Changing Times

Don,

"If public understanding of the market is shallow (as it certainly is), the fault lies first and foremost with people like me — people who accept the responsibility for explaining the many merits of markets to a general audience."

Your expectations are too high. The political class spends trillions on "education" and propaganda to convince the public that government can be trusted and relied on. You've got a blog. Considering the odds, you're doing very well.

Martin,

FYI, I did give up tenure once. I left a tenured professorship at Clemson University in 1997 to become president of the Foundation for Economic Education (FEE) — a completely private organization. After four years at FEE, I missed teaching. Having the opportunity to return to the academy, I took it — not because the academy has tenure, but because it's the academy, and I want to teach and do research.

I do not favor tenure, but that institution is beyond my control.

Also, I am not part of any state-provided pension plan. Like many workers in the private sector, GMU makes contributions to my (defined-contribution) plan, but that plan is a private one.

Please be more careful about the assumptions you make.

martin,

I think that your characterization of the market economy is false. You seem to think that the market economy is a constant state of competition amongst actors in the economy. This cannot be; we can see that in many parts of the economy, the levels of competition vary across many different sectors.

Rather, I think that the market economy is about giving people the freedom to choose their own destinies. It is about acknowledging the fact that Professor Boudreaux knows more about what makes him happy then what anybody else would. Competition and anything else that is good is strictly a by-product of giving people that choice.

You also should be careful to not confuse policy with politics. Policy is very much the realm of the economist; commenting and analyzing policy is perhaps his or her foremost job.

Please be more careful about the assumptions you make.

Well, I did pose my assumptions as questions, and I never mentioned tenure, and you only addressed one of the questions I asked, but I'm happy to hear that you aren't on the public pension bandwagon.

I still maintain that you're ignoring many, relevant, real economic factors in this "crisis". The Kling article reports one relevant stat that I hadn't seen before, that Fannie and Freddie account for only 15% of the subprime mortgage backed securities. I suspected that all along, but I hadn't see a precise figure.

I don't support the government sponsored enterprises at all, mind you. I'd be happier if FNMA were dismantled by a bankruptcy court, but I don't at all believe that we'd somehow have escaped this predicament if only the state hadn't created these GSEs and encouraged subprime lending in low income communities (which was only part of the subprime lending anyway).

The unprecedented demand for promissory notes certainly matters, and a more private sector can certainly sell promissory notes. The holders of these notes, the capitalists, are the people we're bailing out, not the people defaulting on their mortgages. You know this.

Today I publish an article in Venezuela where I once again explain that this crisis, no matter what they say, is not the result of a generalized fraud committed by the market, or something similar, but the direct consequence of the intervention of the regulators in the market by means of empowering the credit rating agencies too much.

Yesterday I witnessed the most surrealistic questioning of the credit rating agencies by the Capitol Hill lawmakers.

Not once did they ask the questions…

Is it really possible to guarantee the right ratings?

What risk are we actually rating?

Why do we not rate other risks?

Is there not a chance that by rating we help to leverage the market into committing catastrophically blunders such as the subprimes?

Have you not read the “Use of knowledge in society” or “Economics and knowledge” by Friedrich Hayek?

And on this I last part I very much criticize the silence of a tenured Professor that has a web called Café Hayek and that should of course have been raging out against the regulators creating a risk-information oligopoly.

Rick,

Your comments pose an interesting question: What is the threshold for where simple leftish "empathy" crosses into socialism?

I, too, work with and have known some people who are overtly socialist. The best man at my wedding openly hopes for the government to gradually nationalize the factors of production over the course of the next several years. "Markets don't work" is the clamor I hear over and over on a regular basis. It makes me sad to think about it.

Today I publish an article in Venezuela where I once again explain that this financial crisis, no matter what they say, is not the result of a generalized fraud committed by the market participants, or something similar, but the direct consequence of the intervention of the regulators in the market by means of empowering the credit rating agencies too much.

Yesterday I witnessed the most surrealistic questioning of the credit rating agencies by the Capitol Hill lawmakers.

Not once did they ask the questions…

Is it really possible to guarantee the right ratings?

What risk are we actually rating?

Why do we not rate other risks?

Is there not a chance that by rating we help to leverage the market into committing catastrophically blunders such as the subprimes?

Have you not read the “Use of knowledge in society” or “Economics and knowledge” by Friedrich Hayek?

And on this I last part I very much criticize the silence of a tenured Professor that has a web called Café Hayek and that should of course been raging out against the regulators creating a risk-information oligopoly.

…says Martin the scholastic.

I call myself a "pantheist" and have some reverence for tradition. I'm not exactly a scholastic in the school of Aquinas, but I don't mind the comparison.

And I never claim any superiority to Don in this regard. "So you're just like the rest of us," I say. Why would I come here and turn my scholasticism on the same ideas he targets? Will he shower me with gifts if I kiss his ass?

…says Martin the scholastic.

I call myself a "pantheist" and have some reverence for tradition. I'm not exactly a scholastic in the school of Aquinas, but I don't mind the comparison.

And I never claim any superiority to Don in this regard. "So you're just like the rest of us," I say. Why would I come here and turn my scholasticism on the same ideas he targets? Will he shower me with gifts if I kiss his ass?

Sorry about the double post. This web site is acting up lately.

You seem to think that the market economy is a constant state of competition amongst actors in the economy.

How can I seem to think so when I say the opposite? I frequently say that our economy is corporatist. A market economy is constantly competitive though. Market price formation and thus market efficiency depend critically on this competition.

Rather, I think that the market economy is about giving people the freedom to choose their own destinies.

I like to think so. I don't include Treasury securities, for example, among the choices. Freedom from the obligation to exchange produce for produce by accumulating entitlement to rents is not my idea of "the market economy", but these entitlements are very common, and Treasury securities aren't even the most common variety held by the public. In fact, the Federal government itself (including the Fed) holds most of its own securities, and foreign central banks hold much of the rest.

It is about acknowledging the fact that Professor Boudreaux knows more about what makes him happy then what anybody else would.

Certainly, he does.

Competition and anything else that is good is strictly a by-product of giving people that choice.

Well, I don't pretend know what's "good" as much as I try to know what is. I'm given the "choice" to buy entitlement to revenue from taxes imposed on my children, not to mention your children, but I may not "choose" to have my children hand this produce to me instead of persons who have bought or otherwise accumulated this entitlement, even though I invest hundreds of thousands in my children's labor while people buying Treasury securities, as well as title to land, buy the favor of statesmen. That's just a fact. No one much disputes the fact. We just systematically ignore it.

You also should be careful to not confuse policy with politics.

Look at the words. The confusion is implicit in their definition.

Policy is very much the realm of the economist; commenting and analyzing policy is perhaps his or her foremost job.

But that's what I say Don isn't doing. Or he's doing it with blinders on. The payroll tax surplus peaked this year. This fact is significant less for its immediate effect on the Social Security system than for the demographic destiny it signals, but it's extremely significant, and I can easily understand the role it plays in the current "crisis". At least, I think I can. That's my own systematic bias of course, but I'll go on defending it until someone debunks it. You haven't even made an attempt.

So why doesn't Don discuss the fact? Why doesn't Kling discuss it? Ben Wattenberg is probably discussing it somewhere, but he doesn't post here.

You mean the first sentence of the Decree to nationalize all banks that Lenin drafted after he and his band of murderers overthrew the provisional government and in which he goes on to mandate slavery? Yeah. Here it is: "The critical food situation and the threat of famine caused by the profiteering and sabotage of the capitalists and officials, as well as by the general economic ruin, make it imperative to adopt extraordinary revolutionary measures to combat this evil."

from methinks

Changing times… indeed. Nothing's changed at all since Lenins description. The description above of collapse of unfettered capitalism is a recurrent theme as are the changing times that consistently follow swinging to the other extreme.

It's got nothing to do with an ignorant populace and much too do with a system that has repeatedly failed over and over… two times or more in the recent American experience. What is happening all around us as the market fails and distrust itself to the point of becoming frozen is a predictable result of creeping unregulated capitalism. Attempts to explain it away as regulatory failure are transparently childish to anyone even a little informed.

IT DOES NOT WORK. The reason no one can point to a real life free market as an example to look towards is because every-time we inch towards such a society and economic system it collapses and collapses in a predictable and well described way. And for some god-forsaken reason the libertarian thinks if we can just break through the economic free market sound barrier it will be smooth on the other side. And indeed the Keynesians goal is to save capitalism from itself.

Free market capitalism is a faith based belief and its god like all the other is dead too.

It is difficult to give credence to anyone who cites Keynes to bolster their case. If there has been any notable influence on government fiscal policy that has led to this particular mess it is the Keynesian influence.

"We're all Keynesians now." Richard M. Nixon

Damn, muirgeo, what medical school did you go to? Someone needs to fire whomever is teaching the scientific method to MD's because you've got it all wrong.

There is no way to "prove" a hypothesis that free markets lead to better outcomes than non free ones.

We can look at societies which are identical except for the amount of government regulation and see if that gives us any insights. Those cases are few and far between, but occasionally you get a East and West Germany or a North or South Korea to look at. Invariably, when you control for cultural differences, and for differences of natural resources available, free comes out better.

We can point to medieval iceland, which was a free market (at least until the church introduced tithing). Incidentally, you might want to read up on medieval Iceland, it falsifies your claims about concentrations of wealth under a free market very nicely. 200 years of decentralized wealth before the adoption of Christianity, followed by 100 years of increasing wealth concentration in the hands of the 5 families receiving the tithes.

Your attitude towards economics, if extended to medicine would have us still using leeches, since Pasteur's germ theory should not be propagated until it is "proven", and any attempt to test it should be prevented since it is harming people with an "unproven" treatment.

I swear you increasingly remind me of that guy who used to come at my college and scream that all the girls attending school were going to hell because God said a woman's place was in the home. He made few if any converts, annoyed many, entertained a few who had a taste for japery, and contributed nothing to human knowledge.

Murgeio,

Markets don't collapse. They correct, and when they correct, capitalists lose the illusion of wealth. The capitalists then demand that statesmen replace their illusion with actual wealth (or actually valuable rents). The problem is that statesmen do so.

I certainly agree with Don that blaming "the market" for this problem makes no sense. A market is simply a place where, or a process whereby, people exchange things. The things we're entitled to exchange are a matter of statecraft, particularly in capital markets.

Muirgeo, I think you are asking the wrong question. IMO you have market societies, and non-market societies (even there markets still exist). Market societies have been a better for people than non-market societies.

What you are talking about is regulating market outcomes, which most here would argue is impossible.

Let’s turn your comments back on you:

What is happening all around us as the market “fails” and distrust itself to the point of becoming frozen is a predictable result of capitalism. Attempts to explain that if we only had more regulations that this “failure” would not happen are transparently childish to anyone even a little informed.

MORE, OR MORE CORRECT REGULATION DOES NOT WORK IN CREATING PREFERRED MARKET OUTCOMES. The reason no one can point to a real life regulated market with perfect outcomes is that it does not exist. And for some god-forsaken reason the pro-regulation people think if we can just put the right regulations in place we can break through the economic sound barrier and things will be smooth on the other side, and poverty will dissapear.

Like men almost dead in the desert we reach out to Muirgeo ….water…waaaaatterrr….. asking over and over again for one example of a regulated market society where you base your claims of regulatory nirvana, where markets never go down, and there are no poor people. One example of real world data that supports your thesis…. waatteer… our mouths are so dry… just another mirage.

I see, you did close italics, but am wondering why you used them that way.

Would have been better if you had visually differentiated your modifications to the original.

Or at least included a non-italicized closing comment.

Hey Don,

I believe that the public will always be ignorant of economics, and given the financial distress created and propagated by government, there will no doubt be demand to "do something".

But this belief in government is very trendy, and when entitlements and other government failures really become overwhelmingly apparent to the average person, I would hope that the current fashion for government will go out of style.

Even so, I suspect that maybe economists could be more effective if we frame our argument for the market differently.

I would argue that talking about spontaneous order and the invisible hand are good and necessary. But most people do not understand these matters because they are a bit abstract and this is a classic example of Bastiat's idea of what is seen and unseen.

Furthermore, the public seems to itch for "control" and "regulation". Perhaps this is due to a fundamental ignorance about how the free market controls and regulates economic behavior.

Indeed, perhaps we could fulfill the lust for "control" and "regulation" by consistently pointing out that the market does these functions extremely well.

If a firm fails to satisfy consumer wants, at low cost, or takes risks that go bad, then we should point out that firms shrink or go bankrupt. That is, firms have a "hard budget" as Jonas Kournai has said.

Using Kournai's same idea, governemnt has a "soft budget", and as we know very well from Milton Friedman, when government fails at something, as it almost invariably does, the result is a government which grows.

Only when government failure is absolutely obvious to the public, and politicians cannot hide, will government become less fashionable.

In the meantime, however, I think economists should employ the tools of persuasion from social psychology to best influence the public to embrace markets and reject government.

Perhaps by describing the market as "control mechanism" or "regulatory device", we can get less government regulation because the public seems to think that the market is somehow wild and volatile.

What are your thoughts?

Pingry

Pingry, I think Don is setting himself an impossible task. I also teach college students, and enjoy it. But it seems that at least half of even college students are motivated by a very narrow "whats-in-it-for-me" view of their personal education. The other half, that like understanding for its own sake, are the ones I most love to teach. I think the public does have a good basic understanding of earmarks, yet the congresscritters still succeed for the most part in promoting them. Why? Does the public fail to understand such a concept as the collective effect of earmarks because this effect is too abstract? Or is the failure to give these earmark porkers the boot rather due to a motivational "tragedy of the commons"?
Don, are you being rhetorical here in owning responsibility? You feel you are not explaining things well? I disagree.

Murgeio,

Markets don't collapse.

Posted by: Martin Brock

Fine… markets function efficiently or less efficiently. (when they function significantly less efficiently people lose homes and die… thus my preferred term collapse). But sure, for the sake of argument we can agree that more people losing homes and dying is not a market collapse. Anyway the evidence suggest they function less efficiently when poorly regulated. And since there is no such thing or possibility of an unregulated market in the modern world the discussion needs to be focused on how to best regulate a market for maximum efficiency while considering the other needs of society. Continued talk of Economic Fairytale Lands is counter productive non-sense.

Let’s turn your comments back on you:

Posted by: Mcwop

Yeah right… that's pretty clever. Turn my own argument right back at me.

One problem Mcwop. Regulated economies and less regulated economies do exist around the world and they vary in degree from time to time.

So you're attempt at a reversal fails when I point to the massively failed economies that resulted from the relative deregulation of the 1920's and now the present Reagan era disaster.

See then on top of that I point to the more stringently regulated FRD and post FDR which by all claims of the neoliberals should have been an economic disaster but in fact were the fastest growing period for our economy.

See so I'm working with evidence from the real world not some ImaginationaryLand and that gives me an advantage. I can point to real world examples of the success of good regulation over the failure of deregulation and poor regulation.

All you guys can do is tell me to have faith in some invisible hand. Then when I ask if you've ever seen the invisible hand you tell me of course not…it's invisible.

Call me a cynic but I'd say I'm a rational skpetic.

Fine… markets function efficiently or less efficiently. (when they function significantly less efficiently people lose homes and die… thus my preferred term collapse).

A market correcting is not functioning inefficiently. It's becoming more efficient, i.e. prices are adjusting to reflect information relevant to the value of assets.

When someone who can't afford his house payment loses the house, he doesn't die. If his equity is positive, he sells and downsizes, and that's no big deal. Expecting one's fortune to increase monotonically is unreasonable. Why should it?

If his equity is negative, he defaults, and that's perfectly O.K. He's lived in a house he couldn't afford for a while. That's not a loss for him. He'll need to repair his credit if he wants to borrow again, but that's not a disaster either. [I've never had bad credit, but I've always avoided debt like the plague.] Either way, he finds quarters he can afford, and he's then better off.

Now, who precisely is dying? That's a direct question. I'd like a direct answer, please.

But sure, for the sake of argument we can agree that more people losing homes and dying is not a market collapse.

We can agree to anything you like for the sake of argument, but since people aren't actually dying in this "crisis", the arguments are meaningless. People who can't afford their homes should find other homes. Why is that a problem? If I'm living in a home I can afford, should I be looking for one I can't afford?

Anyway the evidence suggest they function less efficiently when poorly regulated.

If you want to be specific about the regulations you advocate, that's fine, but creditors regulate themselves when they're responsible for their losses. The problem is that they aren't responsible. If these markets were truly "unregulated", we'd have no Office of Financial Stability.

And since there is no such thing or possibility of an unregulated market in the modern world the discussion needs to be focused on how to best regulate a market for maximum efficiency while considering the other needs of society.

Since there is no such thing as an unregulated market, why are you telling me that unregulated markets caused this "crisis"? I'm completely willing to discuss how markets should be regulated. Rule #1: Let insolvent banks fail. Rule #2: Let lenders to insolvent banks (including depositors) lose money. Rule #3: Free channels of communication through which individual factors in failed banks may quickly reorganize, along with their sound lines of credit, into other organizations.

In other words, if you're a loan officer directly responsible for specific loans at a bankrupt bank, a bankruptcy judge entitles you to broker a deal directly with another bank to move the business along with your job. Your boss just loses his job, and he gets no golden parachute.

Continued talk of Economic Fairytale Lands is counter productive non-sense.

I'm not discussing any fairy tales. This bailout wasn't inevitable. A world without the bailout would be a real world and not a fairy tail. A world without FNMA would be a real world. We can argue about what forcible propriety should be and how markets thus should be regulated, but to say that markets have recently been "unregulated" is the nonsense. Of course, they've been regulated.

Markets are pricing CDOs correctly, but socialist politbureaus don't like the price. They are using stolen money to put price on a worthless piece of crap.

I know that was well publicized plan only a few weeks ago, when your "representative" was voting, but guess what? The bill wasn't so specific, and the plan now has changed. We aren't actually buying securities backing the mortgages of trailer trash, that Barney Frank forced helpless bankers to write, anymore. That was the prior-to-passage story. Now, we're buying preferred shares in banks, so we're just handing cash to the bankers to hand to their bondholders, maybe along with some new home buyers, and thus diluting the equity of common shareholders, so we have no idea which notes the banks are using the cash to "secure". Fancy that.

No free market has ever existed – and yet every time one has existed they have collapsed.

Wow. The sad thing is, the guy who just made those claims mutually contradictory claims actually made it through medical school.

After the new spate of regulations and nationalizations run their course, poverty grows, the economy stagnates, and his masters' repeated promises of paradise being just around the corner get less and less plausible, he'll still be coming round here, screaming that God is punishing us for our abominable heresies.

See so I'm working with evidence from the real world not some ImaginationaryLand and that gives me an advantage. – Village Idiot

You're working with ignorance and made up words.

Call me a cynic but I'd say I'm a rational skpetic.

Or we can call you what you are – an idiot.