Coordination Problem

The People’s Republic of Berkeley

Frederic Sautet

Over the summer, I lectured at the Institute for Humane Studies Poverty and Prosperity seminar, which took place at the University of Berkeley. As we were walking on College Avenue (if my memory is correct), I saw a poster from the Berkeley's Rent Stabilization Board (yes, it does exist) advertising the virtues of rent control. In case you thought rent control was an issue of the 60s and 70s and it had virtually disappeared from the policy scene, well, think again... It is still alive and well in Berkeley. (And to my knowledge in NYC and a few other places.)

And here is the group (from left to right Scott Beaulier, moi, Bethany Kitchen, Mario Villarreal, Susan Love Brown, Andrew Cohen, and Kelly O'Keefe. Elisabeth McCaffrey took the pictures. Thanks Liz!):

Hoover and the Great Depression, redux

Steven Horwitz

UCLA's Lee Ohanian has a new paper out (gated) [UPDATE:  ungated version here] that argues that Hoover's high wage policies were a substantial cause of the severity of the Great Depression:

I develop a theory of labor market failure for the Great Depression based on Hoover's industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. I find that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation and low levels of nominal spending apparently had such large real effects during the 1930s, but not during other periods of significant deflation. 

Not surprisingly, he's taking a beating in the left-oriented press (see an example from Salon here) from those who simply cannot imagine that Hoover was anything but Rush Limbaugh's spiritual ancestor.  The fact that Hoover might have been a significant interventionist, many of whose policies foreshadowed the New Deal, is one their brains simply cannot accept, no matter how much evidence there is.  Of course, the fact that Rothbard and Vedder/Gallaway have hammered this point before is not discussed at all.

I have a piece in the next issue of Econ Journal Watch that provides a detailed critique of this AER piece on Hoover and Roosevelt, as well more generally offering a counter-narrative of whole 1929-45 period integrating a bunch of different research.  I'll certainly post a link here when it's out, but I did want to include this bit of it as a counter to the Myth of Hoover the Laissez-Fairist:

Eggertsson’s portrayal of Hoover as dogmatically committed to a balanced budget and small government is utterly at odds with Hoover’s personal history  and stated beliefs, as well as the actual policies he put into place while  president. Hoover’s first major role in government was as head of the Food Administration upon the US entry into World War I in 1917. He leapt into that job with great energy, having long believed that government can and should play a large role in the economy. In 1912, he had supported Teddy Roosevelt and the Progressives for the presidency, and was touted by many, including Franklin Roosevelt, as a potential Democratic presidential candidate in the 1920s. He was a registered Republican, however, and in 1921 accepted a position as Secretary of Commerce under President Harding, a job that he retained through most of the 1920s.

Hoover vowed to turn what was one of the lowest-profile departments of the federal government into a more visible one, specifically by increased interaction with businesses and involvement in economic policy. Donald Stabile (1986) has characterized his views as a desire to “transform the structure of the US economy from one of laissez-faire to one of voluntary cooperation” (819). In her book Herbert Hoover: Forgotten Progressive, Joan Hoff Wilson (1975, 68) summarizes Hoover’s economic views this way:

Where the classical economists like Adam Smith had argued for uncontrolled competition between independent economic units guided only by the invisible hand of supply and demand, he talked about voluntary national economic planning arising from cooperation between business interests and the government… Instead of negative government action in times of depression, he advocated the expansion of public works, avoidance of wage cuts, increased rather than decreased production—measures that would expand rather than contract purchasing power.

When paired with his long-standing antipathy to free trade (65-66), this was hardly the program of a “limited government” or “laissez-faire” dogmatist.  Other ideas he championed around this time included “increased inheritance  taxes, public dams, and, significantly, government regulation of the stock market” (Rothbard 2008 [1963], 188).

As early as the 1920-21 recession, Hoover was becoming famous for convening conferences with business leaders as a way to use the power of government to generate what he saw as desirable “cooperation” as opposed to individualistic competition. In contrast to Harding’s much more genuine commitment to  laissez-faire during that recession, Hoover quickly got busy organizing  conferences and relief efforts and exhorting businessmen and the public to bring that spirit of “mobilization” and “spontaneous cooperation” experienced during the war to peacetime economic reconstruction. At one conference on unemployment in September of 1921, Harding opened with remarks committing him to keeping the federal government out of such issues, and yet Hoover followed by expounding the need to “do something.” The conference leaders, with Hoover’s approval, coalesced around a call for more “government planning to combat depressions and to bolster the idea of public works as a depression remedy” (Rothbard 2008 [1963], 192). Historian David Kennedy (1999, 48) describes Hoover’s activism this way: “No previous administration had moved so purposefully and so creatively in the face of an economic downturn. Hoover had definitively made the point that government should not stand by idly when confronted with economic difficulty” (see also Vedder and Gallaway 1993, 67-68).

It remains a fascinating question why the proponents of the New Deal can't see in Hoover the precursor of so much of what the New Deal gave us.  His call for maintaining nominal wages in the face of price deflation was a belief he'd held for at least a decade prior to the onset of the Great Depression.  That is the Hoover that Americans voted for in 1928!  Of course, what the Hoover-Roosevelt policies gave us was mostly disastrous, but to deny the fairly straightforward facts of what Hoover believed and what he did seems to me to be the worst sort of dogmatic "head in the sand"ism.  Note that the citations here are not just to free market types.  David Kennedy is a liberal and that book won a Pulitzer.  Stablile and Wilson are, again, just historians doing their job.  Wilson's book and its title are particularly telling here as she lays out the case for her title very clearly. It's not "free market" ideology to argue Hoover was an interventionist;  it's good history.

What's even funnier is how the commenters at the Salon piece linked above accuse Ohanian of being a lousy historian and of New Deal critics of ignoring the facts, etc., while stubbornly clinging to an utterly false view of Hoover. 

Physicians, heal thyselves.

A Milton Friedman on the Horizon?

| Dan Klein | --- Guest Blog Post ---

Pete and I were discussing why there is no Milton Friedman nowadays. He invited me to write up what I was saying, so here goes.

The liberalism that emerged during the 18^th and 19^th centuries has been the jewel of prosperous civilization. Liberalism had been a way of thinking, organized around a core vocabulary: liberty, freedom, liberal, property, contract, equality, equity, justice, law, rule of law, and rights. 

That core vocabulary became confused especially in the period 1880 to 1940. Classical liberalism was eviscerated and collapsed during the early generations of the 20^th century, reaching a nadir around 1940. The figure that best illuminates this period as liberal devastation and nadir is H.L. Mencken. Perhaps to a fault, his liberal wisdom shined as eccentric, taboo-smashing, solitary iconoclasm.

Coming out of the Second World War –- waged against regimes even more statist than the western allies, waged as freedom versus evil despotisms –- and going forward, there occurred some liberal re-awakening. Everywhere, the bad consequences of statism started to show. Illiberals became somewhat more diffident about statist aesthetics and sentiments.

But the culture never made a return to any solid liberal understanding. The postwar generations have largely continued in the cultural ruts of the reactionary period 1880-1940.  Liberal enlightenment had not been a matter of foundational, separate social sciences — at least not in the Scottish enlightenment. It was a nexus of verities, by-and-large truths formulated from the core vocabulary, making for a presumption of liberty. Exceptions to liberty were to be treated as exceptional and bear the burden of proof.

With the postwar re-awakenings, bold thinkers defied the cultural ruts of their times. They rediscovered pieces of the liberal understanding. Mises, Hayek, Friedman, Buchanan, Tullock, Rothbard, Kirzner, Alchian, Sowell, Coase, Bauer, Simon and Demsetz developed new statements of parts of liberal wisdom. Because it had been dead and buried, it now seemed fresh and original. They earned status as epic figures by fresh pioneering and academic kudos. But what they formulated and taught to all of us was the low-hanging fruit of all that had been forgotten.  

I’m not saying that everything they teach had been taught 150 years prior. But a lot of it had, and the basic verities pretty much all had.

Other figures, like Hazlitt and Rand, also achieved epic status by rejuvenating ideas that had been simply lost.

The rejuvenation era, say 1960-1985, allowed some air of at least intellectual ascendancy. It was possible for Milton and Rose Friedman to write Free to Choose as though the ideas they were espousing were normal.

But one of the things that makes Milton’s story so special is his air of cultural royalty. No question, Milton was truly exceptional in many ways (his wife being one of them). But one of the things necessary to his cultural royalty was his achieving academic royalty. He was first among his peers at Chicago Econ, and Chicago Econ contended for the apex of the Econ mountain (and the Econ mountain contends for the apex of the political-culture mountain generally).  

Compare with Richard Epstein, a classical liberal prince and one of the closest we have to cultural royalty and epic figure in his cohort. Epstein is at a top school, but he is not first among his peers—he will presumably be regarded at NYU as eccentric ideologically—and Law is not as authoritative as Econ.  Econ has had a mystique because it had been the field with the most liberal conscience. That’s still true, but nowadays Econ is more like the other fields.

Robert Nozick was at Harvard, but not first among his peers. He didn’t want the pressure of being Joe Libertarian Philosopher, and not long after ASU withdrew from political philosophy and never returned.

I don’t think that a clone of Milton Friedman could today become Milton Friedman. To get on in Econ he’d have to do a lot more math, and identify with “normal scientists.” Back in the day, Hayek, Coase, and Buchanan could eschew math and still end up with Nobel prizes. Not today.

Normal scientists won’t embrace you academically if you don’t seem like their kind. You would have to become their kind. You wouldn’t develop liberal vision and motivation. Or, if you did you wouldn’t become first among your peers at a top department (even, that is, if you had the endowments of a Milton Friedman).  

The culture generally is becoming more fragmented, because of technology. But technology is making the academic discipline more integrated and monolithic, even at the international level. There is no “freshwater” vs. “saltwater” and so on. It is like the baseball player market, one big pyramid. The top departments are alike and the rest strive to maintain their standing in the pyramid.

Regardless of academic standing, how is the modern clone of Milton Friedman to cut a figure? The low-hanging fruit has been plucked and digested by the liberal movement. A new young brilliant dynamo could write a nice book like Free to Choose, Road to Serfdom, or Knowledge and Decisions, but who would care? It’s all available in another dozen books that have appeared since 1960.

In art, every generation craves contemporary renditions offering rediscovery of elemental things, and even the older generation welcomes novelty, creating ongoing demand for new masters. But the liberal verities are honored from duty, not savored for their beauty. We’ve learned the place of “buying and abstention from buying”—or “b and a from b.” Most of the world hasn’t. The wannabe new Milton Friedman addresses the world and explains b and a from b, but he competes with the epic figures, now mostly deceased, as well as 50 other aspirants, and fails to interest those of us who know about b and a from b. We applaud his efforts and encourage him to keep at it, but we don’t read what he writes.

Today most of the political culture is tepid, bound by status-quo policies, led by establishment players, and framed by “liberal versus conservative” – a framework that epitomizes the breakdown of liberal understanding. To get play in mainstream culture, one must bargain to an extent that permits little of the inspirational quality that Milton had.

I think that there was something very special about the 1950s, 60s, and 70s – the era in which the true liberals first regrouped, regained their footing, and made a new intellectual stand against the tide that had come in around 1890 and that still mostly engulfs the political culture.

But history rolls on. If there is truth in this depressing narrative, we may hope that understanding of that truth will help to retire it.

Senator Edward Kennedy

Frederic Sautet

Americans like heroes and to many people Senator Kennedy was one. It is not the place to judge the deep motives for his actions, I leave that to others. The reaction to his death is telling, however, of the situation in which the country stands – I mean as far as the battle of ideas is concerned. For a country that was founded on the precept that political power is dangerous as it can lead to corruption and totalitarianism, it is strange that its politicians are often revered as gods. I do not know if Senator Kennedy was ignorant of the teachings of economics, but his lifelong fight in favor of universal health care and various other socialistic legislations paved the way to impoverishment and social disaster. Like many in politics, he stood for ideas that seemed noble and beautiful to the ignorant mind, but were truly destructive of the social order.

Instead of worshiping politicians, we should wake up to the current situation. Since the fall of the Roman Empire, nations and civilizations have fallen because of two things: fiscal recklessness and inflation. This is because bad policies are rarely reversed. Instead, politicians attempt to mitigate the consequences of their stupidity through fiscal expansion and inflation. The U.S. was born under the “Old Time Fiscal Religion,” as Richard Wagner and James Buchanan put it. For decades, fiscal prudence and low inflation were the mantra. Not anymore. So let’s be honest, while Senator Kennedy may have been well-intentioned (and I leave that to God to judge), he has promoted the expansion of government and the establishment of socialist policies in the United States. With others, he has pushed ideas that have made fiscal and individual irresponsibility acceptable. Is this what being a true American hero is about?

This goes to show that it is nearly impossible to be a libertarian politician. Few would praise someone who fought all his life for small (or no) government and opposed all laws that favored the poor (or any body else for that matter). There is no glory in opposing the silent tyranny of socialism. But this is the road the true saints have to follow. “Being in this world but not of this world” is not an easy thing to do, but it is, in my view, our calling. Austrian economists do precisely this: speaking truth to power and seeking glory not in this life but in the next.

And for those of you who are catholic and are revolted by the praise Senator Kennedy has received from the Church, read Fr Thomas Euteneuer’s article (thanks Eileen for the pointer). With all this said, I pray that Senator Kennedy’s soul may rest in peace.

Scale, Scope, and What to do with Failing Banks (or: Has Cowen Forgotten his Higgs?)

Steven Horwitz

Tyler Cowen has responded to Pete over at Marginal Revolution.  Tyler seems to be arguing that the preferred way, for many libertarians, of dealing with failing banks is no better and probably worse than what actually happened, namely TARP and the other bailouts.  The preferred way for many of us was to let those banks go through the normal bankruptcy and reorganization process.  Tyler argues that this too is "government intervention" and that it is "ill-suited" to dealing with the sorts of problems we saw last fall.  He offers no argument for the claim of "ill-suitedness."

One commenter rightly notes that in the world of the second best, he'd prefer the known, predictable process of bankruptcy over the new, uncertain processes of the bailout.  I think that's exactly right.  One can make a Higgsian point here about regime uncertainty:  we're always better off (in the world of the second best) by operating under the known and predictable set of government rules than adopting new ones that have never been used before, or giving purely discretionary power to government agencies. 

But there's more to it than that.  We also know from Higgs and public choice theory more generally that once powers are given to government during a crisis, they never totally disappear when the crisis is over.  So even if one thinks there was something unique about the situation last fall, it's naive to think that the powers the Fed and other agencies grabbed to fight it would go away in the long run.  From a libertarian perspective then, the bailouts look like a really bad idea in the longer view.

Now Tyler and others might respond with:  "but wait a second, if you did all of this through the bankruptcy courts, wouldn't that be enlarging government's size as well?"  Yes it would but with one HUGE difference.  Giving more cases to bankruptcy courts would be an increase in the scale of government, but not in its scope. This scale vs. scope distinction is one Higgs makes at the beginning of Crisis and Leviathan but is often overlooked in quick discussions of its main arguments. 

Higgs refers to "scale" as government growing not by adding new powers but by having to do more with its existing powers due to things like growth in the population or the economy or in other factors that would draw more heavily on existing processes.  "Scope," by contrast, refers to the set of powers governments have.  Growth in scope means acquiring new powers.  In Higgs's theory of crises and government growth, the key point is that crises lead to expansions of the scope of government that do not ever completely disappear.

Returning to last fall:  the bailouts gave government new powers it never had before, expanding its scope, but using the bankruptcy process would have only expanded the scale of powers it already had.  Forced to make that choice, a libertarian perspective would see increasing the scale as the notably lesser of two evils.

It was inevitable that the state would be involved in resolving the banking situation one way or the other, but in that second best world it is much better to choose a known and predictable process that only expands government's scale over one that expands its scope by giving it powers it previously did not have.  From a libertarian perspective neither is ideal, but I would argue growth in scale is much less damaging than growth in scope, in the short run and especially the long run. 

I think Tyler's response completely overlooks these Higgsian points.

Hurricane Katrina and the Bourgeois Virtues

My latest Working Paper is now up on the Mercatus site.  It's titled:  "Doing the Right Things: The Private Sector Response to Hurricane Katrina as a Case Study in the Bourgeois Virtues."  Here's the abstract:

Supposedly self-interested and profit-seeking firms engage in behavior that could only be understood in terms of putting their employees and communities ahead of their corporate self-interest. Major American companies from Marriott to McDonald's to Wal-Mart undertook major and minor acts of bourgeois virtue and contributed in a significant way to the recovery from Hurricane Katrina. Managers and senior leaders used the language of ethics and virtue, rather than that of narrow self-interest or profit maximization, in describing what they expected from employees, and employees used similar language to describe their own behavior. "Doing the right thing" was central to their response. What constituted "doing the right thing," how the very nature of large capitalist enterprises made doing "right" possible, and how doing "right" improved conditions after Katrina is explored in this working paper.

2009 Don Lavoie Memorial Graduate Student Essay Competition

The Society for the Development of Austrian Economics is pleased to announce that submissions for the 2009 Don Lavoie Memorial Graduate Student Essay Competition are now being accepted.  Submissions will be accepted from advanced PhD students in economics or other relevant disciplines anywhere in the world.  The competition is limited to thesis chapters and/or other research that is geared toward publication in the professional journals; submissions should adhere to appropriate standards of academic writing and should be on a topic relevant to Austrian economics.  There is no word limit; and, students submitting papers to this competition will retain all publication rights to their work; however, winners are encouraged to submit their papers to The Review of Austrian Economics for possible publication.
 
Three prizes are given, each worth $1000, to be used to pay expenses to attend the Southern Economic Association meetings this November 21-23, 2009 in San Antonio, TX, where the winners will present their work on a special panel scheduled for 10:00am, Saturday, November 21.  Prize awards are contingent on attending the SEA meetings and the SDAE’s annual business meeting and awards banquet on Sunday evening, November 22.
 
The prize committee consists of:
 
·          Peter Boettke, Committee Chair, George Mason University
·          Emily Chamlee-Wright, Beloit College
·          Steven Horwitz, St. Lawrence University
·          David Prychitko, Northern Michigan University
·          Virgil Storr, Mercatus Center at George Mason University
 
Deadline for submissions is October 1, 2009.  Decisions will be made by October 15.
 
Please send all questions and submissions electronically to Peter Lipsey at plipsey@gmu.edu.

Can I bring myself to utter THOSE words?

| Peter Boettke |

Tyler Cowen argues that in hindsight, we should consider the bailout to have been successful in averting a financial meltdown of the US economy.  He specifically asks me whether I can bring myself to admitting this.

I cannot. 

Stossel Goes All Hayek

Steven Horwitz

In his weekly column out today, John Stossel argues for the importance of competition and the role of profits in the health care industry.  He cites Hayek's idea of "competition as a discovery procedure" as well as a Freeman essay of mine on "Profit:  Not Just a Motive."

A Piece in Forbes . . .

 . . . on pirates and proposed financial regulation, here.