The Importance of Keeping One's Head When Everyone Else is Losing Theirs

The recent debate on the "crisis" is an important illustration of this principle.  The simple economics behind Leeson's demand for keeping our heads is that we have yet to see US policy shut down our export and import markets, and we have yet to see US policy curtail technological innovation.  There is a lot to be concerned about, but as long as Smithian gains from trade, and Schumpeterian gains from innovation out pace government Stupidity in the economic horse race tomorrow's trough will be higher than today's peak.

As a counter-factual thought experiment we will be poorer than we otherwise could have been, but we will still be better off tomorrow than we are today.

I am VERY concerned about the current level of interventionism in the US and the future of the dollar.  But I also believe strongly in the "endogenous public choice theorist" and I believe we will eventually address these issues head on, and even more importantly that individuals will find "bottom-up" strategies to cope with government stupidity.

When I read the great work of Bob Higgs I learn about the ratchet effect and I learn of how regime uncertainty can destroy the exchange envrionment. This is what FDR's policies did and it explains the deepth and length of the Great Depression.  Monetary forces caused disturbances, but it was microeconomic meddling that prevented market forces for correcting those distortions and getting the economy on the right path.  It is all about Smithian gains from trade, and Schumpeterian gains from innovation in my mind.

The sort of extreme pessimistic position is justified when monetary disturbances are followed up by microeconomic restrictions.  We have gone down a path that is dangerously close to this, but we haven't completely squashed the market economy yet.  In short, we haven't yet gone the way of Robert Mugabe in Zimbabwe.  The Europeanization of the US economy is something to be lamented and to be met wtih outrage by economists, but it will NOT put us back to the stone age.  We will be poorer than we could be, we will be less free than what would be appropriate, but we will be richer than we are now, and freer in our economic, political and social life than we are now.  At least that is my prediction for my kids and their kids.  My grandchildren will look back at our lifestyle and wonder how we ever did it, just as we look back to 1900 and our grandparents and great grandparents and wonder how they survived when work and life was so hard.

Let's just remember the 20th century was one of WWI, WWII, Korean War, Vietnam War, Cold War, and turmoil in the Middle East, etc.  It was also a century of the panic of 1907, the Great Depression, the stagflation of the 1970s, the 1987 crash, and the 1997 Asian contagion.  A century of full of regulations, mismanaged money, and irresponsible fiscal policy.  A century of protectionist legislation and pork-barrell politics.  Yet it was also a century of amazing technological innovations that saw us start with horse and buggy and end not only with automobiles, but having developed the ability to fly around the world, and rocket a man to the moon, and a machine to mars.  During the 20th century, the costs of domestic trade fell swiftly as train, truck and plane enabled coast to coast transactions of goods, and international trade reached from the US to the remotest corners of the world.

Let me be clear, I am VERY disturbed by the latest policy choices and disgusted at the behavior of our political leadership in this time of crisis.  I am very concerned.  But my concern is about the counterfactual --- what could have been had we allowed the free market to correct the distortions and get us back on track.

Comments

[Ivan Pongracic, Jr.]

Pete B., though you don't mention my name in this post, it seems that your implication is that I'm the one "losing my head" about the current situation. I just posted my response in Pete L.'s original "Hell in a Hand Basket" post, but I just want to clarify something here: I certainly was NOT predicting the end of civilization, etc. All I did was point out the following things (taken from my original challenge to Pete L.):

"Disappearance of multiple trillions of dollars from the financial markets (and we're not done yet - take a look at CNN right now), devastating many people's retirement savings and making it impossible for them to retire until much later than they planned, if ever; a large run-up in unemployment (and we haven't seen anything yet - unemployment numbers will definitely go up much higher than they are now); the federal government becoming a part-owner in many American banks, leading to God-knows-what down the road; and probably the most problematic long-term development, a huge increase in the federal debt, leading to questions about the government's ability to repay it in the long-run and leading to the Chinese and Japanese slowing down in buying of the US treasuries (I believe that the federal govt will be facing a very real possibility of defaulting on debt within the next several years)."

Now please, raise your hand if you really think that none of these things are happening or could happen. And if they are/do, then certainly there's a great chance that our standard of living will fall, and maybe for years to come. The political world is far too uncertain to be able to predict where the next several years will take us in terms of the policy and intervention choices, but I think that at the very least the current partial nationalization of banks is significant enough of an intervention to entertain the notion that it might have considerable negative impact on potential future growth - and not just in terms of the counterfactual but in fact in terms of the standard of living that Americans have gotten used to over the last ten years. (This would seem to be a non-controversial statement given that most people now admit that Americans have been living beyond their means for much of the last ten years.)

Please look at my other response for a fuller discussion.

[liberty]

I was with you till you said "and freer in our economic, political and social life than we are now." I am not at all sure of that.

Also, all your examples of improvements came from markets in relatively free countries, as America was for most of the 20th century, but despite a few bad patches (like the 30s and 40s) America was freer during the 20th century than it is becoming now. What if we go the way of the Soviet Union? Then we certainly would not create greater wealth and our grandchildren could be worse off than we are today. The only reason the grandchildren of Lenin's generation could be said to be better off than Lenin's generation (and they were certainly not "freer in [their] economic, political and social life," was due to "borrowed" technology from the west. Consider Hazlitt's Great Idea, to get what I mean.

I may sound alarmist, but I am just being the devil's advocate here. You are being optimistic.

[Steve Horwitz]

Perhaps not surprisingly, let me just say "What Boettke said".

That's my position as well.

[Ivan Pongracic, Jr.]

In their own recent words:

"We are currently seeing the consequences of political capitalism and the hampered market economy. Economic science has been perverted, economic teachings has been perverted, economic policy has been perverted --- all by politics. To continue down our current path is to reinforce the perverse folly of politics that has threatened the viability of the current economic system."
Peter Boettke on October 22, 2008

"My worry these days is that all the ongoing attempts to "cure" the hangover that Pete rightly rails against may well, even if they eventually temporarily relieve some of the symptoms of the hangover, cause precisely the kind of chronic, debilitating disease that this hangover is NOT. The prime directive for doctors is to "first, do no harm." The political class the last two weeks has been more like doctors who are ramming every medication they can think of into the patient while simultaneously performing guesswork surgery hoping they'll find the cure, never bothering to ask whether the patient, in fact, has a real disease that needs their intervention."
Steve Horwitz, October 10, 2008

"Instead, we are seeing the consequences of an orgy of reckless fiscal policy for the past 25 years (if not more) and the consequences of inflationary central bank policy. Credit induced booms that are not allowed to be cleared out when the malinvestment is revealed in the market through government intervention and even easier credit DOES NOT GET YOU OUT OF THE TROUBLE. Instead, it merely masks the problems for another day. We have been pushing off the adjustments for decades… Irresponsible monetary and fiscal policy needs to cease. If we come clean, we might have a viable future. Market discipline will be restored, and the needed adjustments will be made, and as long as government gets out of the way the enterpreneurial talent world-wide will realize the gains from trade and the gains from innovation. Unfortunately, it appears that our political imagination doesn't permit the sort of clean living that would bring forth the necessary adjustments and recognize the great opportunities for mutually beneficial gains."
Peter Boettke on October 10, 2008

[Steve Horwitz]

Yup, and I stand by "my worry." I didn't predict disaster. I worried about it. I worry about another GD, but I put the probability low. I worry about the cure giving the patient a disease that makes it worse off than it would have been. I put that probability high. But that doesn't deny, to use Pete's terms, that in the long run the Smithian and Schumpeterian forces win out over the Stupidity forces.

Western Europe suffers from a chronic, though perhaps not debilitating, disease that makes it worse off than it would be otherwise. But it has neither died nor gone on life support yet.

To be clear: all the nonsense of the last couple of months is BAD. It will make us poorer and less free than we would be otherwise. The question is HOW MUCH poorer and less free and whether that will lead to severe economic dislocation in the long run. Ivan and Bob are closer to the "yes it will" pole, Pete, Pete, and I are closer to the "no it won't" pole.

[Ivan Pongracic, Jr.]

Really, Steve?

Pete B. wrote: "To continue down our current path is to reinforce the perverse folly of politics that has THREATENED THE VIABILITY OF THE CURRENT ECONOMIC SYSTEM." Also: "If we come clean, WE MIGHT HAVE A VIABLE FUTURE." Are we coming clean? If not, then Pete is saying we don't have a viable future. Now, Pete may be engaging in rhetorical flourishes in which he doesn't really believe, but if not, that above passages sure makes it sound like HE is more to the "Bob/Ivan" side of the pole than than to the "Leeson" side. (AND I'M NOT SAYING WE'RE PLUNGING INTO ANOTHER GREAT DEPRESSION! I'm just saying taht Pete L.'s original claim that 'nothing will change' and ' economic progress will coninue as before' is wrong.)

You yourself wrote: "The political class the last two weeks has been more like doctors who are ramming every medication they can think of into the patient while simultaneously performing guesswork surgery hoping they'll find the cure." How likely would this be to make the patient better? Or is it likely to actually kill him? It sure sounds like you were saying that the current govt interventions WOULD lead to severe economic dislocation in the long run...

[lwaaks]

I don't see how anyone could read the P. Boettke passages quoted above by Ivan Pongracic without taking away the feeling that we are in grave danger. A clarification would be nice.

[Roger Koppl]

Aren't we getting off target with all this back and forth?

I remember Fritz Machlup's argument against rational expectations:

I was Mises' research assistant. Every day I would carry his books from his office in the chamber of commerce to the university and we would pass the Creditanstalt. He would say, "Someday it will fall, Machlup. Someday it will fall!" I had money in the Creditanstalt. I understood Mises. I knew he was right. And yet I never withdrew my money. So, you see, I can't really accept the theory of rational expectations!

Old Fritz was on to something there.

[lwaaks]

An additional comment: I remember reading a comment by David R. Steele a few years ago about how some Austrian economists (I don't know who) he had discussions with in the late 1970s, early 80s, had a perverted sense of joy about the coming economic catastrophe (I expect because it would vindicate their views). Of course, I don't know if this is true but perhaps they were Rothbardians -- I have noticed that they do tend to be gloomier than the GMU bunch. But this outlook is confusing for a non-economist like myself. Austrians of all stripes emphasize the self-correcting nature of the market by pointing out that the recession of 1920-21 was short-lived (and the same would go for 1982-3). As Roger Garrison has emphasized, ABCT is about the boom and bust, not about the severity of the depression. If policy makers don't engage in drastic intervention akin to FDR then we should be ok, right?!

[lwaaks]

An additional comment: I remember reading a comment by David R. Steele a few years ago about how some Austrian economists (I don't know who) he had discussions with in the late 1970s, early 80s, had a perverted sense of joy about the coming economic catastrophe (I expect because it would vindicate their views). Of course, I don't know if this is true but perhaps they were Rothbardians -- I have noticed that they do tend to be gloomier than the GMU bunch. But this outlook is confusing for a non-economist like myself. Austrians of all stripes emphasize the self-correcting nature of the market by pointing out that the recession of 1920-21 was short-lived (and the same would go for 1982-3). As Roger Garrison has emphasized, ABCT is about the boom and bust, not about the severity of the depression. If policy makers don't engage in drastic intervention akin to FDR then we should be ok, right?!

[Roger Koppl]

lwaaks,

I don't think we should hold people to positions taken on a blog at the moment the crisis hits. Nevertheless, I think BPete & co. were pretty steady all in all. They expressed alarm at the bad consequences of the bailout, noting in particular the problem of regime uncertainty. They also lamented the increase in state control over economic activity. Well, they were right! Now when Plete comes along and says, "You know the market is so powerful it will probably work around much of the damage created by these lousy policy choices," BPete says, "Good point." I think the Plete and BPete and Steve and, FWIW, I all agree that 1) we may slide into a Euro-style regime with chronic unemployment or some similar infirmity, 2) we might get lucky and escape that fate, 3) most of the public commentary on the crisis has greatly exaggerated its magnitude and the threat posed to "the economy," 4) in any event we'll be poorer than we would have been under a more truly liberal policy regime, and 5) the civil liberties problems are much more dangerous and unfortunate.

I bet Ivan could sign onto that, too. Ivan?

[Ivan Pongracic, Jr.]

It's very nice of Roger to offer a conciliatory note. I'm not quite there yet, but I will say that I indeed can sign onto Roger's summation. However, does that summation fit into Pete L.'s original comments? Here they are once again, just to be clear what started this whole thing:

"Contrary to the impression one gets from the vastly over-discussed economy in the media, there isn't much interesting to talk about... Life for most Americans will be essentially unchanged as a result of the "crisis" or government's attempts to "fix" it."

Roger, can you sign on to these comments by Pete L.? Pete B. and Steve?

I'm dying to know. A simple yes or no will suffice.

[Daniel J. D'Amico]

Pete,

I really love this post. And agree that when compared to the extreme alternative - a subsistence agricultural society - things could obviously be a lot worse than they are.

On the other hand, I think we might be overlooking a more likely set of counter factual conditions. Rather than moving on a trajectory backward, towards previous output levels we should be concerned with the wholly new trajectory of urban plight and poverty that may be created as a result of our mismanaged financial history.

When all is said and done, going back to the farm seems quaint compared to getting by in the slums of Detroit or Harlem in 1980s, or parts of Chicago and Baltimore today.

Yes on average our children will continue to live in societies where it is technologically easier to get by than in the past, but there are a host of new social dilemmas that our political hubris has erupted for us to deal with that in some ways are just as challenging or perhaps more so than the raw Malthusian challenges of subsistence. I refer to gang related crime, drug addiction, mental illness, homelessness, and new infectious diseases. Yes the inner city youth has air conditioning, vaccinations, food, shelter and clothing at lower prices and higher qualities than in the past. But he also endures a gamut of challenges un-faced by previous generations.

While the image of Tom Joad was a rugged migrant farmer, who got by alongside an entire population of poor migrant workers. I'm not sure what his fate would be walking the streets of an inner American city in economic decline today.

The irony of the situation is that these phenomena have been identified as symptomatic of markets when markets were perceived to be naturally cyclical. The sociology and anthropology literature thinks that the theory of creative destruction - booms and busts - overlooks the long term effects left by the permanent wakes of economic downturns. The unemployed become drug addicts which reinforces unemployment - so on and so forth.

This story changes radically when we admit that the downturn is more caused by planning than by markets but we should make sure to all be on the same page as to what the consequential effects are.

[Steve Horwitz]

Ivan challenged me to sign on to this line from Leeson:

"Contrary to the impression one gets from the vastly over-discussed economy in the media, there isn't much interesting to talk about... Life for most Americans will be essentially unchanged as a result of the "crisis" or government's attempts to "fix" it."

I can't sign on to those two sentences. That's more sanguine than I am willing to be.

I can, however, sign on to Roger's 5 points, with only the small caveat that I'm not sure if the civil liberties threats are "much" more of a problem as I'm not as convinced as he is they are going to happen. But that's a quibble. Roger has it about right and the bit of Leeson's post that Ivan has quoted is more rosy than I'm willing to be. I think those two positions are consistent.

[Ivan Pongracic, Jr.]

Thank you very much, Steve. This is all that I was saying from the very beginning.

[Bogdan Enache]

Counter-factuals aside, I think the comas around the word crisis could have had a more fortunate use.

[Roger Koppl]

Ivan,

I'm probably about where Steve is except for his quibble. Thus, I suppose I am also more pessimistic that Plete, but it does depend on what he was packing into the word "essentially," which gives him wiggle room.

[Charles N. Steele]

The federal debt cannot expand indefinitely without extremely harmful consequences. Fed manipulation of credit has genuinely harmful real effects. U.S. fiscal and monetary policies are genuinely dangerous.

When Ivan Pongracic makes this point, the response "keep your heads, simple economics tells us that as long as Smithian gains from trade, and Schumpeterian gains from innovation out pace government Stupidity in the economic horse race..." is no argument at all. That we *should* expect these gains to outpace govt in an environment of credit manipulation, out of control federal spending, and increased govt intervention is the point Boettke and Leeson need to establish, instead of simply repeating their Pollyanna-ish assertions that it's simply so.

[Peter Boettke]

Charles,

First, I have been arguing against US fiscal and monetary policy for well over 2 decades now, and in fact point to Buchanan and Wagner's Democracy in Deficit book.

Second, I feel there must be a miscommunication going on because both you and Ivan seem to think this is a personal assault, when actually it is an intellectual argument about magnitudes of effects. And the "argument" you are denying is not just the theoretical point about real productivity growth but an empirical fact of the 20th century. In short, the US economy has clearly evolved to absorb a level of government ridiculousness that previously we might have thought was impossible.

Third, I think there is a fundamental point about Austrian economics and classic teachings of economics which has to be rethought. A major wisdom of classical economics was something called "the classical dichotomy" --- reals impact reals, nominals impact nominals. This was an important issue because it eliminated the idea that we can fix poverty by printing more money. On the other hand the Austrian Theory of the Business Cycle shows that nominal variable can lead to real disturbances. So there is a modified classical dichotomy -- analogous to Mises's modification of the quantity theory of money.

However, this does raise an issue about whether nominals can impact reals in the long run? And aren't we talking about the long run?! So we need to be looking at the microeconomic restrictions government is imposing on the economic system, and if they go over a tipping point we can see the sort of catastrophe that Ivan is pushing for. I just don't think we are there yet. We should be concerned, very concerned, but as long as we don't go over that tipping point (and yes curtail the Smithian gains from trade, and the Schumpeterian gains from innovation) we will continue to muddle through and our children and grandchildren will be better off than we were.

That is not repeating an assertion that is a basic economic argument backed by economic history of the US.

Pete

[Vedran]

Pete B,

I had a random thought. Couldn't one see Freddie and Fannie as the tipping point that has already occured? They engaged in a form of intervention the market couldn't maneuver around. What's my evidence? The current situation.

In short, we don't have to wonder what sort of ridiculousness the market can't handle. We already know; it just happened with Fannie and Freddie.

[Pete]

Amen, Pete! And I'm glad I wasn't the only one who felt certain people were taking economic arguments as personal assaults, which is why I decided it was best to stop participating in the discussion.

[Ivan Pongracic, Jr.]

Pete and Pete, I believe I was the one that kept strictly to arguments and at no point questioned your own actions. I certainly engaged in no personal attacks. I also tried to present your own arguments in as accurate of a way as I could before I challenged them. I am sorry but I don't feel I was awarded the same courtesy. Not only was my argument basically dismissed by bringing up my investment decisions rather than dealt with head-on, but it was badly distorted and replaced with a straw-man that then proceeded to be knocked down over and over again. And it continues - quoting Pete B.'s above post: "the sort of catastrophe that Ivan is pushing for." I'm sorry?? I'm 'pushing for a catastrophe' when I challenge Pete L.'s claim - using mostly Misesian theory, mind you - that "life for most Americans will be essentially unchanged as a result of the "crisis" or government's attempts to "fix" it." I really don't know what to say...

[Charles N. Steele]

"Nominals vs. reals?" Pete, go back and read Mises' discussion of money. You're not making any sense. It's you and Leeson who seem to think that money is a veil, and there are no serious real effects to a credit bubble.

As for Ivan "pushing for catastrophe," I've discussed these issues with him at length, and this is a gross mischaracterization of his position. And in public forums I've heard him correct people who refer to this recession as a "crisis."

[Peter Boettke]

Charles and Ivan,

This is sort of surreal.

First, the basic idea of putting money where your mouth is, is NOT a personal assault. It is an epistemological point about betting markets in ideas combined with basic economics. Why this got confused with a personal attack on "investment strategies" is beyond my comprehension.

Second, I never said money was a veil --- read my position again. It is somewhere in-between the classical dichotomy and the Keynesian disjoint. As Hayek and the Garrison have emphasized, it is a loose joint --- not a tight joint (of the classical dichotomy and the mechanical interpretation of the quantity theory) and not a disjoint or broken joint (as in Keynes).

The bottom line, there may be macroeconomic problems, but there are only microeconomic solutions. We need to look at the microeconomic restrictions that government imposes (that is the point about the gains from trade and the gains from innovation).

Am I concerned? I have repeatedly said I am. But the US economy is full of opportunity. Has the government messed up the economy? I have repeatedly said, yes and when you destroy a currency things can get very troublesome.

Do I think we will destroy the US economy? I would put that at 10%. Will we just come through this with great growth? I'd put that at less than 5%. Will we become a fascist society? I'd put that at 10% as well. Will we muddle through be poorer than we could have been, but richer than we are now? I put that at roughly 50%. Will we muddle through be poorer than we are now, but not a complete economic basketcase? I'd put that at 35%.

Off the top of my head, those are my p values. The question Pete L asked was essentially --- Ivan, what is your P value on a complete collapse of the US economy in the next decade? And why?

I have given you mine, and also my anwswers --- other things are not constant, and as long as trading opportunities are not shut down, and technological innovation are not curtailed, the gains will be enough to absorb government stupidity and make our lives better off.

If you actually look over the history of this blog, this question has been raised multiple times by Fred Sautet and myself because our good friend Ed Weick has been warning of what just happened for 3 years if not more. I have continually pushed back against the dire conclusion, while admitting the logic of the position if other things are held constant.

We don't have our head in the sand, but we also aren't screaming our heads off. Look at my recent public address on this available on You Tube. I really don't understand the position that both of you are taking with respect to Pete and myself.

Let me remind you from my post just a few days ago --- Adam Smith did say that the power of self interest was so powerful that it could overcome a hundred impertinent obstructions which the folly of human law put in its way. Pete is emphasizing that. I also quoted Smith as saying that what was folly for an individual was surely folly for a nation with respect to irresponsible fiscal policy. I was emphasizing BOTH sides of Adam Smith.

It is true that Ivan is not suggesting we will for sure be in hell tomorrow, then there is absolutely NO difference in the positions except for rhetoric. And Pete and I have both given P estimates on the future possibilities.

As a final point, the great Kenneth Boulding taught me two things about economics --- scholarship in the discipline is about deadly serious topics, and there is a sheer joy and fun associated with scholarship and finding things out. Finding that balance is important. Part of the blogsphere benefit is the sheer joy and fun of argumentation, thinking aloud, wrestling with others.

So there is a deadly serious economic scholarship issue related to magnitude of effects and off setting factors; and there is an enjoyment factor is simply applying economics to figure stuff out.

Can you give me some sense of magnitudes and offsetting factors in your model? And can you both find some joy in economic thinking and debate? It wasn't that long ago that both of you were either in NYU or GMU environments where economics is all encompassing and fun. Don't you have fun with economics anymore in Hillsdale? :).

[Brian Pitt]

D'Amico's points are well put. I will append, however, that many may be ALOT "better off" by watching their parents grow their own food rather than watching their unemployed relatives turn to drugs and alcohol or traversing the streets of say Camden, NJ or Washington, D.C.

[Roger Koppl]

Myyyyy dear Peter, Surrrely you would agrree . . . surrely you would . . . surrely you would agrree that we should not be using probabilities to descrribe a future . . . to descrribe a future . . . to descrribe a fut-taaah which is UNNknowable. Yah! Yah!

As for our frriends Drs. Pongacic and Steele, surrely we can agrree they have a point! We may welll be headed for difficult times. Yah! I have never underrstood why-eee they feel soo strrongly about it. But I can well remember a time when we were all surrprised by just how badly things worrked out in the end. Prrofessor Taleb has recently exprressed his grreat anxiety over the future. Here is someone who underrsands that the future is unknowable. Yah!

[Roger Koppl]

Huh? What? What just happened? I was about to type a comment and then it felt like someone else was in the room with me . . .

[Ivan Pongracic, Jr.]

Pete B: This is sort of surreal.

Me: You can say THAT again! Both Petes keep twisting what I said and then trying to make me look like a dour and sensitive fool.

Pete B: First, the basic idea of putting money where your mouth is, is NOT a personal assault. It is an epistemological point about betting markets in ideas combined with basic economics. Why this got confused with a personal attack on "investment strategies" is beyond my comprehension.

Me: BECAUSE I answered Pete L. right away when he asked me this. I explained that I have no idea how to invest my money in a way that would be safe. I explained it the second time. Now I have to explain it for the third time. I have a well-diversified portfolio and my time-horizon is 30+ years. The problem was that Pete L. would not accept that answer, but kept bringing up this investment stuff which got tired fast, to say the least. Oh, and never actually provided a substantive answer to my challenges despite me at least attempting to answer his challenge to me. I'm sorry my answer was not satisfactory.

In addition, Pete, if you two Petes are so smart why aren't YOU rich?? Why haven't you come up with an investment strategy that would make Buffet green with envy? It's a completely ridiculous and intellectually dishonest argument, and I think you both know it. If we were to judge theory on the basis of how well-off the economists were that believed it, well, I certainly don't think any of us would be hanging out at something called the Austrian Economists Blog.

Pete B.: The bottom line, there may be macroeconomic problems, but there are only microeconomic solutions. We need to look at the microeconomic restrictions that government imposes (that is the point about the gains from trade and the gains from innovation).

Me: Pete, I did exactly that. In my original reply to Pete L.'s Panglossian post, I raised the problems of having large losses of financial value in people's retirement savings and more significantly partial-nationalization of the largest banks in the US (as well as the problems of increasing unemployment and exploding federal debt). Neither of you ever addressed these points.

Pete B.: Off the top of my head, those are my p values. The question Pete L asked was essentially --- Ivan, what is your P value on a complete collapse of the US economy in the next decade? And why?

Me: I never predicted a complete collape of the US economy. Let me repeat that: I never predicted a complete collape of the US economy, I never predicted a complete collape of the US economy, I never predicted a complete collape of the US economy. Please, for God's sake, STOP! I'm begging you!

And I have no idea what the p is. I don't care. That was NOT the point of what I was saying.

Pete B.: I have given you mine, and also my anwswers --- other things are not constant, and as long as trading opportunities are not shut down, and technological innovation are not curtailed, the gains will be enough to absorb government stupidity and make our lives better off.

Me: What this was all about was Pete L.'s following claims: "Contrary to the impression one gets from the vastly over-discussed economy in the media, there isn't much interesting to talk about... Life for most Americans will be essentially unchanged as a result of the "crisis" or government's attempts to "fix" it." Pete L. never specified short-run or long-run. My point was simply that given what has happened in the last six months or even the last 3 weeks, I deeply disagree with this claim. I provided four factors that I believe should call Pete's incredible claims into question. I have asked YOU, Pete B., to tell us whether you can agree with those two sentences above, but you have not answered, either.

Pete B.: I really don't understand the position that both of you are taking with respect to Pete and myself.

Ditto. And I really don't understand why you keep distorting my position.

Pete B.: It is true that Ivan is not suggesting we will for sure be in hell tomorrow, then there is absolutely NO difference in the positions except for rhetoric.

Me: Whoo-whoo, finally, acknowledgment!! As far as the second, part, no, absolutely not right. Though I am not suggesting the imminent collapse of the economy, I also deeply disagree with Pete L.'s claims that there's nothing interesting going on, that there's no financial crisis, and that economic progress will continue just the same as before. THIS was my point all along.

Pete B.: And can you both find some joy in economic thinking and debate? It wasn't that long ago that both of you were either in NYU or GMU environments where economics is all encompassing and fun. Don't you have fun with economics anymore in Hillsdale? :).

Me: I think you're trying to engage in good-natured teasing rather than a cheap shot - I'll give you that benefit of the doubt. Petes, I entered this with a fine sensee of fun, but it was difficult to keep it as Pete L.'s kept pounding on my investment decisions even after I tried to explain to him why I made my decisions, and then having my positions distorted over and over again. I think you can understand that frustration would set in after a while, no?

[Charles N. Steele]

Pete B.: I realize this is just a blog, not a set of serious academic papers. Still, I would suppose it's regarded as a relatively authoritative source of Austrian thinking. That's why it is frustrating that you & Peter Leeson entirely sidestep serious arguments put to you, and instead say some very strange things.

Pongracic has argued that there are serious reasons to think the monetary & fiscal policies of the federal govt are causing real economic damage, and that this damage will persist for quite some time.

Instead of addressing this, Leeson gave an argument which is, frankly, silly: that Pongracic's investment portfolio proves Pongracic doesn't believe his own arguments. In doing so, Leeson also grossly mischaracterized Pongracic's position (Pongracic should be stockpiling barter goods???) and revealed that he, Leeson, might not be the world's sharpest investor either (Peter L., explain again how it would be optimal to sell off one's 401K at a low point?)

You (Pete B.) chime in with the vacuous statement that so long as market participants are able to create wealth fasster than government intervention destroys it, there'll be economic growth.

None of this is relevant to Pongracic's argument that there's real damage being done, and that this isn't just a little blip. And the "if you're so smart, why aren't you rich" argument is, again silly -- and one Austrians should be particularly averse to making. It is entrepreneurship -- the alertness to unforeen oportunities, and special knowledge of time and place -- that makes one a good investor, not knowledge of economic theory. Ivan Pongracic is a very good economist and a lousy investor (sorry Ivan). George Soros is a lousy economist and a very good investor. I'm astounded that you and Leeson apparently confuse the difference.

I wouldn't bother with this discussion, except that Austrian ideas have enough trouble gaining headway in the profession. But Austrian economics has a great deal to contribute to understanding the current crisis, so this should an opportunity for serious discussion and contribution, instead of the kind of silliness you're giving Pongracic's arguments.

[Roger Koppl]

STOP! Right now, immediately, everyone! The real substantive difference of opinion here is quite mild. We're usually a quite amiable group. Somehow everybody's got his tail feathers in a knot -- on both sides, gentlemen.

The problem seems to be this investment strategy line Peter Leeson took. Now, now. The Machlup story shows that such arguments have waaaay less weight than the two Peters are claiming. And the Simon-Ehlich wager was really NOT the same as the Plete line. On the other hand, Ivan, it was not a personal attack. Ivan's reply is fine: as an investor he's flummoxed. That's fair. Let it go. Charles, it's not fair to say BPete is making "vacuous" statements. Come on. He's a serious scholar and the leader of the Austrian school. I know your saying he fell into a tautology without realizing it. I don't think so, but even if you're right we should not use charged language like "vacuous."

To quote the great philosopher Rodney King, "Can't we all just get along?"

[Ivan Pongracic, Jr.]

Works for me, Roger. I agree this has gone much further than it should have. Sorry for whatever role I played in all this.

[Vedran]

I find the answers given by the Petes claiming the market will simply overcome any barriers to be lacking rigor and seem largely based on faith backed by Bayesian updating based on markets overcoming events in the past instead of analyzing the unique circumstances of the present.

A large part of this recession was initiated by the inability of the market to deal with the interventions created by Fannie and Freddie. The market failed to maneuver around their interventions. The idea of the market being strong enough to move around any regulation has also failed by example of the recent crisis.

It hasn't happened before; so it's not happening now is not a good argument.

Further, it's like claiming a driver will manage to avoid all wrecks on the road today when he's obviously already in one.

[Steve Horwitz]

Folks,

It's possible to acknowledge that we are, in fact, in a recession of some seriousness (though it's not at all clear how serious) and still agree that markets are resilient etc.. "Resilient" does not mean "never has bad things happen," rather it means that one is able to come back reasonably quickly and strongly when faced with obstacles.

I can't speak for P&P, but my position is that even given the short-run problems that we are now in and likely to be in for a bit, barring some major intervention/screw-up beyond what we've seen so far, I think the forces of Smith and Schumpeter are strong enough to overcome Stupidity in reasonably short order. What's happening is not uninteresting (contra Leeson), but I don't see it as being a problem of the level Ivan seems to think it is (or is likely to be).

Something like the Great Depression is unlikely for two sets of reason:

1. I actually think we know more about what constitutes good and bad policy, esp. monetary policy, than we did back then. And there is a better set of pro-market ideas with louder voices to head off the worst ideas.

2. The economy itself is more diversified and flexible in ways that will allow it to respond better, on the assumption we don't make very major errors in policy. The current bailout does not, in my view, yet rise to that level.

[Vedran]

Steve,

I would agree with you for the majority of recessions. But in this case, the market did not overcome the interventions already in its path. Something must be done politically to change Fannie and Freddie or the market will not come back quickly.

You're mentioning future regulations which are frightening. But don't you see that we haven't even dealt with the past ones successfully?

[Vedran]

Another problem that I'm having is well if everything is always going to be fine....the market will always overcome interventions and come out on top then,

why do we teach Austrian economics? Why fund student scholarships? Why hold seminars? Why write op-eds or academic journals? Why have think tanks? All these organizations must be really stupid or something because the market will always overcome in the long run.

If everything is going to be fine no matter what then there's no point in doing any of this crap unless you just purely enjoy it. If this idea is really true, I don't think this blog or our professions have any real meaning. In fact, we're detracting from society as we could be producing in the private market which is going to be just fine anyway with or without us and all these free market institutions.

[Steve Horwitz]

Vedran,

You're not reading carefully. Yes, markets overcome most obstacles, *but not without making us worse off than we would have been otherwise*.

So there are two reasons to study Austrian economics:

1. To understand why markets are, in fact, resilient and what the source of our prosperity is.

2. To understand why intervention makes us worse off than we would have been, if not absolutely worse off if the intervention is severe enough.

[Ivan Pongracic, Jr.]

Steve wrote: I don't see it as being a problem of the level Ivan seems to think it is (or is likely to be).

Me: Steve, which of these four things do you not think is a big problem? 1) loss of $8 trillion from financial markets, wiping out many people's retirement savings; 2) partial nationalization of the largest banks; 3) massive recent increases in the federal debt and the creation of further liabilities with potential to add trillions to the debt in a matter of months; 4) unemployment likely hitting 7-10% over the next year.

Steve writes: Something like the Great Depression is unlikely for two sets of reason:
1. I actually think we know more about what constitutes good and bad policy, esp. monetary policy, than we did back then. And there is a better set of pro-market ideas with louder voices to head off the worst ideas.

Me: Really? So, how exactly did these things keep "us" (who now know so much more) from bailing out one investment bank after another, as well as Fannie/Freddie, with massive amounts of money, as well as partially nationalizing our largest banks, as well as giving unprecedented authority to the Tresury Dept, as well as having the Fed engage in years (most of which were non-recessionary) of expansionary policy?

And most importantly, how did these things keep pretty much ALL of "us" out there (including ostensibly highly pro-market people) from blaming the markets and lack of regulation on everything that's been going on this year?

Steve says: 2. The economy itself is more diversified and flexible in ways that will allow it to respond better, on the assumption we don't make very major errors in policy. The current bailout does not, in my view, yet rise to that level.

Me: That's a heck of an assumption, Steve. Don't we teach our students that there was nothing inevitable about the Great Depression, that it was not the economic consequence of the stock market crash of '29, but rather due to all the subsequent horrible policy errors? That it was basically the Fed completely screwing up the monetary policy that was the largest single contributing factor to the depth and length of the Great Depression? We all here cheered Anna Schwartz's WSJ interview where she explained that Bernanke is getting it completely wrong right now. We all here were aghast at the partial nationalization of the banks. We all here were dead-set against the bailouts. How can you possibly have the tiniest bit of confidence that horrible policies will cease in light of what's already been done, especially once Democrats are in complete charge of the government, starting very soon? Colbert had an FDR apologist on his show on Thursday who talked about Obama's giant admiration for FDR and how that is the sort of leadership he hopes to provide.

As Bob Murphy said a day or two ago, you guys seem to be in some serious denial....

[liberty]

Indeed, I was thinking something similar to what Vedran said. Of course, the positions of the Petes don't deny that we are making ourselves worse off than otherwise. And policies may not achieve their ends and backfire on those they aim to help. So, one can still argue those things even if markets will ALWAYS overcome obstacles.

But, surely they sometimes also provide short-term relief. So, if markets will ALWAYS overcome policy obstacles, then really there is little to battle against.

But obviously markets won't ALWAYS overcome intervention. We all know that. Markets can't overcome the abolition of markets -- except to the extent a black market can never be fully stamped out. But, clearly that isn't enough to allow for continued improvement in living standards. So, there is some tipping point, as I've been saying.

I guess we are all just drawing the line somewhere different. But, what I want to know is WHY. I have made a few remarks about why I think we are nearing the tipping point - and I'd be happy to elucidate my position on that further. I'd be interested to know why Pete L. thinks we are nowhere near this tipping point, I think he said that it is because we have not yet cartelized labour markets. He did not reply to my mention of the EFCA, but presumably he thinks it won't change anything much (since it is very likely to pass, so it isn't that). The other labor market restrictions don't seem to bother him either, nor nationalization of banking.

Clearly, adding n% more intervention, even if n is similar to past increases, at some point brings you to a tipping point. For you, what indicates we are dangerously near to reaching a tipping point?

[Vedran]

I agree. "markets overcome most obstacles" emphasis on the most which is different from what Leeson and Boettke are essentially saying. (unless you mean can overcome everything except outright communism)

I don't think Pete and Pete are making a strong case. Instead of pointing out how the market will overcome, their stand seems to be "markets have overcome in the past; hence markets will overcome now" which is not a logical proof.

I think there is considerable evidence that markets will not overcome this crisis unless things are changed in the fundamentals of financial sector especially regarding Fannie and Freddi. Boettke and Leeson's entire argument seems to ignore all the relevant facts of today and simply look at the past and then draw a conclusion. This just isn't a proper analysis of what's going to occur and what's relevant now.

Lastly, I like that you mention "if not absolutely worse off if the intervention is severe enough." I think we are generally in agreement with the clarification.

[Steve Horwitz]

Maybe we are in denial Ivan, but I think this dispute is really a matter of degrees not a difference in kind. Again, I agree that these interventions will make us worse off than we would have been without them. Where we seem to disagree is *how much* worse (with you allowing for the answer to be that we'll be absolutely, not just relatively, worse off) and over what period of time.

Of course the loss in wealth you talk about is a problem. But consider this: the loss in wealth from the 1987 stock market crash was a larger percentage of GDP than the loss from the 1929 crash, yet that was a mere speed bump during a longer period of growth. One reason, I would argue, is that the Fed did its job (again, in a world of the second best), having learned lessons from 1929. So a massive loss in wealth need not lead to a severe recession.

Consider further than one of the biggest problems in the 1920s and 1930s is that we were a nation of small, unit, undiversified banks, primed to fail at a moment's notice. The banking system today *even with the mistakes of the housing boom* is less likely to experience that level of failures. The economy today is different and the odds of the worst-case GD type scenario playing out are much lower.

Yes, Obama and a filibuster proof Congress could try to resurrect the New Deal. Yes, that could make matters worse. Again, I don't discount completely that we're in the world you say we're in. I just think the odds of it are lower than you do.

[Vedran]

Just wanted to note a distinction in the arguments here,

Ivan, liberty, and I have been talking about what's going on now.

From the Petes, I'm hearing a lot about happened in the past.

All recessions are different to some extent. They are not homogeneous events. The current facts are the most relevant. It's like talking about the panic of 1893 during the Great Depression. Sure that might be somewhat relevant but the key facts are the labor market cartelization and the gold standard.

Same in this case, sure let's see what the crash of 1987 has to tell us but ultimately it's different from what's going on now.

As Ivan has been doing, let's talk about Fannie Freddie, about what the gargantuan losses mean, about future regulations. Recessions are not homogeneous events. You can't just look to the past for all the answers and ignore real facts of the present.

Every single time there is some unique additional problem gold standard, labor market, run-away inflation, energy shocks, etc.

To say the market will just work does not in any way deal with the specifics of the problem. It is so generalized that I could not endorse a position of the sort as a solution to the problem.

[Ivan Pongracic, Jr.]

Fair enough, Steve, thanks for the thoughtful answer. I agree about the differences being of degrees rather than in kind...

[Peter Boettke]

First, let me say that I would like to see all tensions in this discussion go away. I never meant a personal attack on anyone, and within the confines of writing while on the road I tried to be interpret people fairly and also to give more than just vacuous comments. I apologize to anyone I affended, and I also apologize to anyone who thinks I engaged in loose logic, I will try to do better.

Second, I too agree that these are important times and we need rigorous argument. I wrote an entry not long ago entitled "Pivot People for Pivotal times" I believe. I also have been a critic of the current policy choices and the current situation. So I think it would be hard to say my position is Pollyanish.

Third, while I invoked p values to try to sharpen the discussion (I just want to know how much confidence people have in their assessments) I was not violating any sort of Lachmann Law (though Roger's impression online is almost as good as the one he does in person). It is just a common sense test --- what do you think will happen? I said I believe there is a 10% chance we will go to hell. A 35% chance we will be poorer tomorrow than today. Only a 5% chance we will come through this as rich as we could be. And a 50% chance we will come through this be pooer than we could have been, but still richer than we currently are. My only "justification" for this numbers is a hunch about our future (unknowable, but not unimaginable -- and these are imagined futures). I think it might make sense to others to lay out their vision as well and how much confidence they have in it. Perhaps that is asking too much.

Fourth, Charles chides me for not dealing with substantive issues in Austrian economics. I am not sure I would agree given the constraints of a blog and also writing while I am on the road. But Charles refused to engage me on the points I did raise in theory, in applied theory, and in empirical economics. Fundamentally, the major issue in an empirical discussion is magnitude and contingencies. But there is also a substantive theoretical point here about the nature of non-neutral money and how to study its influence on the real economy. Just as there are substantive issues concerning the implications of the capital structure that consists of heterogenous good that have multiple-specific uses.

I too am concerned about the professional reputation of the Austrian school --- in fact one could argue that I been attempting my entire career to get inside the economics profession via some rather varied and often clumsy strategies. Pete Leeson's ability to engage the profession on their terms via his own approach should be an exemplar to anyone coming up the ranks, but lets not digress. My biggest concern is with the charge leveled at Austrians of "unreasonableness" and "logically flawed" and "empirically empty". I think each of these charges are false --- otherwise I wouldn't be an Austrian. But I must admit that the extreme pessimism of some Ausrians does convey the message that even a broken clock gets the time right twice a day. We can do better. And the way we can do better, I am suggesting (with humility and in full realization that I might be completely wrong) is to consider magnitude of effects, and off-setting factors that might molify (rather than amplify) these effects. Remember I believe in the 10% range that we will be in hell, and 35% range that we will be in a prolonged and poorer state. Thus, 10% current policy amplifies the effect of malcoordination and rather than ships merely passing in the night, they will crash and burn. And I said 35% range, the ships will pass in the night to such an extent that the molifying forces of trade and innovation will be kept to a minimum. I do think that in the 50% range that the economic forces at work in our economy will molify the impact of bad government policy, not completely, but enough that tomorrow's trough will still be higher than today's peak. There is a 50% chance in my world that my children and grandchildren will be living a life of riches almost unimaginable by us; but there is a 45% chance they will be living a life that a younger version of ourselves could have lived (sad -- imagine if we still had 8 track cassetts?).

But look, my suspicion is that there is more agreement here between Ivan, Charles and myself and Pete than one could glean from these exchanges. The good Dr. Koppl is right. I for one apologize if anything I said could be taken as offense and in particular personally offensive (I don't apologize for arguments, in science, arguments should hurt that is how we learn). I bounce ideas around because I don't connect them to people -- they are disembodied from person and just "out there" to be assessed, to be torn apart, to be reconstructed, and in some instances to be stolen (just as Steve Horwitz how good I am at theft). Think intellectually opportunistic, and write as clearly as possible. Again in all humility, I am not the best thinker nor am I the best writer --- but that is what I strive to do for good or bad. Sorry if the blog posts gave a different impression.

[Pete]

As always, what could I add that Pete has not? He put it better than I could. I'm glad my posts provoked discussion; that's what we want. But I certainly hope they didn't provoke hurt feelings. That was never the intent. Onwards and (hopefully!) upwards.

[Ed Weick]

Pete,
As the fly on the wall reading this august debate, please allow me to add my 2 cents worth.

My thought is that our past will not be prologue.

Nuclear proliferation and a multi-polar political economic religious world would seem to have raised the generic probabilities of Mises' Catastrophe.

ED

[Ivan Pongracic Jr.]

Clearly this discussion is winding down, but I did want to add one more comment.

Glad to see the comments by two Petes, and to see tensions dissipated. At no point was I offended or anything close to that, just frustrated. But that is now gone, and I'm happy to continue in the usual amicable spirit.

I also agree with Pete B. that by any reasonable standard there's little substantive difference between the two Petes, Charles and me in terms of how we see economics and the application of economics. The differences are simply in terms of how we see the recent events and their impact on the near and far future. I understand Pete's attempt to assign probabilities as a way of clarifying how we see the future. I wish I could go along with that, but I can't - I really have no idea what they are, and I'm not sure how helpful it is to assign probabilities which are derived strictly on the basis of 'imaginative hunch.'

But I would like to comment on the 'extreme pessimism of some Austrians' description by Pete. I don't know if he was referring to me, Bob, Charles, Vedran, liberty, Fred, etc. here or maybe certain other Austrians. I would just like to clarify this as far as my own view. I don't feel that I'm a particularly pessimistic person. Over the last few years I had many debates with my father, who was predicting doom and gloom and I honestly believed that he was completely wrong. It turns out he was almost completely right. He's been predicting for years that the current financial crisis would happen. Was it a matter of a broken clock being right twice a day? I don't think so, because the reasons he gave for it - heavily expansionary monetary policy creating a giant real estate bubble, multiplied several times over by derivatives which are based on highly problematic if not dead-wrong models - turned out to be right on. I was the 'optimistic' one, saying trust the markets, people know what they are doing, despite understanding at least the terribly distortionary effects of the Fed policies. But now I see that he was not just being pessimistic - he was actually applying his knowledge of economics, and what do you know, ended up being right. What a shocking thought - you should be able to use economic analysis to foresee the coming of severe crises. (BTW, this happened before - my dad was warning people of utter collapse of communism in Yugoslavia even back in the '70s when he was a public auditor for the state of Croatia. They all dismissed him as a dour crank, nobody thought such a thing was possible. When Yugoslavia collapsed, a civil war exploded, thousands of people died, and the whole region went to hell in a handbasket for almost ten years.)

I understand the desire to be optimistic and present a positive face to the world on the part of Austrian economists. But is there really much to be optimistic about right now? We have a situation where almost certainly sooner rather than later the very process of allocation of capital in an economy will become politicized due to recent partial nationalization of largest banks. How can we talk about 'the market system' in such a situation? Both presidential candidates are proposing buying out a large amount of private mortgages, too. So we are looking at the federal government becoming a major player in the 1) banking and 2) real estate markets - in addition to everything else it's been doing for decades. Oh, and let's not forget the hugely expanded role of the Treasury dept as well as the more and more forceful interventions by the Fed - and an almost certain large wave of new regulations coming down the pike in the next year or two. Bob Higgs has been describing our economy as 'participatory fascism' for many years now. Can anyone doubt that this is the economic system that the US now has? If you want a slightly less loaded term, then 'corporatism' will do. How can we have faith that 'markets will fix it' if the market process is heavily attenuated in its most fundamental role in a market economy - allocating capital? We are no longer living in a capitalist country in the US. Is somebody willing to deny this on this blog?

Now, if we can agree on this, we absolutely must apply Misesian dynamics of interventionism analysis. The current system will destroy wealth not only in relative but in absolute terms and create all sorts of undesirable unintended consequences. These will almost certainly be followed by further government interventions designed to fix them - especially given the undivided, market-hostile government that we're about to get.

It is true that the American economy grew through many bad periods. But the important point to see is that it didn't grow during the Great Depression. There WAS a point where the perverse policies were able to overwhelm the power of the markets. Where does your confidence come from that the government's forceful takeover of the fundamental role of the market economy - allocation of capital - will not create consequences that whatever markets are left in our economy will be unable to conquer?

I'm optimistic in one sense: I do believe that we will pull back from the abyss when we are facing into it, as Fred described New Zealand. But here you go: I guess I'll finally say that I think there's at least a 75% chance that over the next four years we will see little real economic growth (though the govt might be able to manipulate GDP in the Soviet style to show some positive growth) and we will see much deeper govt interventions into the economy as the 'consequence.' We are in a recession, and the current recession will grow deeper and longer. We are not looking at a 6-9 month correction right now. We have something subtantially different today than in the last 70 years - because of the actions the government has taken in the last month or two. So, I'm saying that we have reached a tipping point again through partial nationalization of the banking system and coming partial nationalization of the real estate markets and the continued heavy role to be played by Fannie/Freddie.

Pete and Pete, I would love to hear which part of this story you find fault with. If you don't find fault, then how can you find it in you to be optimistic at this time? And please remember that extrapolation is not analysis.

On the other hand, if you want to let this die and move on, I perfectly understand.