Coordination Problem

Very Well Said: Becker on the Milton Friedman Institute

Gary Becker speaks very clearly on the controversy over the MFI at U of Chicago.  As Becker puts it, Friedman was (a) an outstanding teacher, (b) great scholar and leading economic scientists of the 20th century, and (c) a man of great intellectual honesty.

Unfortunately, Richard Posner does not speak as clearly. 

Under what circumstances it would ever be a mistake for the U of Chicago to name a research and educational center after Milton Friedman is just unimaginable to me.

 

State Predation in Action, Argentina Style

Because it creates institutional uncertainty, predation (the violation of property rights) is one of the main sources of stagnation and poor economic performance. Public predation in all its forms (especially tax and regulation) has been a major theme in James Buchanan’s work. In Why Perestroika Failed? Peter Boettke studied the failure of the early transition period in Soviet Russia showing how promises made and promises broken undermined the reform process and fostered public predation.

There is plenty of state predation going on around us in one form or another. States regularly renege on their promises and predate on people. It happens in the developing world but also in countries that once were among the richest on earth, such as Argentina.

The Argentine Congress has to ratify a bill that was signed by President Kirchner to nationalize private pension funds. This would transfer into the government’s coffers assets representing around US$30b of private savings accumulated over 14 years by individuals.

Allowing people to opt out of the public pension system was a failed experiment explained some official, and it is now time to rescue “from uncertainty… future pensioners and those who are currently in the (private) system.” (See here and here.) Not everyone agrees, especially those who saved for 14 years. Argentina witnessed a massive rally in Buenos Aires against the plan. Some signs read “No Plundering” or “Freedom, Freedom” (see here).

State predation creates a lot of regime uncertainty. It is not the first time that Argentina completely reverses its policy reform process. It sends the signal that because the fiscal situation of the government is unsustainable any asset can be seized by the government. It is unlikely that this latest move will help Argentina regain its past glory.

RIP: Larry Sechrest (1946 - 2008)

Via the Mises blog comes the news of the death of Larry Sechrest at age 62 of heart failure.  Larry was a friend and colleague to many of us.  Larry taught at Sul Ross State in Texas.  He was a long-time member of the SDAE and frequently wrote for various Austrian and libertarian outlets.  His book on free banking remains a terrific contribution to that literature.  Although I did not know Larry well, my interactions with him were always enjoyable and he was one of those people who always had a smile on his face.  Jeff Tucker's blog post linked above has many more details on Larry's life.  Our condolences to his family and friends.

Is Barack Obama a Socialist?

Obama’s recent discussion with Joe the Plumber has raised many eyebrows (see here). Here are two editorials on the issue, one by Don Boudreaux and another one by Richard Ebeling.

Norman Barry

It is with great sadness that I learned of the premature death of Norman Barry.  Thanks to Joe Salerno  for the link to this news report.

The New Financial Order: Dirigisme, De Rigueur

By progressively abandoning the ideas of free enterprise and free markets over the course of the last hundred years, the United States has eventually given the Europeans what they had been hoping to get for a long time: the admission from the Americans themselves that capitalism cannot work (on its own).

This is perhaps the most worrisome development of the current financial crisis. Europeans such as Ivan Pongracic and I have a different (emotional) understanding of the situation than most Americans around us who have never really lived in a world where the state not only regulates and taxes but also owns (some of) the means of production and can impose a diktat on people’s lives.

In this regard, what is happening in Europe is very concerning. Even right-wingers such as Angela Merkel and Nicolas Sarkozy (although one shouldn't be surprised) have awakened in the last few weeks as crusaders for a new type of capitalism: one that has a more human face, one that does not suffer from crisis, one that is more controlled. Unless the US reacts to this development (and it is hard to see how this would be the case), there will be no one left on this planet to oppose the establishment of a new financial order based on wrong and corrupt ideas about capitalism. The tsunami wave of the new financial order à la Sarkozy will be so high that will cover the entire world.

Richard Ebeling explains this very well in a post today (The French have a Plan: Introduce more Socialism, but Call it Capitalism). Ebeling gets it. He is among the few Americans whom I know who deeply understand the long-term impact of current American policies on world affairs. Europeans are now rejoicing, there is a climate of fear, capitalism needs to be redefined, and there are plenty of candidates to do the job. The idea of the EU as a free trade zone died in 1992 but was really buried in 2008. The EU (meaning mostly France, Germany, and the UK) now wants to export its ideas to the rest of the planet by setting up the new international institutions that will oversee the world economy and its banks. Monsieur Colbert is not dead, he is still alive and well. Let's hope Adam Smith now lives in Asia.

Too Important for the Comments Once Again -- Richard Ebeling

Whenever Richard Ebeling speaks I listen.  He is a great teacher of economics (look at the generation of students he inspired at U of Dallas and then at Hillsdale) and he has a great passion for economic thought, especially the Austrian school, but not exclusively the Austrian school.  Richard knows what he talks about.  So when he chides me for slipping or being too loose in my statements I take notice.  I might not agree I have committed the sin in question, but I check my behavior because if Richard thinks I have, then there is a strong chance I have even if I didn't intend to slip in my methodological commitments or err in the logic of my thought. 

Peter:

What these debates about whether we are in a credit crunch or not; whether we are faced with a coming serious inflation or instead deflation; whether this wil be a "normal" recession or a coming real depression, etc., etc., -- what this should remind all of us of is Hayek's points about the pretense of knowledge, or what Wilhelm Roepke called the hubris of the intellectuals.

In fact, neither Austrian Economists nor our Neoclassical and Chicago and Rational Expectations "colleagues" know what is happening in the economy -- nor exactly how and why it hit right now or where the present "crisis" is taking us.

The "deadly sin" of hubris clearly has been greater with our economist colleagues. So using all available information (i.e., statistical patterns of past events) and inserting it in the "correct" model of how the macroeconomic "really" works . . .

Did Robert Lucus or Thomas Sargent know this was going to happen, when and why? Hmmmm. Or did I miss that op-ed piece of theirs in the WSJ? (Oh, they kept it as private, secret information so they could make a "killing" in the market -- now I know who the evil "short-sellers" have been.)

Bu more seriously Austrians have long insisted that the laws of economics are essentially logical relationships, not empirical ones; that economics can "predict" but only in qualitative terms, not quantitative ones; that economics can only make "pattern" predictions.

This economic crisis may I suggest, again reinforces the reality of the Austrian approach to social phenomena.

Austrians (true to their theory of the logic of the interconnections between credit expansion, market rates of interest, the term structure of investment, and relative price and allocation effects caused by the non-neutality of money) have often warned of the inflationary and destabilizing consequences from Fed policy over te last decade.

But no Austrian could (or did) claim to know when the cycle would turn, or what would set it off, and how the downturn would or could play itsef out, i.e., in what in historical retrospect we will see from the vantage point of some future moment as the actual patterns and also unique time-sequence of the "micro" steps by which this will play out.

We could not and cannot know these things. As Karl Popper pointed out in "The Poverty of Histoicism," knowledge of the future is logically impossible. If we live in a world in which knowledge changes, he said, then it is impossible to know tomorrow's knowledge today. Otherwise, it would be today's knowlodge and not a knowledge of the future, the details of which can only be known when the future comes.

We know how the Great Depression of the 1930s played out because it is now history. We know, for example, that FDR ran on a "conservative" platform of balancing the budget, cutting taxes, maintaining the gold standard, limiting Federal intrusiveness in state-level affairs, etc.

And we know that he did the exact opposite of these things when actually in office.

But instead of reading histories of the Great Depression, suppose we went into the archives of the newspapers of the time -- the "Wall Street Journal," the "New York Times" -- and, say, from 1929 to 1935 read the stories, day-by-day, the analysis and the commentaries and interpretations of what was happening and where it was leading.

I would suggest that virtually no one knew where the process was leading. Because it depended upon the "complex phenomena" of individual decisions, political policy choices, ideological influences, and everyday actions based on the expectations held at each moment in time.

And these intersecting actions and events generated the unique path-dependent process that we call the history of that time.

All of our analysis, expectations and predictions should be implicitly framed with the inescapable humility of what our limited minds can know about the workings of our world.

Indeed, this is the reason we Austrians are always suspecious of political solutions to our social and economic problems. The working through the problem -- including an economy-wide economic crisis -- requires more knowledge about the present and the future than any one mind or group of minds can master or ever possess.

So, are we suffering from "tight" or "easy" credit conditions? Has the stock market and housing market "bottomed out"? Will globalization be part of the solution to the problem, or will governments impose forms of trade restrictions to shore up domestic output and employment levels against foreign compeition? Will the next president actually be more concerned with "spreading the wealth" or letting the market adjust so the "pie" can keep growing (or growing faster than wrong-headed policy would allow)?

We will know all the answers -- when some future economic historian (maybe even an "Austrian") writes the history of our times, and tries to tell those future readers how it all happened and why.

Richard Ebeling

Posted by: Richard Ebeling | October 28, 2008 at 05:32 AM

IHS Humane Studies Fellowships

Our good friends at the Institute for Humane Studies have asked me to pass along some info on their Humane Studies Fellowships.  Pete B. and I certainly benefited from IHS fellowships and programs in our grad school days, and I know that Pete L and Chris were involved with IHS as grad students as well.  Fred too, I believe.  If this describes you, you should definitely apply for these as they are not only good money but get you involved in the IHS network.

The Institute for Humane Studies is currently soliciting applications for the 2009-10 Humane Studies Fellowships. IHS hopes to exceed last year's award totals of $600,000 to more than 150 graduate and advanced undergraduate students from around the world. The awards support research into the principles, practices, and institutions that support a free, prosperous and responsible society. Select applicants are invited to the annual Humane Studies Research Colloquium and other advanced colloquia throughout the year. Fellows also join a growing network of over 10,000 IHS academics who are committed to the ideas of liberty and intellectual freedom. For more information, visit www.TheIHS.org/HSF or contact Mr. Jasmin Guenette, Academic Programs Director, at jguenette@ihs.gmu.edu. The deadline to apply is December 31, 2008.

Resources for Intro Teachers: Opportunity Cost in the Comics

Today's "Non-Sequitur" shows a nice understanding of the concept of the opportunity cost of one's time, not to mention a broader Heyne, Boettke, Prychitko point about the nature of costs.

Credit Crunch Debate

Over at Marginal Revolution Alex and Tyler are engaged in an interesting discussion on the theory and empirics of the credit crunch.  I find Alex's arguments to be the more persuasive.  How about you?

Also, Anna Schwartz continues to provide important insights into this mess.  She has argued that unfortunately the Fed and the Treasury have acted as if the only lesson to be learned from the Great Depression is the lack of liquidity lesson, which she argues is not the relevant lesson.  She also used an interesting argument about how the attempt to recapitalize the banks is doomed to failure because we are trying to recapitalize insolvent banks, when only the solvent banks are the only institutions capable of using the funds correctly. This is similar to the arguments and data we found in relation to foreign aid --- only those countries that already had good institutions were the countries that could use foreign aid productively, countries where the institutions are bad, foreign aid just goes into a black hole.  But, of course, the countries with good institutions do not require foreign aid because they are already receiving foreign direct investment.  Schwartz's argument applied to the banks reinforces why the bailout and recapitalization policies we are following are counter-productive.  But they no doubt make politicians feel better because they are at least doing something, even if that something is the wrong thing to do!