Coordination Problem

A Correction to a Wrong Impression From My Earlier Post

|Peter Boettke|

I made reference to Tony Evans in my post from last night not because Tony is the author of the  Cobden Centre proposal, but because he has thought seriously about these issues.  George in reply seemed to think my reference implied that Tony wrote the proposal.

To the best of my knowledge, the author is Toby Baxendale and that Toby has derived his position through years of self-study, and reflection on his business practice, and in spirited conversations with Tony, Kevin Dowd, Jesus Huerta deSoto, and many others (including myself).  I don't know if he has talked at length with Steve, George or Larry personally.  From my experience, I know that Toby would love to have a spirited discussion with them as well.

Tony has written his own paper reflecting his meditations on free banking --- Tony argues that banks can be free, fractional, and solvent.  So Tony comes down closer to the Horwitz, Selgin, and White position.

As my post should have indicated, I am neither trying to stir up controversy where none is needed, nor am I saying this side or that side is obviously correct.  I honestly do not know enough monetary theory and history to pass a professionally competent judgement in the field of monetary economics.  My priors lead me to think of the Horwitz, Selgin, and White position with respect to economic theory, but the political economists in me think they don't deal enough with the "from here to there" transition question.

NGDP targeting does not seem to deal with the administrative problems that Friedman came to recognize with the K% rule (or any rule for that matter).  There is a reason why Hayek eventually came to the position he did on the denationalization of money.  It does seem weird that I am chiding the very people who have pursued Hayek's ideas on this more than any others to take Hayek's ideas even more seriously as a solution to our problems in a time of crisis. 

So I remain puzzled and asking questions.  I am thinking aloud, which is always dangerous because it by necessity reveals half-baked and poorly thought out streams of consciousness.  But I am genuinely confused.  What is so wrong with getting banks to operate based on the ordinary principles of property, contract and commerce?  Does the Baxendale proposal go beyond that simple suggestion to propose something deeper?  It seems as if Horwitz, Selgin and White believe so.  Why don't I share that same assessment?  I must be intellectual "blinded" somehow that I don't understand, so I will try to re-read and re-think.   But what we must not do in these discussions is confuse a theoretical point with a market prediction, and confuse a point of morality with issues associated with positive economic analysis.  I am wondering if the way Baxendale is trying to frame the policy debate for sound and honest money isn't correctly staying in the realm of theory (rather than market prediction) and on point in positive economics (rather than moral theory).  Baxendale does have moral outrage --- but don't all broadly speaking free market economists at the current status of privileged banks under a government monopoly supplier and protected through the power of the tax state.

Selgin has responded to the legal and economic history claims about the origins of fractional reserve banking in a working paper.  He finds the arguments about the principles of property, contract and commerce used by critics of fractional reserve banking to be theoretically unpersuasive and factually incorrect.  But I, for whatever imperfect and perhaps confused reason, believe that I can agree with Selgin and still think the Baxendale proposal works to push for banks to be subject to the ordinary principles of property, contract and commerce and to allow the market mechanism scope for experimentation with a variety of contractual relationships between banks and their customers subject only to the self-regulation of the market through profit and loss.

 

ADDENDUM

If you look at the comment sections for this post and also my earlier post, then you will discover that it appears that I may have misrepresented significant details in the Baxendale plan.  I said from the beginning of my posts that I may be guilty of this and was thinking aloud on the general topic to try to think through it and learn from others.  But I will remain quiet for now until I actually study the proposal in depth and I do apologize to all for any confusion I might have perpetuated.  The bottom line is, I am in great sympathy with any effort to rein in the monetary authority and return to a regime of honest and sound money and banking.  It is that simple --- we need to think creatively about how to get a regime of fiscal responsibility and sound money.  It is my prior that this can only result from a radical rethinking of both the scope and scale of government and the elimination of state monopoly control over money.  Radical fiscal federalism coupled with free banking would be my preferred policy agenda.  But any step in that direction whatsoever is a step in the right direction in my opinion, and any step away is taking us further away from fiscal responsibility and sound money.  Such statements as this are too vague to be of much use in the world of practical policy. But hopefully such general principles can serve as a guide for more concrete policy proposals which can have a practical effect.

The Newspeak of Paul Krugman

Steven Horwitz

That's the title of today's "The Calling" in which I respond to a recent Krugman column defending the amorality of economics and the positive effects of war on a depressed economy.   A snippet:

So yes, Professor Krugman, it does matter how we try to get ourselves out of depressions.  The world is not upside down and vices aren’t virtues.  War isn’t peace and destruction isn’t wealth-creation. The real solution to digging out of a recession is to remove the barriers to the free exchange and production that actually comprises wealth-creation.  Borrowing trillions more from our grandchildren to spend on building the equivalent of pyramids or on blowing up innocents abroad only digs the hole deeper.  And when one is reduced, as Krugman is, to saying we “needed Hitler and Hirohito” to get us out of that hole in the 1930s, one has abandoned morality to worship at the altar of economic aggregates.

@Steve Horwitz, Larry White and George Selgin: What is Wrong With This Proposal for Bank Reform?

|Peter Boettke|

Toby Baxendale and the folks at the Cobden Centre have been working on various banking proposals that would demand that banking enterprises operate under the ordinary rules of property, contract and commerce.  Banks, in other words, would have no special privileges provide by law or politics.

The proposal is for a free market in money and banking.  Baxendale envisions that there are basically 3 functions of banking and finance.  In the proposal each of these functions would be accomplished by separate "windows" or "divisions" of the banking enterprise (or by separate enterprises).  

The first function is the most basic of banking functions which is to serve as a warehouse.  The warehouse would function just as a safety deposit box functions.  The second function would be the saving and loan function.  Financial intermediation would be accomplished through this second "window".  Credit would be based on savings, never created out of thin air.  The third function would be more the "investment" or "high risk/high yield" finance option.  Here consumer/investors would provide funds to money managers who would attempt to invest the funds to realize high returns.

I don't know if I have completely captured the proposal in its full (@Tony Evans straighten me out if I am wrong).  But if I have captured the Baxendale proposal, I wonder how anyone can object to it on either side of the squabble between 100% reserve vs. fractional reserve banking.  As I am reading it, the core idea that banking should practice without an special privilege under the ordinary principles of property, contract, and commerce is something all market=oriented economists can agree to.  Also, the financial intermediation role of banking is served in the second window of basic savings and loans.  And finally, the more adventuresome investment function is served by the third window.  And in the proposal, each of the separate functions are sealed off from one another so that the risks from the 3rd window (under contract with consumers) will not spill over to the other functions if decisions prove to be incorrect.

I realize that my presentation is stripped down and simple.  But remember I am the champion of the position that simple economics is not simplistic, and that in times such as what we are living through we need ordinary economics more than ever.  But I also realize that scholars such as Steve Horwitz, Larry White and George Selgin have forgotten more monetary economics and monetary history than I will ever learn, so 9 out of 10 times defer to their judgement.

My position on the squabble within Austrian economics has more or less been that I rejected the moral objection raised against fractional reserve banking on two grounds: (1) I believe people know that the money they deposit in the bank is not the same physical units of money that they pick up when they withdraw from their account, and (2) I want to understand the economics of free banking.  To me Selgin and White have explained the self-regulation of banks from overissuing in a competitive currency system.  So to me the debate was not one of economic theory and instead reduced to one concerning a market prediction of what consumers would value from money and banking services in a truly free market economy.  And I think the White argument about the law of reflux explained why banks operating under fractional reserve would be held in check.

Now I do also understand that there are theoretical questions concerning free banking and credit expansion.  But I come down on the side of the monetary equilibrium/free banking theorists who emphasize the self-regulation through the market of money supply and money demand.  Everyone needs to remember that both sides of this debate are challenging the existence of a centralized monopoly supplier of the currency in the economy, and instead are advocating the demonopolization of money and the destatization of money.  Money and banking instead of privileged enterprises, would operate based on the common law principles of property, contract, and the general rules of commerce.

Baxendale's proposal begins there and develops consistently from that premise.  Or at least that is how I read it, so why am I wrong?  I am more than willing to be persuaded that I don't really know what I am talking about on this issue.  So my question really intended to "think aloud" and get others who know more than I do to set me straight on where I am going wrong in my effort to pursue simple economics that is not simplistic.

Does History Matter and Why Does it Matter?

|Peter Boettke|

Nathan Nunn surveys the literature.

The move from "what happened" to "why it happened" is a move I try to tell our PhD students is the necessary move they must make guided by sound economic and political economy theory if they are going to make a contribution to our understanding.  Reading this paper of Nunn's alongside of Acemoglu's recent JEP paper "Theory, General Equilibrium, and Political Economy in Development Economics" would be my best advice for our graduate students as they think about setting out their own research agenda that I can give this week.

HT: Tim Harford

Advances in Austrian Economics, Vol 14 is Now Available

Steven Horwitz

Series editor Roger Koppl and I are happy to announce the publication of volume 14 in the Advances in Austrian Economics series.  This volume, edited by Roger, Pierre Desrochers and me, is What is so Austrian about Austrian Economics? and contains papers from the second biennial Wirth Workshop on Austrian Economics, held in October of 2008 in Mississauga, Ontario.  Contributing authors include Pete Boettke, Chris Coyne, Dick Wagner, Gene Callahan and me, and David Colander's keynote address.  A full flyer with table of contents can be found here. 

The third annual Wirth Workshop is coming up in just over two weeks in Vancouver, BC and is themed around "Austrian Views on Experts and Epistemic Monopolies."  Our keynote speaker will be Sandra Peart and it will include papers by Roger, me, Emily Skarbek, Rob Garnett, Leslie Marsh, and Diana Thomas among others.  Advances will eventually publish that volume as well.

If you have an idea for an edited collection on a topic under the broadest conception of Austrian economics, please contact either me or Roger as we're always interested in new volumes for the series.

Strike Action in the 21st Century

~ Frederic Sautet ~

 

No, this is not a picture of a state-owned grocery store in a former Soviet country. This is a grocery store in France. I took the picture myself, as it happens that I was in France during a national strike action last week (and there is another one scheduled for next week). The strike took place mostly in the public sector, but many private companies were also affected. Indeed, it was the first time I saw a strike disrupting, to such an extent, the supplies of a (privately-owned) grocery store, so I wanted to share this. As I am writing these lines, the strike is still going on. I had forgotten how wonderful life can be when France gets all wrapped up in social conflicts. The French are so used to it that they don't even realize that life could be different.

Strike actions are more common in Europe than in the US. In the US, some jurisdictions even prohibit strikes by public employees. This is now also enacted in Europe, but it has been difficult to implement. The economics of striking has mostly to do with incentives. Western economies often provide generous laws for strikers, which reduce the cost of going on strike (such as an expectation that the days of strike will be paid). When incentives change, strike action also changes. NZ is a case in point. In the early 1980s, according to Stat NZ, there were more than 500 days a month lost in labor strikes (up to a million person days of work lost). This number has since then gone down to around 50 (less than 10,000 person days of work lost). With the various reforms, especially the Employment Contracts Act of 1991, the NZ labor market became more fluid, unemployment went down, and the cost of striking increased. When living in NZ, one forgets that pre-1990s, the country was constantly threatened by strikes, the way France (and others) are now (and have been for a long time).

In addition to incentives, there may also be cultural issues. In France it is not rare to find the public in favor of strikers in opinion polls (even when it makes everyone’s life more difficult). Opinion polls have their limitations, but if there weren’t an attitude in favor of strikers, it would be harder to go on strike. Many see the right to strike as a sacred right given to workers and employees, on par with voting or freedom of speech. For instance, the abrogation of Le Chapelier Law in 1864, which reinstated the right to strike, is seen as one of the most important social victories in France. But again, a change in overall incentives would probably eventually affect the cultural attitudes towards striking (even in France).

 

Thinking About Deer and Beaver

|Peter Boettke|

Back in the mid-1980s, Dave Prychitko and I were in graduate school together and we had the amazing experience of having James Buchanan and Kenneth Boulding as professors in the same semester.  Buchanan spent a lot of time that term discussing Adam Smith's deer and beaver model.  But so did Boulding.  Both Buchanan and Boulding also were very proud that they were students of Frank Knight.  I asked Boulding after one class as we walked back to his office, why are we talking about the deer and beaver model over and over again in both Buchanan and his class.  He characteristically laughed and smiled at me, and simply said something along the lines of, "My dear Peter, that is just the great Frank Knight approach to teaching. He either talked about that deer and beaver model, or he commented on religion."  I was confused, but I also put my confusion aside because I had to work on my next assignment from Buchanan related to variations on the deer and beaver model.

Tomorrow in my PhD course on modern history of economic thought I am discussing the transition from classical economics to the founding of neoclassical theory.  We are reading Blaug's Economic Theory in Retrospect and Mirowski's More Heat Than Light.  But as I was thinking about how to stimulate discussion of the refinements in the economic way of thinking during this period, I came back to Adam Smith's deer and beaver discussion from Bk 1, chap 6: "In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labor necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another. If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. It is natural that what is usually the produce of two days' or two hours' labor, should be worth double of what is usually the produce of one day's or one hour's labor."

What do you think I am doing by invoking this thought experiment in relationship to the development of economics in the late classical and early neoclassical period?  And how do you think it relates to what Knight, Boulding and Buchanan were trying to do in their use of the thought experiment in teaching?  I wonder if my students will use Smith's example 20 years from now when they are teaching their graduate students.

The 2010 FEE Prizes in Austrian Economics

Chris Coyne

The Society for the Development of Austrian Economics is pleased to announce that nominations are now open for the 2010 Foundation for Economic Education Prizes for the best book and the best article recently published in Austrian economics.

The following conditions apply:

1. Authors nominated must be members in good  standing with the SDAE (check the Society's  website at http://it.stlawu.edu/sdae/ for information on how to join).

2. The books and articles nominated must have been published between January 1, 2008 and August 31, 2010.

3. Nominated articles should be emailed as an attachment or as a URL to the article to Chris Coyne – ccoyne3@gmu.edu

4. Nominations for the book prize should include the title and all other relevant information (publisher, date of publication, ISBN #) and be sent to the above email address. Those nominating books need not send copies.  Edited volumes and short monographs are not eligible for the award.

5. All nominations must be received by Chris Coyne no later than October 21, 2010.

6. Self-nominations will not be accepted.

Each prize comes with a cash award of $500 thanks to the generous support of the Foundation for Economic Education. Winners will be announced at the annual banquet of the SDAE, this year in Atlanta, GA in conjunction with the Southern Economic Association meetings from November 20 – 22, 2010.  The SDAE dinner will be held on Saturday, November 20.

Questions may be directed to Chris Coyne at ccoyne3@gmu.edu

Steve Horwitz
SDAE Secretary

Chris Coyne
SDAE Vice President

Virgil Storr as Editor of STUDIES IN EMERGENT ORDER

|Peter Boettke|

I have been meaning to post this for awhile, but Troy's comment on my last post reminded me.  My close colleague Virgil Storr has taken over the editorship of Studies in Emergent Orders.  Virgil has really had strong success in publishing his work in "cultural economy" in outlets ranging from Rationality and Society and Public Choice to Journal of Urban Affairs and Space and Culture.  All of this while directing our student programs at the Mercatus Center and helping steer several PhD students successfully through the program here at GMU.

Virgil's brand of Austrian economics blends the classic teachings of Mises and Hayek, with a more explicit reference to its roots in Weberian sociology and the extension of that tradition in the hands of Alfred Schutz on the one hand, and Richard Swedberg on the other.  He is combining the argumentative structure of an economist with the skills of an ethnographer to tackle questions raised in social theory.  Working closely with Virgil is to see in a very real sense the research program that Don Lavoie tried to encourage a generation of graduate students to pursue. I think Don would be very pleased and surprised at how Virgil has developed that program and moved beyond even what Don thought was the way to go.

It is funny how careers shift.  I was a student of Don Lavoie as his research interests switched from very traditional Austrian economics and history of thought, to a philosophical social theorists.  I was influenced and trained more or less by Lavoie I (Austrian economist), but exposed to the ongoing transformation to Lavoie II (hermeneutical Austrian social thinker).  But if you look at my dissertation (and first book), I did a combination of history of thought and economic history to tackle a debate in comparative political economy my only reference to Gadamer was about doing history with the aid of theory, and to Polanyi was to his work on the Soviet system.  I did not set out to contribute to a new form of social science/social theory.  I wanted to bring the insights of the Austrian school to force a re-examination of the Soviet experience with planning.  Bergson, Nove, Grossman, etc. they were my intended audience in economics; Conquest, Pipes, Malia, Cohen, etc., they were my intended audience in history.

Since I left GMU as a student (and under the direct mentorship of Don), I continued to move more in the direction of a traditional economics (albeit an Austrian version of that) research path, and have sought to use a blend of Austrian, Bloomington, and Virginia schools of thought to forge a program in conceptual and applied political economy.  I did in that early period write some methodological essays influenced by Lavoie, but it was always with an eye to create space within the traditional discourse in economics and political economy for the sort of entrepreneurial market process, property and institutions, politics as exchange and the constitutional level of analysis perspective that I thought was necessary to tackle the "big questions" in the discipline.  It was from the economics perspective that I had that I then sometimes attempted to make contributions to philosophical discourse with respect to the nature of science, but also on philosophical topics such as justice and distribution.  But basically I do an Austrian version of microeconomics, a Bloomington version of institutional analysis, and a Virginia version of political economy.  In short, I do economics and political economy and I try to talk to economists and political economist more than any other target audience.  This is still how I work.

Don tried to get us to go, in many ways, the other way --- think philosophically/methodologically and then let that influence the way you did your political economy.  This led Don to emphasize a more sociological understanding of the economy --- interpretive political economy as he termed it at times, and to which his efforts at the end of his life where directed to write a book on the subject before his time was tragically cut short due to illness.  Don gave up talking to economists, he wanted to talk to philosophers, historians, social theorists.

Virgil has actually found another path between Don and myself.  Don told him when he came here to study with him that there was a "good Pete" (the more critical of economics) and the "bad Pete" (the more accepting of neoclassical orthodoxy).  Virgil in moving beyond both Don and myself, took the logically consistent positions of the "good" and the "bad" and has as far as I can tell avoided the pitfalls of either.  I guess that means I am saying he just does "good work" that you should all read.  He talks across disciplines and across ideological perspectives. And he has been very successful as a look at his CV will reveal at forging this conversation (what Lavoie sometimes called provocatively but incorrectly 'disciplinary trespassing').

Well, in addition to his own scholarship, Virgil is now taking over the editorship of Studies in Emergent Order.  I think this is a fantastic opportunity for scholars across the sciences and humanities to think seriously about spontaneous order and have an outlet for their work.  I expect Virgil to cultivate a very "good" conversation in this journal with his wonderful knack of transforming not only "bad" into good, but to take "good" and make it even better.  The only drawback to him taking on this new editorial role, we need to make sure at GMU/Mercatus that Virgil has the time and space required to finish his major book projects on the dream of freedom in post-colonialism, and on the culture of markets.  

These books are on vitally important topics and are being written by the right man for the job.

RAE 23 (3) 2010

|Peter Boettke|

 

The new issue of the RAE is out. You can access it online (if your library has a subscription) here.

On another note, the RePC rankings of scientific journals by citation impact was recently made available. 

The RAE has a long way to go to improve in its ranking (355), but there was some surprising comparisons.  The RAE actually ranks higher than the Journal of Economic History (401), AJE&S (544), Review of Social Economy (420), etc.  None of the history of thought journals have much of a citation impact, though the Journal of Economic Methodology (248) does better.   The RAE is the only journal within the Austrian school that makes the list. 

A close look at the top 100 journals listed is revealing. A look at the next 100 is an interesting window into the slightly out of sync cutting edge of economics.

We do really have to do a lot better, but we are moving up.