A Contested Exchange, or First Round Knock Out in an Intellectual Boxing Contest?

|Peter Boettke|

Tyler Cowen links to the recent "review" by Paul Krugman and Robin Wells in the New York Review of Books. The NYRB essay discusses three recent books on the financial crisis, but Krugman and Wells focus mainly on chiding the authors for focusing too much on why we are in the crisis, and not enough on thinking our way out of it.  But as Raghuram Rajan points out in his response, if the very policies that are now being proposed to get us out of the crisis are the reason we got into the crisis then they are no solution at all.  Furthermore, Rajan corrects many subtle and not so subtle mistakes and false rhetorical tricks that Krugman and Wells commit in their "analysis" of his argument.  I like especially his point about why study the crisis, his point about the housing crisis and easy credit in the US and overseas, and his point about bipartisan criticism.  

I recommend that everyone read the exchange, but I'd emphasize reading very carefully Rajan's response. Krugman is not a political economist, he is a politicized economists, and Rajan reveals this in his measured but pointed response.  Krugman can no longer have a serious discussion with his professional peers (I mean that in terms of scientific reputation and professional rank).  He is incapable of being anything put a partisan pundit.  Tyler calls this a "contested exchange", but to my mind it is a knock out of Krugman at the end of the first round by a superior economic mind, and a more civilized scholar.  Rajan practices the "sweet science" beautifully in his reply, and Krugman finds himself flat on his back and counted out.

Rajan has interested me for several years with his work.  He is no doubt one of the best economic minds of his generation.  Even before his book with Luigi Zingales, Saving Capitalism From the Capitalists, I found his work in finance to be very important and a source of constant learning.  Zingales as well is someone who I learn a tremendous amount from --- and his exchange in the Economist with Brad DeLong is also very much worth revisiting, but that is more about fiscal policy (Zingales makes the Buchanan and Wagner point from Democracy in Deficit about the political legacy of Keynesianism). 

But back to Rajan, as students of mine who have taken my graduate course in comparative systems know, I have been pointing to this little paper of Rajan's "Assume Anarchy?" from the moment it was published.  This is where our group (both prior to this article and after) were focusing on --- endogenous rule formation in a world absent of formal structures capable of defining and enforcing rules.  This is the positive political economy research program in anarchism -- or what I have called analytical anarchism.  Rajan summed up the basic motivation better than I have could.

Rajan and Douglas Diamond also have written an important paper on the credit crisis which is important for all within our camp to read and understand thoroughly.

This is a great time to be an economics student and in particular someone inspired by the writings of Mises, Hayek, Buchanan, etc..  These ideas are circulating throughout the profession with a renewed intensity and gaining wider acceptance.

Comments

[Daniel Kuehn]

The exchange is good - but take a critical eye to both.

Rajan claims several times that Krugman "doesn't think X played a role". When you go back and read what Krugman actually wrote, he almost always says that he didn't think it played a primary role. So readers should be careful to way the real Krugman vs. the real Rajan, not Rajan's version of Krugman against Krugman's version of Rajan.

I liked Krugman's initial piece and I like Rajan's response - but this sort of tone and the tone with which people have been reposting it seem like they can very quickly degenerate into dueling strawmen.

Tyler probably thinks it's "contested" because he recognizes that Rajan overstates his points a little in several places. I wouldn't be surprised if Krugman does too, but I don't follow Rajan as closely as I follow Krugman so I can't speak to how faithful he is to him.

[Daniel Kuehn]

*WEIGH the real Krugman vs. the real Rajan

[Greg Ransom]

I thought "contested exchange" was a notion about power relations, and how these trump and overwhelm the "marketplace".

The power dominant bully here in the marketplace of ideas in terms of prestige and ink by the barrel is clearly Krugman.

[Greg Ransom]

The real Krugman is a dishonest lunatic who can't be trusted to engage in honest discourse.

[sandre]

Greg,
If Krugman is Dr. Evil, then Daniel Kuehn is mini-me.

[Greg Ransom]

I don't think Krugman is evil.

He's proven himself to be dishonest -- and his partisanship is at times certainly unhinged.

And I believe it is important that many top economist have been brave enough to tell the public the truth about this man.

The general public deserves to be allowed to know the judgment of Krugman's character, when the man has such the legitimacy of the highest credentials in the profession -- and he is playing such a lead role in the economic conversation of the country.

[sandre]

I was kidding of course.

[Troy Camplin]

I'm not kidding. Does Krugman know what the good is and chooses against it (which would be true if he were being dishonest rather than merely wrong)?

Let me give a non-abstract example:

An engineer who is good at building bridges is a good engineer. The steel he uses must be of high enough quality to do the job – it must be good steel. When building begins on the bridge, it can only be done in good weather. A good engineer is good at being an engineer. Good steel is steel that can be depended on to do the job at hand (being dependable to do the job at hand is also a feature of being a good engineer). Good weather is weather that provides favorable conditions for what work the person wants to do – in this definition, rain is good weather for a farmer, but bad for our engineer. A good person is thus a person who is good at being a person. We must work at being good – ethics is work. But ethics is not necessarily what works. One has to keep in mind the end at which one aims. We need an idea of proper ends, a proper target at which to aim. The proper end of our engineer is obvious: to build a bridge that will span the gulf at hand and remain intact. He must design and build a bridge that does the work of a bridge.

From the example above, we can now distinguish between bad and evil. A bad engineer is one who is not able to design a bridge that will do the proper work of a bridge. An evil engineer is one who is able to design a bridge that will do the proper work of a bridge but who chooses instead to design a bridge that will not do the proper work of a bridge. For the bad engineer, the destruction caused by his bad bridge is incidental to his inability to design a good bridge. The bad engineer is bad because he is ignorant. He would build a good bridge if he could. For the evil engineer, the destruction caused by his bad bridge comes about because he chose to make a bad bridge so that it would cause destruction. The evil engineer is evil because he knows the right way to build a bridge, but chooses not to do so. He can build a good bridge, but chooses not to.

[Lee Kelly]

Krugman doesn't seem to mind what kind of attention he gets, so long as he gets attention.

DO NOT FEED THE TROLL!

[Peter Boettke]

Would someone in addition to Daniel please talk about Rajan's work, including his book as well as his reply to Krugman?! I know I cannot steer a conversation directly as I want, but let me try one more time, Rajan's work is very important for Austrian types to study carefully.

[Jerry O'Driscoll]

I agree with Pete on Rajan. I have read only one piece by him, but his analysis is simpatico with that of the Austrians. Anyone who understands the dangers of low interest rates is thinking along the right lines. I plan on reading more of his work.

[Rafe Champion]

Taking up a point from the last para of Rajan's piece, on Bush's "ownership society", what about a "responsible society" - amidst all the criticism of agencies and policies, what about the lack of responsibility of the borrowers? Or just rationally following the inventives?

For contrast with the Fed, the Australian Reserve Bank kept interest rates high and home prices were almost flat for many years, with inflation many homes lost 20-30% of value in a fairly painless way and housing became more affordable for many people with unemployment trending down and many people on rising incomes.

The biggest problem for home ownership here is a combination of public policy (locking up supplies of land) and lack of personal responsibility - people work for years without saving and turn to the state to provide assistance to first home buyers.

[Ryan Murphy]

I just added Rajun's book to my reading list. He seems like a mix of ABCT and fractal risk/black swan stuff, and that would be awesome... No idea if that guess is on target at all.

[Troy Camplin]

For those who are interested, this is Rajan's blog:

http://blogs.chicagobooth.edu/n/blogs/blog.aspx?webtag=faultlines

and here is online access to some of his works:

http://faculty.chicagobooth.edu/raghuram.rajan/research/

[FC]

Krugman is beyond mere academia and no longer needs to debate as a scientist. He has tenure, the New York Times and the Democratic party.

[Ashwin]

I'm repeating myself but Rajan's monetary macro is based on this paper he wrote with Doug Diamond in which he explicitly references ABCT http://faculty.chicagobooth.edu/douglas.diamond/research/Diamond%20Rajan%20Interest.pdf .

Some quotes from the paper:
"We are certainly not the first to place the emphasis for contraction and crises on the mismatch between the long duration before investment produces consumption goods, and the temporal pattern of
consumption in an expansion. This dates back at least to Von Mises (1949) and the Austrian School."
"While the Austrian view seems to rely on banks that are excessively optimistic, our model can produce crises with rational optimizing banks. Crises stem from the mismatch between the household desire for immediate consumption goods as a result of anticipated higher incomes (coupled with their ability to withdraw cash needed to pay for these goods) and the illiquidity of projects the bank has invested in, and can occur in states where households anticipate high future incomes. An interventionist central bank, especially one biased towards cutting interest rates excessively, can make crises worse."

The Diamond-Rajan model can be seen as a "rational" variant of ABCT but IMO atleast, there is a fundamental difference as I note here http://www.macroresilience.com/2010/08/03/raghuram-rajan-on-monetary-policy-and-macroeconomic-resilience/ : "The conventional Austrian story identifies excessive credit inflation and interest rates below the “natural” rate of interest as the driver of the boom/bust cycle but Rajan and Diamond’s thesis identifies the anticipation by economic agents of low rates and “liquidity” facilities every time there is an economic downturn as the driver of systemic fragility. The adaptation of banks and other market players to this regime makes the eventual bust all the more likely."

Their model is more one of the moral hazard created by the Greenspan Put and one that I believe is largely correct in respect to the Greenspan-Bernanke era.

I don't have much to say on the Freddie-Fannie debate but Rajan's point on Europe is spot on. The ECB policy circa 2005 was suitable for Germany and France but disastrous for the periphery, especially Spain and Ireland which unsurprisingly had a boom and a subsequent bust.

[Niko]

"Would someone in addition to Daniel please talk about Rajan's work, including his book as well as his reply to Krugman?!"

Well, Rajan says what it had been said here and mostly everywhere over and over again. It is very hard to comment on him and still sound fresh.

PS: I am not a smart person and I admit about being one of those trolls who give a bad name to Austrians, as some complained here some time ago, but I doubt anyone takes Daniel seriously anymore.

[sandre]

Niko,

Daniel Kuehn is a smart guy and makes some really smart observations once in a while. But he has this annoying habit of saying nothing and typing a lot, especially when someone he disagrees with produces a gem - like in this case, Rajan.

His job in such cases is to caution us, like an annoying baby sitter, not to read it without critical eye( LOL). He'll find faults(or nitpick) where no such faults exist. He often will say that the writer is "overstating his case". This is an often repeated pattern of his - that when there is nothing worthwhile for him to say as a rebuttal, he will resort to this overstating the case meme.

[Charles Rowley]

The analogy to a boxing match is excellent. One of the boxers - I shall not identify which but leave you to guess - reminds me of Mike Tyson. He comes into the ring overweight and undertrained and, when he is losing heavily on points, invites disqualification by biting off his opponent's ear. To call such an episode 'contested' is a misuse of vocabulary.

[Mathieu Bédard]

A great article from Diamond and Rajan that I'm using in my thesis is "Fear of Fire Sales and the Credit Freeze".
http://www.nber.org/papers/w14925

It deals mostly with the issue known as 'debt overhang'(ie why stockholders would sometimes rather let their firm go bankrupt than raise capital) with a twist; here it's institutional overhang. It could be of interest to people working on issues of moral hazard in finance, systemic risk/contagion, bailouts, but also to people concerned with issues related to limited liability, etc.

[Niko]

Sandre

"Daniel Kuehn is a smart guy and makes some really smart observations once in a while. "

Even a broken clock is right twice a day. As for the statement of him being smart, I'm still waiting for proof.

I think almost everyone here has a critical eye on their own statements and what they read. And probably most people look forward to intelligent and interesting polemics, but there aren't many, and Daniel is a not a promising source. I've actually read his paper on the 1920 recession, it made no sense. Maybe one day ..., but not today.

[Steve Horwitz]

I'm going to ask politely that we treat our guests with some hospitality. The content of the arguments of other commenters are absolutely fair game of course, but can we respond to those arguments in ways that aren't attacks on the person's intelligence? Deal with the arguments please.

[Mario Rizzo]

Right.

[The Cuttlefish of Cthulu]

I rather like Daniel Kuehn's comments. Although I think he (and Keynesianism) is quite wrong, he always forces me to rethink my position.

[Niko]

OK.

[Jim O'Connor]

Troy:

What does one make of a bad engineer who knows (or ought to know) he is a bad engineer but insists on designing and building bridges which kill people anyway? He doesn't do it in order to kill people, he doesn't have the capability to design better ones, but he keeps doing it anyway. Is he bad or evil?

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