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Yes, the principles are unchanged, problem is that many principles are still contradictory.

Yes, the principles remain unchanged but the institutional and historical circumstances in which they operate result in different emphases or new applications.

Thus, we must dust off our past analyses of command and control economies, but the current situation will not be carbon copies of what was experienced in the earlier decades of the 20th century.

There are a wide variety of theoretical forms of the interventionist-regulatory economy, and like a virus that mutates the current version that is developing in the U.S. has it own unique qualities and characteristics.

Thus, the underlying economic way of thinking is not changing and will not change. But how it fits when it is overlayed on the terrain of the contemporary social order will have its special and distinct properties, as it has in each historical epoch.

And, as a result, our knowledge will grow about the nature and qualities of both the market economy and the interventionist system as we think through and apply our economic way of thinking to the new world of the Obamanomic State.

Richard Ebeling


Are you putting this up to put us on or provoke us, or do you have Mankiw on the same silly pedastal that you have the execrable Andrei Shleifer?

Things will change, whether or not they should. There will be renewed "faith" in Keynesian macroeconomics. And this part of Principles will offset whatever good the price theory side might do.

Dean Baker nailed it:

"Gregory Mankiw uses his NYT column today to give us an explicit "who could have known?" about the economy crisis. He tells readers that: "fluctuations in economic activity are largely unpredictable."

No, this crisis was completely predictable. The problem was that the leading lights in the economics profession completely missed the boat and are now using their platforms to tell the public that it wasn't their fault.

The basic story was and is the housing bubble. How could they miss an $8 trillion housing bubble? What were they smoking?

We have a hundred year long trend, from 1895 to 1995, when nationwide house prices just track the overall rate of inflation. Suddenly in the mid-90s, coinciding with the stock bubble, house prices begin to hugely outpace inflation.

The run up in prices cannot be explained by any obvious shifts in the fundamentals of supply and demand. Furthermore there is no remotely corresponding increase in real rents. And, the vacancy rate for housing rises to record levels.

If economists could not see this bubble, then they should look for another line of work. Sorry, this fluctuation was entirely predictable. The people whose job responsibilities including recognizing a dangerous bubble like this one just blew it completely. It speaks volumes about the nature of the U.S. economy that almost all of those people still have their jobs, unlike the tens of millions of other workers who lost their jobs or can only work part-time because of the incompetence of the economists."

Where's the evidence that Greg Mankiw understands the principles of economics, or how to use them to provide a sound and proper economic explanation?

Greg, how much did you make in the market from your prediction of current events? If its as easy as you claim it is, then you must now be a very wealthy man.

In my corner of the world, Britain and Ireland, I think that house prices will continue to rise in the long term.

They will rise because of restrictive planning laws preventing the building of more, because of immigration and because of high petrol taxation. (And if you're interested I am invested in that position).

Spotting bubbles is very difficult. You have to distinguish them from the effects of capital competition and changes in capital complementarity. And you have to distinguish the state interference too.

Gordo, if I was in the financial industry, I easily could have made $3 BILLION. One guy did.

But this McCloskey / Fama stuff stuff that is behind your remarks is bunk -- a mistake of conflating the understanding of overall market order and disorder with knowledge of particular market opportunities -- with the capital to exploit it.

Two different things which a competent economist should understand, but which many econ professors don't seem to understand. Justin Fox has a book coming out in a week or two on this topic, a book I understand which points out how the Fama crowd have misunderstood Hayek

Surely though Greg if you understand the overall market order that presents an arbitrage opportunity?

If I'd have known about the crisis, even had I not known when it would happen exactly or in what sector I would have been able to protect more of my investments.

Nice try, Greg Ransom, but I don't buy your deflection of Gordo. If the crisis was so easy to predict, you should be rolling in dough, laughing at the rest of us silly people who believe the weak-form EMH is basically true.

Your contention that in order to have made money from this there is some requirement to "be in the financial industry" makes no sense, and your statement that "one guy did" make a lot of money means absolutely nothing: it is the same thing as saying "anyone could predict the powerball numbers, if I were in the lottery industry I could have made millions, one guy did."

The reality is neither you nor I nor Greg Mankiw foresaw the crash. Some people may have - or, at least, they thought it was more likely than the rest of us did - and they made money. Don't pretend otherwise.

Now, "Where's the evidence that Greg Mankiw understands the principles of economics, or how to use them to provide a sound and proper economic explanation?" Other than his often insightful blog and well-written principles texts? How about "A Contribution to the Empirics of Economic Growth" or several of his other journal articles? Plus less obvious proof that comes from looking at the work of his best students, some of whom are doing the most interesting work in economics today.

The work of Hayek has a lot to say about the current economic situation. However, understanding Hayek does not give you mystical powers of precognition, and such powers are not required of good economists.

N.B. the Justin Fox book is called "Myth of the Rational Market" - a few years ago, he joked that he and Bryan Caplan would coauthor a book called _Good Times: Why Absolute Monarchy and the Feudal Economy Weren't So Bad After All_ :)

It is one thing to see a crisis coming; it is quite another to call its precise timing, which is how one makes money, especially lots of it. For the congenitally risk averse who go with long run "diversify and hold" strategies and are afraid of trying to play fancy puts with their requirements for precise timing calls, it is not unreasonable to have been pointing out that there was an absolutely overwhelmingly unprecedented housing bubble that was clearly going to crash, and that there were lots of derivatives based on those that were going to crash also and bring down a lot of financial institutions, but in the face of the opacity of the system it being impossible to call exactly which ones, not to mention when, it was perfectly rational to sit tight and wait to suffer.

All this "put up or shut up" and "do you wanna bet about it, buddy?" is just so much stupid macho horseshit.

Zac, How does a person who is not in the finance business make money out of knowing that housing prices have to decline dramatically sometime soon, apart from selling out to minimise their loss if they own property in an area where the value is inflated by the bubble?

Enjoyed your interview with Philip Adams on 'Late Night Live' last night. Is there any chance that you would place a photo of your Supply and Demand Diagram on your website, please?

Zac. You've read half of what I said. And I said something very brief to begin with.

I began writing about the artificial boom / housing bubble in 2004, perhaps 2003 (most of my blog archives are gone.)

To make real money in the crisis it really did help to be in the financial industry and to have some capital to invest, and some contacts to leverage money.

What Barkley said.

Until late last year, I had given little thought to macroeconomics. Since then I have become quite appalled at economists like Greg Mankiw.

I worked for a couple of mortgage brokers three or four years ago, but knew nothing of ATBC at the time. Had I knew then what I know now, I could have easily predicted the housing bust.

But I wouldn't have made any money off it--I had nothing to invest, and I couldn't have timed the bust precisely anyway.

Well, chaps, it looks like the general opinion is that we do have some arbitrage opportunities. In that case the theory may spread because of them.

Predicting that there will be a recession sometime or other in the future is easy. Timing exactly when it will start is next to impossible. That was Mankiw's point and it is correct.

The ABCT is perfectly consistent with this mainstream position.

That isn't to say there aren't differences between the mainstream view of what causes recessions and the ABCT view.

But if someone were to ask me, "will a recession come in the future?" I would say, I think so. And if they said, "if you are so sure, why aren't you rich," I would laugh. Because I didn't say I had a way of predicting the timing of turning points.

The standard ABCT doesn't claim to predict turning points. While it would be great to have a theory that determine turning points, I don't think that a theory that can't do so is useless.

My view is that recessions are due to an excess demand for money. This caused by changes in the money supply or the money demand. And both of those can change for any number of reasons. The monetary disequilibrium theory of recession is next to worthless for predicting turning points. But I don't think that makes the theory worthless.

Of course, my approach doesn't create the looming sense of disaster associated with ABCT in a world with growing money and credit. My view is like the mainstream view. Recessions happen sometimes. When? I don't know.

As for recent history, I thought a bubble in housing prices was likely, but I wasn't sure. And while I would have expected that those holding mortgage backed securities would have taken a loss, I had no idea how many mortgage backed securities were held by banks. (I knew investments were a large proportion of bank assets, but not how many of them were mortgate backed securities. And nothing about how many were held by European banks.) I had no idea that investment banks were using commerical paper, including _overnight_ commercial paper, to fund large portfolios of mortgage backed securities. And so, when the "runs" of these shadow banks happened, I was pretty much surprised. How far that drove down T-bill yields was a surprise to me. (As people got out of now risky commerical paper and instead when into T-bills.)

The rise in structual unemployment and the shift in production out of construction into other sectors of the economy was not shocking. Kind of normal..

But the 6% drop in spending in 6 months, that was a surprise. The huge increase in the demand for money (FDIC insured deposits) and base money (now interest bearging deposits) was a surprise to me. That the Fed appeared unable to break out of its interest rate targeting mentality surprised me as well.

But nothing that has happened has been inconsistent with the monetary disequilibrium approach to the business cycle.

Dear Bill Woolsey,

I subscribe to much of what you say above, but the monetary disequilibrium theory of recessions that you adhere to is not a complete theory. Stripped of all fancy words and numbers, it simply says that there's a demand shock in money held - and from this selective, ad hoc, postulate - dropped from the sky like a meteorite - combined with some auxiliary assumptions about price dynamics whose underling rational can vary widely, your approach deducts a process and a corollary cure for the dysfunctions brought by this process in the macroeconomic price structure. But the capital question here is not simply, well, "there is a demand shock", either of the monetarist or of the Keynesian kind, but "why is there a demand shock?". (There are others who identify shocks on the supply side, yet another meteorite dropped on Earth, a more verosimile ad hoc postulate in fact, but how aften does meteorites crush on our planet, drastically alter the resource scarcities and we live to make an economic alaysis?). A Hayek noted, the fundamental, basic and essential problem in explaining business cycles - to the extent they are a regularity and not an hazard of nature - is to explain why does a short-circuit in the price system - which left to operate freely is universally thought to bring supply and demand into equilibrium - why, then, does a shortcuricuit in the price system occurs in such situations and only afterwards the consequences and the cures of this problem can be inquired and identified. In other word, the fundamental problem implicit in Hayek's statement - which has implications for all economics - is this : does the price system sometimes fails or is it an insufficient conceptual framework or does he actually work and the causes of the cycle are exogenous to the price system ?


Thank you for your reply.

Think of the auto industry. Usually, production is growing. Firms make business profits. But, sometimes, production shrinks and firms suffer losses, workers are laid off, and so on.

Now, we have a general undestanding of supply and demand. Of how the selling prices have some relationship to the subjective values of buyers (relative to other things they might buy) and how the resource prices have some relationship to opportunity costs. We can think in general terms about what is true when firms lose money and contract output (value of product less than opportunity cost.) We can also think about specific things that might cause this to happen to the auto firms. New alterative uses for steel raise costs. Improved trains reduce the demand for cars. Whatever. And we can look at past episodes of losses and try to explain what caused them.

But, we might try to come up with a grand theory of why auto firms generally make money and expand production but sometimes have reversals. I guess "cobweb" theories would be of that sort. But I can't imagine that one would say that we must develop such a theory. That to say, that it is all supply and demand, tells us nothing. To list things that could cause changes in supply and demand. Gee, that is like an explanation in terms of meteor strikes. To look at history and explain what happens with supply and demand is pointless.

Well, I think the business cycle is much the same, but it is the story of the quantity of money and the demand to hold it. And, of course, with sticky prices.

(For what it is worth, monetary disequilibrium theory is about the supply and demand for money. I find it confusing to combine that lingo with demand and supply shock lingo. Demand and supply of money, or or aggregate demand and supply of goods. Monetary disequilibrium, of course, is about how any problem with aggregate demand is the result of changes in the supply or demand for money.)

We have recessions sometimes... the car industry contracts and suffers losses sometimes.

We have a general understanding about how the quantity of money and the demand for money fits together and why prices and wages are sticky.

Why should the money supply process generated by banks and goverment and the money demand generated by the desire to hold money relative to other things never have an excess demand for money at the current price level? Why should the causes of an imbalance always be the same? (Is it aways competition from Japan that causes a decrease in the demand for U.S. autos, and a contraction in production and losses? Why can't it be different things at different times?)

As for the grand notion as to whether this should be accounted as a market failure or not... well, I am very intersted in such issues, but I don't think justifying the market economic system should be always first in our thoughts as we try to explain market phenomenon.

But, of course, I do advocate having monetary institutions where the quantity of money adjusts to the demand to hold money so that aggregate nominal expenditures grow at a stable rate.

Maybe before the Messiah the principles or economics were unchanged, but after the One has embarked on his 8 fold path of change and hope, all will be be filling with empathy and togetherness.

Bill, what about misallocation?

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