If you don’t know them already, check out these two sites while you have time during the holiday: Curtis Melvin and his North Korean Economy Watch and Rudolph J. Rummel’s Power Kills, a website dedicated to those who don’t live in freedom.

Melvin works for the Mercatus Center and has traveled to many countries that score very low on the index of economic freedom (North Korea, Myanmar, and Turkmenistan among others). He is about to travel to Iran soon.

Rummel is the author of Death by Government (1994), Power Kills (1997), and Statistics of Democide (1997). He has done a lot of work on the nefarious effects of government throughout the world. For instance, he estimates that the death toll due to direct government action against its citizens in the 20th century is around 170,000,000. His website documents the consequences of the lack of individual freedom in the world, providing a very complete analysis of world-wide democides.

Fyi, see also Bryan Caplan’s famous Museum of Communism, although I believe Bryan has not updated the site for a while.

Capitalism and the Media, French Style

The French left-leaning newspaper Libération (also known as Libé) has been in financial trouble for a long time. Since its founding in 1973, the newspaper has gone through many financial difficulties (the first serious one being in 1981, the year François Mitterrand was elected President of the French Republic). Libération has always been more known than read, which is strange coming from a country where one would expect a steady readership for a left-wing newspaper. This reflects the cultural attitude of the French towards the printed media (newspapers are more widely read in the UK than in France, for instance), but also, perhaps, the (poor) quality of Libération. In any case, the newspaper is currently going through another financial crisis and has to conform to the laws of economics: in a market system, if an organization does not transform inputs into valued outputs, it cannot survive.

Well, don’t forget this is France. Libération has a debt of €10m with various banks, and has other short and long-term liabilities: €6.8m in payables to suppliers and €12m to the state (one may wonder why the state has such a huge financial stake in a private media company). Now, get this: a consortium of banks, which remains unknown, has decided to extinguish €7m of the debt Libération owes to banks, leaving €3m to pay over the next five years. One may suspect the hand of the French government behind the deal. It would not be the first time that a newspaper (left or right) gets an easy way out (of financial troubles) in France thanks to the government. This creates bad incentives for management.

One more time, Libération will not be sanctioned by the market for not producing what its readers desire to buy. Instead, it will continue to be subsidized by French taxpayers in various ways. The trouble is not only that the French subsidize their newspapers as part of the idea of “cultural diversity” (although this is a profoundly screwed up idea); it is that state interference in the media weakens the spread of freedom and can be linked to bad economic performance (as Chris Coyne shows in his Mercatus Policy Comment on the role of media—see here).

Mario Rizzo embraces Modernity?

The Austrian School of Economics benefited from a great influx of talent in the 1970s.  Walter Block, Gerald O'Driscoll, Joe Salerno, Jack High, Don Lavoie, Rich Fink, Larry White, Roger Garrison, Bruce Caldwell, etc. all studied for their PhD's and entered into the community of economic researchers with their articles and books.  Each of these individuals made significant contributions to the literature and with their teaching at the undergraduate and graduate level.  They represent a special group of scholars and many of them benefited greatly from the programs run by the Institute for Humane Studies and also Israel Kirzner's Austrian Economics Program at NYU.

Personally, these guys were who I looked up to and learned from when I decided I wanted to be an academic economist.  Hans Sennholz introduced me to Austrian Economics and to FEE (and the great Bettina Bien Graves who mentored me).  But it was Walter Grinder at the Institute for Humane Studies who introduced me to all younger members of the Austrian School and showed me that I could have a career as a college teacher and researcher in Austrian economics.  In the summer of 1984, I was invited to attend the Austrian Economics Summer Seminar at Marquette University.  Gerald O'Driscoll, Roger Garrison, Mario Rizzo and Israel Kirzner gave lectures.  At my first Institute for Humane Studies Liberty and Societ seminar the following summer Don Lavoie and Larry White spoke along with libertarian greats such as Ralph Raico.  At FEE I met Roy Childs for the first time and absolutely loved to talk to him about economics, politics and philosophy.  Anyway, I was so impressed with all these guys and wanted to be like them.

Of course, meeting Israel Kirzner, Murray Rothbard, Ludwig Lachmann, W. H. Hutt, James Buchanan and Kenneth Boulding were amazing experiences for a gradaute student.  But it was in meeting that next generation of Austrians that I found out that the ideas were alive.  Among those early exposures to the next generation of Austrians, Mario Rizzo stood out in my mind as an intellectual powerhouse.  Even though Mario sort of snubbed me for asking a stupid question at the Marquette seminar, I was blown away by him.  As a graduate student I read paper after paper of his in law and economics and also methodology.  His paper "Law Amid Flux" is one of my favorite papers of all time, he read a paper at the Center for the Study of Public Choice on the political economy of nuclear energy that I remember as if it was yesterday, and I remember the excitement that Dave Prychitko and I had in reading the pre-publication version of The Economics of Time & Ignorance that Don Lavoie somehow smuggled in for us.  Dave and I, in fact, have the first 2 US copies of the book and we got it signed by Mario and Gerry as soon as it got delivered to the old CATO building after being held up in customs the day of their book talk on the US release of The Economics of Time and Ignorance.  Dave beat me out, so he has #1 and I have #2 --- and I still think the first 90 pages of that book is an amazing discussion of the role of time in human activity and of great importance to further development of market process analysis.

Mario, however, was slow to join the technological revolution.  Roger Garrison is a master of the power point, Larry White is an expert not only on surf music, but also everything electronic from e-money to blogging, but Mario --- like Israel --- stayed away from computers.  When I joined the faculty at NYU in 1990, Israel had Larry White's old computer in his office and it still had never been turned on in 1998 when I left.  Mario had resisted the computer for years, but by 1998 he was at least emailing on the computer (with a hunt and peck version of typing that was charming).  He did not, however, use the computer as others do to ease his research burden, etc.

However, Mario is now joining the modern world with a new website that will make his research more widely available.  I am thrilled to say the least.  Though I have a request of Mario --- please put up your essays on "Praxeology and Econometrics" and "Law Amid Flux" so that a new generation can read them. 

For readers who have never read Rizzo and Cowan's paper on the causal genetic moment in economics, the paper is one of the most serious and philosophically subtle discussions of praxeology ever written so read it today and learn from it.  Reading Rizzo can produce a "mind-quake" in a way that very few within the Austrian and libertarian world can generate.

Friedman v Galbraith

2006 is coming to an end in a few days, and often at this time of year it is appropriate to remember those who passed away during that year.  The field of economics loss two of its most amazing intellectuals of the 20th century.  John Kenneth Galbraith passed away at the age of 97 in April, and Milton Friedman passed away at the age of 94 in November.  Both were able to write to a wide audience and also speak with authority on TV, radio and the public lecture hall.

However, we should never lose sight of the fact that Friedman was a scientific economist in a way that Galbraith never was, and that Galbraith was a political ideologue in a way that Friedman never was.  This important but subtle point is often missed.  If you look at the contrasting coverage in the NYT on their deaths, you can see that Galbraith is praised for holding up a mirror to society, while Friedman is described as a theorist.  This seems to imply that Galbraith captured reality, while Friedman captured the blackboard.  But nothing could be further from the truth.  Galbraith didn't hold a mirror up to society, but presented a distorted picture of reality that fit with warmed over theories from Marx, Veblen and Keynes.  Friedman, on the other hand, certainly was a theorist, but his lasting contribution was in the application of theory to make sense of the economic world around us and draw out the policy implications.  Works such as Capitalism and Freedom and Free to Choose are among the most insightful general reader books in economics one can find.  Are they perfect?  Of course not, no human work ever is. But they use the economic way of thinking in a rigorous way to inform the general reader about the way markets work and government fails to work.

We can perhaps excuse the NYT writers for making this mistake of confusing the contributions to Friedman and Galbraith.  But when an economist as accomplished as Joseph Stiglitz commits such a fundamental error, it is time we recognize just how deep the intellectual prejudices are against laissez-faire in our society.  Stiglitz has to engage in an act of amazing intellectual gymnastic to insist that Galbraith understood capitalism as lived not as theorized, and betrays his own intellectual blinders in the process.  This is a man deeply suspicious of free exchange, and greatly hopeful for the power of government to correct perceived social-ills. 

Stiglitz suffers from both what Fritz Machlup refers to as "misplaced concreteness" and what Tom DiLorenzo once refered to as the "oh, s**t theory of economic policy."  Machlup chided economist for confusing the model with reality, instead models are heuristics to help us think about reality.  They are necessary tools to thought and thus what we need to worry about is not abstraction per se, but adequate abstraction.  Thinking without theory is not possible. The choice is never between theory and no-theory, but between articulated and defended theory, and non-articulate and non-defended theory.  But we should never confuse theory with reality.  Stiglitz commits this fallacy all the time in his work on "market failure" (see for example his book Whither Socialism?).

This brings me to the very insightful observation of Thomas DiLorenzo.  Tom was my teacher and he was one of the most entertaining teachers I had (and I had some great teachers of economics in my education ---- Hans Sennholz, Kenneth Boulding, James Buchanan, Gordon Tullock, Bob Tollison, and Don Lavoie to name a few --- though I should say that Kevin Greir might technically be the best teacher I ever had in any subject).  Tom always peppered his lectures with economic history and economic policy discussions.  In a memorable lecture (at least memorable to me), he said that the problem with a lot of economists is that they have an "oh, s**t theory of economic policy."  They look on their blackboard, they look at the world, and they say "oh, s**t" and then they devise policy so as to make the world conform to the blackboard.  DiLorenzo said, why don't they ever think about changing the blackboard to conform to the world?  This was extremely insightful because the "s**t" in the world that was causing problems were things like firms, advertising, strategic pricing practices, etc.

The great "oh, s**t" theorist of the last 40 years is Joe Stiglitz, and this op-ed on Galbraith simply reinforces the point.

EconTalk Rated #2

Russ Roberts's EconTalk podcasts was recently voted #2 for Best Podcasts for 2006.  I very highly recommend the podcast that Russ did with Milton Friedman.

Russ led a discussion with me on the Economics of Crisis, focusing on Katrina, that is the last podcast at EconTalk for 2006.  I found the experience to be wonderful and I believe Russ does an outstanding job as the host of these podcasts.

Thanks Russ for the opportunity.

The US Supreme Court as a Referee

According to Lexington in The Economist this week, chief justice John Roberts has been pushing the US Supreme Court to embrace modesty (instead of judicial activism), legal minimalism (deciding issues on narrow  grounds), predictability (rule-following decision making), and consensus (in the court’s decisions). In itself this sounds like a dream change for anyone versed into public choice economics and constitutional political economy. Nobody really knows how to control the growth of the state and to make government focus on what it can do best. The recent evolution of the court may offer some solution.

One reason why it is so difficult to control government activity is because the (still) dominant model of government in most parts of the world is that of a player. If we use the analogy of sports, the government is still seen as a potential quarterback or forward. And in this view, the role of the economist is to be a savior in the service of the state. Pete Boettke and Chris Coyne have explained these roles in a matrix (see paper here) where the state has the choice of being either a player or a referee, and the economist can choose to be a student or a savior. The stable positions are the N-W and S-E quadrants. The dominant 20th century view has been that of the state as a player and the economist as a savior (S-E quadrant).

In this context, remember that chief justice Roberts used, in his confirmation hearings, the metaphor of a baseball umpire: “Nobody ever went to a ballgame to see the umpire… It’s my job to call balls and strikes and not to pitch or bat.” Clearly John Roberts sees the role of the US Supreme Court (and that of its members) as a referee, not a player.

If so, then the highest institution in the US is slowly moving in the direction of only interpretating the law (rather than the more active role it took in the progressive era). It is a very important sign, a slow move towards a position emphasizing the “original intentions” of the US Constitution. This move is important not because judicial conservatism is good for its own sake, but because it is one of the best ways to force the state back into its role as a referee—thereby limiting (and reversing) its growth. With more economists today who see their role as humble students of society and more lawyers who understand the limit of judicial activism, the US may slowly be moving from the S-E quadrant towards the N-W one. If chief justice Roberts (following the lead of chief justice Rehnquist) continues to make his court act more like a referee than a player, the current US Supreme Court may turn out to be the greatest thing that the world has seen in decades.

Teaching Fundamentals and Doing Good in the World

Looking through the Sunday papers I was struck by 3 items: an investigative report on the basketball system in Russia and Lithuania; an op-ed by Serge Schmemann on Putin's Russia; and a magazine article by Peter Singer on what we owe the least advantaged in the world.

I have really only had 3 jobs in my life that had meaning to me: (a) coaching basketball, (b) teaching tennis, and (c) being an academic economist.  In fact, my understanding of the Christian notion of "calling" emerged in my experience with these three professions at different stages of my life.  And at different phases of my life I have tried to balance at least two of these at a time, but obviously never all three.  For example, currently I am a college professor of economics but also a high school and AAU basketball coach.   Anyway, for the past 10 years I have put in a lot of time studying basketball technique and strategy (building on a knowledge base gleaned in high school and college and working as a counselor at summer camps in my youth).  So reading the Washington Post article on the development of youth basketball talent in Russia and Lithuania was fascinating to me.  I often watch Europe League basketball precisely because I appreciate the sound fundamentals and the "spacing" that they create offensively in their systems.  One of the interesting points made in the article was that in their youth development, competitive play begins only at 12, while training starts at 8.  In other words, the players are taught right fundamentals between 8 and 12 before they start serious competition.  Winning basketball is about Tenacious Team Defense, Unselfish Team Offense and Superior Fundamentals, and the Europeans have taken this message from Dean Smith to heart.

The stress on fundamentals is as true for economics as it is for sports.  Percentage tennis, for example, can be broken down into a few fundamentals: first serve, return of serve, first volley, passing shot.  The aggressive player on these shots will win the point more often than not.   In basketball, it is all about defense, rebounding, and offensive efficiency.  Well in economics, it is about basic economics and the consistent and persistent pursuit of the economic way of thinking to a wide variety of topics in the world.  Good economics does not worry about political "feasibility" but tracking truth.  The focus should not be on intending to do good, but actually accomplishing good in the world.

Serge Schmemann's piece on Putin is extremely insightful on how appearances can be deceiving.  The politicalization of economic life still remains the norm in Putin's Russia.  Relationships between individuals remain that of hierarchy and dominion rather than one of mutuality and voluntary exchange.

Peter Singer's essay on what the rich should donate to address problems of poverty, disease and death in the development world is well worth reading.  Though the calculation of how much our income we should give up to pursue global justice does appear as arbitrary as anything I have ever seen.  And for a utilitarian Singer does not address the consequences of policy to the extent one would hope.  Back to fundamentals — in the economic way of thinking we can distiguish between endowments and choices, and we admit that we can do things to change endowments, but not in a manner that does not impact on the choices of individuals.  Every moral philosopher I have met who works on questions of global redistribution seems to recognize this point when you push it, but they often don't seem to "get it" in terms of the weight this has in assessing alternative possibilities in addressing poverty, disease and death.

Anyway, the "European" way of teaching fundamentals is analogous to what I try to do with my graduate students at GMU.  We have a graduate student paper workshop (Frederic Sautet is actually in charge of that now), we get them involved in the classroom, and at conferences, and we encouage the students to try to publish early on in their careers.  But we start in environments that are competitive but sympathetic and then, as they develop their fundamentals, move on to highly competitive and unsympathetic environments (conferences and targetted journals).  This system has produced very productive scholars, such as Ed Stringham, Ben Powell, Pete Leeson, and Chris Coyne.  We are constantly trying to perfect that training ground at GMU, but our goal is to produce scholars of economics who have mastered the fundamentals of basic economics, and become skilled communicators of economic argument and evidence.

Is a Little Economics Dangerous?

In a recent article, "What We Learn When We Learn Economics" Christopher Hayes discusses his experience of attending a basic economics course at the University of Chicago taught by Allen Sanderson.

Hayes is respectful of the logic and evidence presented, but in the end argues that economics cannot answer all questions.

This conclusion is actually not as surprising as the author seems to imply -- even to the most ardent defender of the economy way of thinking.  There may in fact be nothing more dangerous than an economist who only knows economics, except perhaps a moral philosopher who knows no economics whatsoever.

Is Language a Determinant of Reform Success?

Last week Graham Scott gave a lecture on public sector management and governance at the Mercatus Center. Dr Scott was the Secretary of the New Zealand Treasury between 1986 and 1993, which was a very important position at the time of the NZ reform process. Dr Scott had an enormous influence on the evolution of NZ economic policy and he was  one of the key people behind the public sector reforms.

The State Sector Act in 1988 created the State Services Commission. In 1989, parliament adopted the Public Finance Act, and, before the 1993 election, Finance Minister Ruth Richardson, introduced the Fiscal Responsibility Act. The first act removed the power to manage public administration from the hands of government and created an accountability mechanism that imposed a higher level of discipline on government departments and their CEOs. The second act focused on how government departments spend money. The third act provided rules for the conduct of fiscal policy, establishing principles of fiscal management and reporting requirements.

During his lecture Graham Scott remarked that the word “accountability” has no translation in many languages. For instance, it has no direct translation in French and Spanish. I presume it is the same with other Latin-based languages, such as Italian or Portuguese. While the word “responsibility” is Latin in its origin (and thus has equivalents in French and Spanish and other languages), it encompasses more than just accountability and, for that reason, is much less precise. In Scott’s view, the concept of accountability is at the core of the public management reforms in New Zealand. But its absence in many other languages may limit (and perhaps has already limited) the adoption of similar reforms elsewhere. Or it may lower the quality of their results. This would show the power of language in shaping institutions. An interesting conjecture...