The Most Interesting Points Can Not Be Put In Your Footnotes!

I love the footnote -- both the aesthetics of it (at the bottom of the page) and the treasures one can find in it ---  but as a young writer in economics I often overused the footnote.  My good friends Dave Prychitko and Steve Horwitz in commenting on my papers used to say "you cannot have your most interesting arguments in the footnote."  Leland Yeager went as far as suggesting that in writing economics we should eliminate the footnote altogether.

I agree and disagree with these assessments. In fact, Gertrude Himmelfarb wrote a wonderful essay on "Where Have All The Footnoes Gone?" that I think scholars should read about the devolution of scholarship that follows the move from footnotes to endnotes and endnotes to no notes. 

But I can agree that in the blogosphere sometimes there are treasures in the comments that run the risk of being lost, and that we should work to make sure that doesn't happen. So in that spirit I am posting Richard Ebeling's excellent comment on the state of the economics profession and the ability to diagnosis the current financial crisis.

In answer to Peter's question as to which prominent economist will step up to the plate and speak out in defense of allowing the market to correct and recoordinate in this time of financial crisis, the answer is: most likely no one.

The mainstream of the profession is a "victim" of the Keynesian and Monetarist revolutions that "proved" that the Great Depression was caused by either a "failure" of effective demand or a dramatic 30 percent decline in the money supply.

Virtually all of the profession believes that it is necessary to have an activist central bank to stem the financial collapse -- and thank God there is an economist at the head of the Fed who has studied all the "errors" of monetary policy in the early 1930s and won't allow that to happen again!

And most certainly price and wage deflation must be prevented at all costs -- especially during a financial crisis during which it could snowball into, well. . . the end of civilzation as we know it!

In the 1930s there were certainly many economists who believed that easy money and political intervention were needed to "cure" the Great Depresssion -- in both Cambridge and Chicago, as well as many other places.

But what did exist then, unlike now, were a signficant number of economists who believed that depressions were caused by prior monetary mismanagement that resulted in misdirections of resources and capital malinvestment. And that the downturn was an inevitiable and necessary process of adjustment and recoordination.

In England there was Edwin Cannan and T.E Gregory, along with Lionel Robbins and F.A Hayek at the LSE. Indeed, in 1934, A. C. Pigou delivered a series of lectures at the LSE in which he argued against "reflation" as a hindrance to the needed ajustment of the wage and price structure, which would only delay and distort the process leading to a rebalanced economy.

In Sweden, Eli Heckscher and Gustav Cassel were strong free market advocates against the interventionist and reflationist policies of other Swedes like Gunnar Myrdal and Bertil Ohlin.

In Germany, while Wilhelm Ropke may have warned against the warmful affects of a "secondary depression," his general analytical framework was one that argued that monetary mismanagement created the distortions that required real adjustment. And Ropke was joined in this by other German economists like Waltet Eucken, Moritz J. Bonn, Gustav Stolper, and others.

In France, Jacque Rueff, Louis Baudin, Louis Rougier and others were also arguing for allowing the market to self-correct for the most part.

In the United States, the voices for a truly laissez-faire policy were fewer. But there was Benjamin Anderson, who in his regular "Chase Bulletins" (that were widely read in business and political circles) wrote true "gems" of analysis on the cause of the depression and the need for price, wage and production adjustments for a restoration of balance.

Indeed, in the early 1930s Anderson was already refuting Keynesian-type argument about "effective demand." He explained that balanced production and "right prices" generate sustainable purchasing power and economic stability wtih full employment.

And, of course, in Austria Mises, Machlup, Mogenstern, and Strigl were making the clear "Austrian" case about these matters.

Also among many of these economists there was a strong belief that a commodity-based monetary system -- a gold standard -- was essential to economic stability and prevention of future inflationary booms.

Today, there are virtually no members of the mainstream of the profession who consistently understand and defend such ideas.

Oh, yes, there are many admitting that Fed policy had been too easy over the last ten years. That regulatory policies and that Fannie Mae and Freddie Mac distorted the mortage industry, creating the housing crisis, etc.

But there are basically no mainstream economists calling for (as a positive and desirable policy)the government to get out of the way. A "Do Nothing" policy as, for example, Simon Newcomb (the early developer of the "equation of exchange" before Irving Fisher)called for in the 1870s with that as the title of an article that he had in "Atlantic" monthly.

And none of them seem to understand Hayek's point that no one had the knowledge, wisdom, or ability to "centrally plan" an economic recovery. The knowledge of how, where, and to what extent is divided among all the minds of the market in their own corners of society.

In the early '30s, Mises reminded people that what they were living through was not the crisis of capitalism, but the crisis of the interventionist state. We are about to have another lesson in what Mises meant by that.

Richard Ebeling

Comments

[Bob]

I wrote my entire dissertation without a single footnote! Seriously. I figured if it was important enough to say, it was important enough to say in the body of the text. It's not like there's a word limit on a dissertation.

[Grant]

To comment on the posted comment, I think a lot of the reason economists seem to disregard a laissez-faire approach is because they know that simply isn't a political option. In the 1930s it probably was, but today it would be political suicide to do such a thing. Whats the point in talking about an alternative that really isn't an alternative?

I'm no economist, but thats the impression I get from reading their blogs.

[David Foster Wallace from beyond the grave]

I second the call for more footnotes.

[Kirk Dameron]

Thank you Pete for bringing Dr. Ebeling's comment up to the primary level so we would not lose it in the econblog bitstream.

And THANK YOU Dr. Ebeling for your explication of the historical difference between then and now in the economics profession!

Kirk Dameron
Foundation for Economic Education Austrian Seminar, 2006

[Doug Thorson]

My son is taking an economics class from you right now. My book shelf is full of Austrian Economist books - I pray that he learns to love economics, as you and I do, as he listens to your lectures this fall.

[mt]

I stumbled upon the following analogy which seems to be emblematic of the current popular opinion.

Imagine the Titanic. The captain of the ship did the romantic thing and went rode the ship into the icy water. The steerage compartments were also locked. This was fundamentally unjust, but because of the panic that could have spread this was justified. The crime allowed the people on the top decks to orderly file into life-boats and some were saved, whereas a possible counter-factual would have been the swamping of virtually all the life boats if the whole ship were allowed to fight over them.

This story suggests that the role of the government, like the captain, is made up of these two kind of decisions: 1) resigning himself to his fate 2) making tough decisions which hurt some and privilege others.
While I would agree that the first should hold, I am conflicted over the second role. The economy is not a sinking boat. Panic ultimately subsides and everyone rebounds quite well (besides the lost time and trouble). The analogy of the sinking ship begets further panic. The problem is that financial contagion is an imaginary problem that becomes real. Ultimately I am not sure that systemic risk is adequately understood. There is some probability that the sinking ship mentality does apply to this very complicated risk.
Another problem has been articulated in the media. The captains are the first on the life boats.