Coordination Problem

SLU Economics Department Homepage

Well, since in less than two months, I go back to being a regular econ faculty member again, for the first time since the spring of 2001, I figured I'd promote my department a bit, especially since we have a very nice looking revised website that went live within the last hour. 

One thing you'll see in our mission statement, and as you look at the pages of individual faculty, is that we try hard to ensure that we have a culture of scholarship in the department.  At a liberal arts college like St. Lawrence, where we're all teaching a 3-3 load, that can be hard to do, but we have made a collective commitment to it because we don't think we can provide the quality of teaching we aspire to unless we are all deeply engaged in the production of knowledge through the scholarly process.  We cannot produce the scholarship that a major research institution would, but I think we do pretty damn well for a liberal arts college with the kind of teaching load and expectation of high quality teaching that we have.  Judge for yourself.

This year will mark my 20th at SLU.  I have been very lucky to have had departmental colleagues (including and especially the late David Richardson who was the chair who hired me) who have tolerated, if not encouraged, my eccentricities and who have supported my work if by no other means than continuing to insist on that "culture of active and relevant scholarship."  I often remind myself that even though Canton, NY is in the middle of nowhere, I could have done a lot worse professionally and personally.  I have been treated very well both by my department and university-wide these past 19 years and I would not trade it for anything else.

So if you have kids looking for a really good liberal arts college with a very good economics department, check us out. 

Quiz: Why Does This Commercial Confirm Economics and Public Choice?

Liberty Mutual has a series of commercials on responsibility --- this one is called election. Given the discussion we had on the blog about the universal application of "rationality" a few weeks ago, lets discuss how this commercial and even the intention of the script writers prove the economist's point --- especially as understood by Mises, Hayek, Buchanan and Vernon Smith.

Do Austrian Economists Ride on Trains?

There has been a rumor (though flatly denied) that one of our graduate students at GMU once spent significant time riding on trains as a hobo. The debate will no doubt continue since the source of the rumor is from the most tenacious debater I have ever met! However, we now have confirmation that the smartest Austrian economists of his generation (IMHO) spends his time fiddling on trains.

BTW, when I was a graduate student I was entrusted with the job several times of picking up Ludwig Lachmann from Union Station and we would get the chance to talk economics and whatnot, and he would use my office during his stay at GMU.  On the first time I picked him up, I asked him why he didn't just take a flight down from NY to DC, and he looked at me and said "The train is the only rational way to travel."   I too prefer train travel to airflight whenever practical.  Also, despite my preference for cities, like our fiddling Austrian economist I can enjoy fishing and the outdoors.  Recently in Montana I took a fly fishing lesson and all I could think about was wonderful memories of my Dad (who was a great fisherman) and Dave (who is a great outdoorsman and fisherman) and the short time I had actually spent with both of them doing what they love, and realizing that more time doing that would have been time very well spent.   I cannot fiddle, and not even sure I could tap my foot in time, but a part of me sure wishes I could learn.  And perhaps that I could be fiddling on a train as well, and stopping off to go fly fishing.

QUIZ: what reasonably well cited paper in Austrian economics was first conceived of on a fishing trip at Burke Lake? 

Creative Capitalism: a conversation

Very promising new blog.

Oil Prices, Industrial Policy, and INEQUALITY

A loyal reader of this blog (D.G. Lesvic), chided me on email this morning for not posting more relevant items and instead engaging in a mutual admiration society.  I am not sure I would go along with him on that assessment, but he does have a point.  I am seeing more foreclosure signs being placed in front lawns in Fairfax City, gasoline prices are rising, the investment climate is uncertain, and the candidates are tripping over each other to propose governmental solutions.  And as our loyal reader noted to me, the WSJ column by David Wessel points us to the fundamental issue of inequality and asks me "why are you silent on it".

The basic lessons of political economy seem to have been lost in much of the current debate.  Government cannot be seen as a corrective, but at best should be viewed as a referee.  The incentives politicians face are distorted, and the knowledge they have to work with is constitutionally limited, that efforts to tinker with the economy let alone guide the economy are destined to fall short of the goal and in most cases in fact make matters worse.  From Bastiat to Friedman the problem of crowding out of private investment by public investment has been noted as a source of trouble.  And perhaps nowhere has the problem been stated so clearly as in Adam Smith when he wrote: "The statesmen, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would no-where be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it." (1776, Bk IV, p. 478).

Yet in our current political context we are once again looking for government to be an active player in the economy, and for the economists to be saviors with their grand plans.  But it was precisely government policies that created the problems we confront today (and got us into the mess in the 1970s, and the mess of the 1930s before that).  I used to often joke when describing the evolution of government policy tools with respect to macroeconomics that it is as if the Yankee shortstop (I have stopped using this since Derek Jeter took over the job so this goes way back in my teaching career) kept letting balls roll through his legs and instead of replacing the shortstop, we just kept giving him a bigger glove.  Now the glove is so big the shortstop cannot even move to cover the ground ball hit to his left or his right.  What manager or team owner would allow such a thing?  Yet we do all the time with respect to public policy.  The Fed screws up, give it more power.  Lets just try harder next time.  IT DOESN'T WORK.

Not all economic voices are united on this give the government more power and we will try harder next time, but those that work closely with government tend to be.  As F. A. Hayek put it once, the economist is called upon to offer policy advice more often than any other social science, yet suffers the fate that once his advice is given to have it discounted as soon as it is uttered.  Obviously Hayek had a certain type of economists in mind when he made that statement because some individual who call themselves "economists" are in fact listened to everyday.  What Hayek meant is the economist who understandings incentives, realizes the limitations of knowledge, and focuses his analysis on structures and constraints.  It is that economist -- the one worthy of the name -- that places parameters on people's utopias, and in so doing is actually viewed as impolite and impractical in the context of politics.  But getting excluded from a conversation that is corrupted by the lust for power is not a sin --- if you speak truth to power and get kicked out you have done your job, if you speak nonsense and you get kicked out, then you have failed to do your job and you have discredited your discipline.  Sorting out which one has happened requires that you take a stance on what is good and what is bad economics. Again, Bastiat might be a useful starting point in his emphasis on direct and indirect (what is seen, and what is unseen) --- good economics sees not only the direct and immediate, but also the indirect and distant consequences of government policies.

So what should we economists be insisting on during the current political discussions:

1. Intentions do not equal results

2. Innovations that are economically viable cannot be orchestrated by government, but must come through the free market

3. Policies to eliminate inequality distort incentives and often harm the very individuals they intend to help

4. Politicians possess a shortsightedness bias and policies are adopted in order to concentrate benefits on well-organized and well-informed interest groups and disburse the costs on the ill-organized and ill-informed mass of voters/citizens.  What is good politics in other words may very well be bad economics, and what would be good economics might be bad politics.  In short, we should not expect politicians in a democratic system to adopt good economic policies because the costs of doing so may very well be their inability to get elected.


There are no doubt many other points we economist could be insisting on as Obama and McCain run for office and the US (and perhaps world) economy continues in a tailspin.  But the bottom line, we will never get out of this current economic downturn until the government gets out of the way and the creative powers of the market society are unleashed to correct the previous malinvestments caused by government distortions, and to adjust to changing circumstances to coordinate the creative innovations of producers with the demands of consumers to live more enjoyable and comfortable lives.  Bob Higgs's work on post-WWII recovery and the Great Depression should be on the reading list of every politician this summer --- neither the New Deal nor WWII got us out of the Great Depression.  Government policies cannot do that job for us --- we need to stop looking at government as a corrective to our ills. 

Wealth creation, not income distribution, is the way out, and market processes and not governmental decisions will be source of that wealth creation.  Who will be the most famous and boldest economist of this generation to state that clearly to the politicians the way Milton Friedman did throughout his career?  No need to work for Obama or McCain, but there is a need for someone to make the case for the market economy in this time of rising oil prices, depressed housing, and uncertain investment.

Government policy got us into this mess fueled by bad ideas of social justice and public policy, and the incentives within policy making which bias the policies proposed and adopted in a certain direction, and we have to understand that government policy will not get us out of this mess --- especially if the bad ideas on social justice and public policy persist in our culture.  We are in a situation similar to the mid- to late- 1970s again, but this time we don't have a Milton Friedman producing FREE TO CHOOSE, and we don't have a political leader like Reagan who employed Friedman's rhetoric (if not his actually proposed solutions) within the political debate.

Pivotal times require pivotal people.  Think of the economists in the 1970s that could articulate the case for limited government: Friedman and Hayek lead the list, but also Buchanan and Stigler, Becker and Coase, Alchian and Demsetz, Meltzer and Brunner, etc.    Who would be on your list today that has achieved the same scientific status as these men, but also are articulate spokesmen for their position on limited government?  If only Paul Krugman, Jeffrey Sachs and Joe Stiglitz can claim to be both scientifically respected, and capable of being public intellectuals on policy relevant subjects, then the policy making game is over before it has started isn't it?

How My Worlds Collide

I am both a college professor and a basketball coach and I have been living this dual reality for awhile -- close to 2 decades or more if you go back to before I was a college professor.  But I do try to link the worlds.  First, I think the "lab" of basketball is an excellent study ground for constitutional political economy and in particular the examination of how rules impact strategies, etc.  Second, I think of "coaching" as teaching and focus on ways to improve both the way I teach economics and techniques, strategy and attitude.  Third, the fact that I see the game as a "lab" for a broader academic examination and that I also see the academic quest as a competitive game to be played skillfully means that my worlds collide constantly even when others don't see any connection.

However, I want to suggest to the readers to read this blog post by Brian McCormick --- a very insightful coach and trainer. In this particular post McCormick makes the distinction between "what" questions in coaching, and "how" questions in coaching.  This distinction dovetails nicely with a distinction I made between information (what) and knowledge (how) in my SDAE address many years ago.  But it also relates to something I try to tell my students as they prepare to write their dissertations.  For about a decade I have been emphasizing the derivation of dissertation projects by "looking out the window" not on the blackboard.  But I am quick to add that while "what" questions are a prerequisite for decent work, it is the "why" question that will determine your success or failure as a thinker.  In other words, you have to be able to explain why something happened, not just the details of what happened.  Similarly in coaching, you have to be able to explain not just "what" we are supposed to be running, but "how" it should be run --- and I would say that your best players have to understand "why" you run it as well and "why/when".  To go back to McCormick's point from a coaching perspective the importance of "what" you teach is determined by "how" you teach it.  In coaching circles there are two phrases I really like: (1) you are what you emphasis, and (2) you haven't taught until they have learned.  Both were fundamental to Coach John Wooden's approach.  Basketball IQ is really a result of your players moving beyond "what" you teach, and even beyond "how" you teach it, to understanding "why" you are teaching it and "why" you expect them to do "what" you want them to do at different times and in different situations.  This is the sort of "creativity in discipline" that McCormick talks about when he discusses the concept of "flow" and that concept of "flow" has inspired several scholars to think about what underlies the unleashing of the creative forces of a free society.

My worlds collide, but they collide in a wonderfully symbiotic way.

Religion in the U.S.

The Pew Research Center, which calls itself a “fact tank,” has released today their survey of religious beliefs and practices in the U.S. (see here and here). It is informative and provides plenty of data. The U.S. is a very religious society with a huge diversity of beliefs and views. Here are three findings of note:

While very religious, Americans are not dogmatic about religion. In other words, they are not necessarily certain that their own belief is the unique interpretation of the truth, but rather a good interpretation of the truth.

Nine-in-ten Americans believe in the existence of a personal God or a universal spirit, but there is considerable variation in the nature and certainty of this belief.

Not too surprisingly, Americans who regularly attend worship services and hold traditional religious views are much more likely to hold conservative political views.

Personal Finance, Public Finance, and the Political Economy of Debt

This morning I relaxed to watch the morning news shows and as often happens decided to switch channels.  Analysis of the upcoming NBA draft and news that Brandon Jennings is having problems passing his standarized tests and therefore might go to Europe rather than play at Arizona can keep me occupied for only so long.  So flicking from ESPN to NBA.TV back to ESPNU had to switch to something else.  As I hit Showtime, a documentary caught my attention --- MAXED OUT: HARD TIMES, EASY CREDIT, THE ERA OF PREDATORY LENDERS.  How many of you have seen this before?

What is interesting to the economist watching the documentary is how easily they link reckless personal finances with reckless public finances --- see the trailer.  When I was learning economics in the late 1970s and early 1980s, the Keynesian hegemony argued against this simple point about fiscal responsibility.  You know the fallacy of composition and all that.  Buchanan's Public Principles of the Public Debt, in fact, was the best professional statement of the "old time fiscal religion" that defined classical political economy.  The second point which strikes the economist viewer of the documentary is how the causal explanation is a combination of credit card company greed, and political connections.  Nowhere in the documentary, nor in the various people interviewed is it explained that the source of the problem is the perverted incentives in the banking industry that create moral hazards with regard to lending practices.  Of course, there is also an issue of prudent decision making that should be raised but isn't on the part of consumers. But that would get in the way of the story that is being weaved --- credit card companies want to suck unsuspecting consumers into debt, and that the most profitable position for the credit card companies is for these debt ridden consumers to pay the monthly balance, but never pay off the debt. And the risk side of this practice is covered by their political connections.  The Bush adminnistration, in particular, is responsible for the financial debackle that we are living through at a personal and public level.

Now there are many points raised in the documentary which demand comment from Austrian and public choice economists. Has anyone from that perspective ever written a review essay?

Advice to impressionable young minds who want to change the world

Yesterday (June 19th) I had the opportunity to speak to the fellows in the Koch Associate program in DC.  The program brings in recent graduates for a year to work in the network of think-tanks and go through a series of training programs designed by Koch.  It has proven to be a very successful program.

My talk was on how to think about the problem of "transition" and how to engage in "transition analysis" and I mainly drew on my experience in East and Central Europe and the former Soviet Union, as well as more recent work on development economics in general (Latin Ameria and Africa) and also 'reconstruction' efforts after war, and after natural disaster.

Prior to my talk, however, I gave 3 general pieces of advice aimed at serious, smart, and impressionable young minds who want to change the world:

1. DON'T CONFUSE COMMITMENT WITH DOGMATICISM

Science, I argued, progresses by the commitment of scientists to propositions.  This is a very Polanyi point to make, but one that is essential.  A lot of people NOT involved in science (including philosophers of science) have no clue how science makes progress and they claim that it is all about self-subversion.  Clearly self-criticism is important, but it is not how science progresses. Science progress by the dogged pursuit of an agenda by some scientists confronting the dogged pursuit of others in the field.  Science should HURT when propositions are wrong.  But for something to HURT the one who is proven wrong had to sincerely believe they were right.  The boldness of the conjectures is positively correlated with the level of commitment the scientist has to the proposition.  We want BOLD conjectures subjected to refutation, not weak ones.  That means the scientists will have STRONG opinions, and too often that is confused with dogmaticism.  It is not.  In fact, as I have said here before, dogmaticism is never really a problem at the individual level, it is really a problem at the level of the discipline. As long as there is open scientific/scholarly competition in the field, dogmaticism doesn't do damage to the advance of science/scholarship.  To claim otherwise is in fact, I would argue, to misunderstand how science progress, and how the best scientists in human history have in fact worked.  However, system-level dogmaticism must be rejected at all times because that will kill scientific progress.

2. DON'T CONFUSE FAUX HUMILITY WITH REAL HUMILITY

In this post modern age, it is commonplace for people to assert that we don't know anything.  I don't know, you don't know, we all don't know.  Aren't we all really cool because we don't know anything?!  NO, it is not cool to not know, in fact it sucks to not know certain things.  There is a real joy to figuring things out and if you want to think seriously about issues, start figuring things out rather than claiming that we don't know anything.  Also, the progress of knowledge is not a simple linear path from the unknown to the known, but it also isn't just a stab in the dark either.  The phraseology is the more we know, the more we know we don't know.  We have an expanding sphere of knowledge and as knowledge grows the sphere expands --- that is the area of the known expands, but as the sphere expands the surface (or awareness of) of the unknown also expands.  This is the humilty we learn from scientific progress, not the false humility that none of us knows anything.  No, most opinions on economic policy are wrong and we know them to be wrong because they are not based on either logic or evidence.

If we think about issues with regard to economics for a minute we might be able to clarify this. First, the economic world which we occupy is a complex phenomena comprised of an intricate web of interconnections, historical path dependencies, and engulfed in as Keynes put it "the dark forces of time and ignorance." That is the situation in which the economic actor finds himself. But that is not the plight of the economists, who instead is studying the matter and trying to understanding the coping strategies and institutional mechanisms that emerge to aid in coping with time and ignorance.  In other words, the knowledge of the economist is different from the knowledge of the economic actor.  We as economists have access to knowledge that actors within the economy do not.  This is an important point stressed by Hayek, but sometimes forgotten by the extreme subjectivists.  You can indeed have an objective science that is concerned with studying the subjective perceptions of opportunities for exchange and production for profit --- it is called the entreprneurial theory of the market process.  Knowledge of the theory of the market process doesn't mean you could be a businessman, let alone a regulator of that process, but it does mean you can understand the "explanation of the principle" underlying the order produced in the market process.  Knowledge is sweet, lets not sour on it.

3. SPEAK TRUTH TO POWER, DON'T STRATEGIZE WITH POWER

The key issue for individuals who want to change the world is to realize that the problem is not different political parties, but different rules of the game.  it is the structure of governance, not who is governing that matters most.  Focus on changing the rules and find rules that are incentive compatible with the "game" you hope to promote.

Related to this, the idea of communicating economic ideas so they don't hurt might make you popular on the lecture circuit, but it will not help change the world.  Again, let me repeat, science shoudl hurt.  Also strategizing with others over how to water-down a message from economics to those in power so they may adopt it doesn't work either.  The expert at watering down economics might rise to high political office, but he will not advance truth in economics or in policy.

In my opinion, I told the fellows, the most important books they could read this summer are: Richard Epstein's Free Markets Under Seige, and W. H. Hutt's Politically Impossible? both published by IEA.  Epstein emphasizes the low hanging fruit in public policy, and argues that if we just focused on the simple economic problems that politics gets wrong and get them right we would improve the plight of millions of people world wide --- lower tarrifs, lower taxes, cut back regulations, eliminate price and wage controls, etc.  LOW HANGING FRUIT. There are complicated issues in economic public policy, but for 90% of the problems we face in the world it is the low hanging fruit issues that distort the world an harm the lives of so many.  Think of the current food crisis and examine the rise of protectionist policies world-wide that is preventing the gains from trade from fixing it.  LOW HANGING FRUIT.

Hutt, on the other hand, emphasizes that it is the economists responsibility to speak truth as they see it to power, and never to compromise their message.  The simple reason is that if the economists water-downs his message, the politican will water-down even more in the policy process, and by the time the advice become actual policy it will be unrecognizable to the economist. Rather than the economic voice being given an hearing, it is completely muted by the economists own consent.  NO SPEAK TRUTH TO POWER AND DAMN THE CONSEQUENCES IN TERMS OF YOUR POPULARITY WITHIN THE POLITICAL REALM.

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Not sure how well my message was received, but that is it in a nutshell.  Be bold and seek truth; be humble, but also confident in what you know and don't lose your curiosity in trying to figure things out; and based on your search for truth and discovery of truth, speak that truth loudly and clearly to power if given that chance. DO NOT COMPROMISE THE TRUTH FOR THE SAKE OF PERSUASION, INSTEAD BE PERSUASIVE ABOUT THE TRUTH.

From Hope and Change to Industrial Policy?!

Dani Rodrik reports on Barack Obama's plans for engery policy and he argues that it is sounds like sensible industrial policy.  Despite protests from a variety of sources that Hayek's critique of "planning" doesn't apply to the modern left, I would argue that Hayek's ideas are as relevant today as ever.  And I should add that Don Lavoie's National Economic Planning: What is Left? is particularly useful for the current context.

The real problem with our political choices is not that we don't understand the policy goals of the left, it is that the alternatives on the right don't understand why those policy goals cannot be served by the policies of the left.  This just reaffirms the role of the economist in society.  Compromising with politicians of either party is NOT the path to improved understanding of what works and what doesn't work in public policy.  Only an uncompromising commitment to the logic of economic argument and to clarity in presentation will provide that.  The economists voice must be heard loud and clear, but it also must be an economists voice, not a politicians voice who happens to be an economist by training.