Some Links

by Don Boudreaux on March 21, 2011

in Books, Complexity & Emergence, Curious Task, Economics, History, Monetary Policy, Video, Weblogs

National Review‘s John Miller just published this splendid article on my great GMU Econ colleague Walter Williams.

Here’s the Center for Freedom & Prosperity’s Dan “Bulldawg” Mitchell in the first in a series of videos on central banking and its alternatives.

Bill Easterly interviews Deirdre McCloskey on the theme of Deirdre’s newest book, Bourgeois Dignity.  (I’m reading this book closely now; it’s packed with phenomenally important insights.)

My GMU Econ colleague Pete Boettke has this very interesting discussion of the popularity of economic ideas.

What wonderful news that Paul Rubin is now blogging, at Truth on the Market!

Arnold Kling and Paul Krugman are having an argument.  Arnold wins this one, IMHO.

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{ 25 comments }

Krishnan March 21, 2011 at 6:59 pm

Walter WIlliams observation/comments about teachers/professors providing critical feedback is so right on … Far too many are willing to reward a good grade just because he/she is from some “minority” group – A terrible outcome of that attitude is the mark it leaves on those really terrific students who do earn that terrific grade but are left wondering as to how real that grade is – they wonder if they are allowed to graduate OR given a passing grade OR given a wonderful grade just because they happen to be part of a favorite groups on campus …

We cannot abandon our meritocracy – Yes, the US has it’s share of history that is despicable – but the US is also perhaps the first country to recognize it’s evils and start undoing the wrongs – Condescension will not help those that are seeking to improve themselves – it is very important that the professor is free to provide his/her best opinion on the students’ performance without being deemed “racist” or “sexist” or whatever …

And yes, Walter Williams is indeed terrific … I hope he keeps teaching till he is at least 100 years old and then maybe for 25 years more!

Doc Merlin March 21, 2011 at 8:18 pm

Re: Kling versus Krugman

1) If you can print infinite money without raising the price level, then you can generate infinite real wealth by printing currency. This strikes me as absurd.
2) Increases in monetary aggregates for sovereign currencies tend to hold down or lower interest rates, so if Paul Krugman is correct and liquidity traps exist, one can then make infinite wealth just by printing enough money.

This is frankly absurd.

vikingvista March 21, 2011 at 8:59 pm

But printing money results in spending money. Doesn’t spending equal wealth?

tkwelge March 21, 2011 at 9:08 pm

I’m still a little bit of a novice when it comes to the more basic economic principles that I only learned once and rarely go back to. Even as I learn higher and higher concepts, I find myself having to go back to re study the basics time and time again. Whenever I try to read about the liquidity trap, it just confuses me. Telling me that demand for money is perfectly elastic or that we’re in a liquidity trap doesn’t really inform me of anything useful.

Why is monetary policy ineffective? Because we’re in a liquidity trap. How do we know we are in a liquidity trap? Because monetary policy is ineffective.

All of this bullshit they try to confuse people with is simply a fancy way of saying that monetary expansion isn’t working. The keynesian conclusion that we MUST engage in fiscal stimulus in response to a liquidity trap seems like it is based on the reading of tea leaves. The conclusion of fiscal stimulus being necessary does not logically follow simply from the knowledge that monetary stimulus isn’t working.

Fiscal stimulus does not have a great track record either, considering that the explosion of GDP during WW2 began when foreigners were revving up their wartime consumption, before we had borrowed any money for that purpose, and GDP began to stagnate and decline while the amount we were borrowing increased.

GDP growth during ww2 seems to correlate more strongly with foreign demand and than our own borrowing. Price controls also made inflation seem artificially low. During the war, the US was the lone provider of goods, since it was far and away from the theater of war, so even if global demand had remained the same, the sudden shift to consuming primarily US goods was guaranteed to increase US GDP.

Is there any actual proof that fiscal stimulus will improve economic performance? More than a little bit? Do we have any good data anywhere for that?

kyle8 March 21, 2011 at 11:14 pm

Not only is there no proof, but there are many nice real world examples of fiscal stimulus NOT working. As in the 1930′s, in the USA and Europe in the 1970′s, In Japan in the 1990′s, an here most recently.

Monetary policy is important however, a lack of liquidity could make a recession much worse, however, there are limits to what easy money and low interst rates can accomplish when there is a lack of confidence among both business and consumers.

dan March 25, 2011 at 1:17 am

The ‘lack of confidence’ is not defined well enough. The phrase leaves room for much assumptions and interpretations. What is generating the lack of confidence? And, amongst whom is it most important to re-instill confidence? Easy money and low interest rates will not have a positive effect on those already employed in the middle class.
When has the manipulations from Govt officials in the market place had success devoid of negative consequences, elsewhere?

Methinks1776 March 21, 2011 at 9:42 pm

Why is monetary policy ineffective? Because we’re in a liquidity trap. How do we know we are in a liquidity trap? Because monetary policy is ineffective.

We’re in a worldwide de-leveraging “trap”. Credit spreads were too low, lending standards were too loose and we’ve suddenly realized that lending $6MM to person with an annual income of $60K is probably not such a hot idea.

Until leverage, worldwide, returns to some normal level (one that properly accounts for risk), there will be some deflationary pressure that the Fed will fight with all its might. Presents an excellent opportunity for the Krugmans of the world to ride through the villages screaming “liquidity trap! Liquidity trap!” to convince them to submit to more “stimulus”.

Ryan Vann March 21, 2011 at 10:01 pm

De-leveraging/asset deflation trap/spiral of doom: sounds about right to me.

Methinks1776 March 21, 2011 at 10:39 pm

You’re probably kidding, but not “doom”. At some point, leverage will return to something more prudent and the pressure on asset prices will ease. We may be at a new, lower point, but then the credit bubble sort of meant that we should never have been at the lofty valuations we were. Biting the bullet is tough, but there’s still no free lunch.

dan March 25, 2011 at 12:58 am

‘We may be at a new, lower point, but then the credit bubble sort of meant that we should never have been at the lofty valuations we were.’- Methinks1776
And, here it is. Krugman and many other economists of his ilk assume that ‘valuations’ on any products and services or assets of the previous decade must stand. That we cannot have falling prices. But, considering that the previous decade was entirely built on loose credit and over valuations, we must have prices and assets reasessd. This will mean lowered pricing and lowered overall ‘valuations’. The Great Recession is a reset in the market, but elected officials, who feel it is their duty to maintain and to be the superhero, continue in an attempt to evade the ‘reset’. The very reason for our continued stagnating economic activity is this evasion of reaching the market clearing pricing and valuations.
I hope my assertions are not too elementary for this website.

tkwelge March 21, 2011 at 10:03 pm

Exactly. There are a million reasons why monetary expansion could be ineffective. Simply announcing “liquidity trap!” is just laziness. It isn’t an explanation.

Methinks1776 March 21, 2011 at 10:37 pm

Yep. Turns out 30x – 60x leverage is not such a hot idea. A reduction in leverage is akin to a margin call. To meet margin, you have to sell assets and when everyone sells assets to meet margin calls, asset prices are depressed. Though I can offer only an anecdote, I don’t know anyone whose leverage has not been cut.

So, when financial institutions were over-levered we screamed at them for taking on too much risk and “crashing the economy” and what have you. Now, what? We want them to re-lever because we don’t like the consequences of returning to a more prudent level of debt? Or, better yet, have the government lever to infinity because that’s so much more awesome. Politicians and their shills (ahem, Krugman) would love to have permission for option 2.

Drives me nuts.

kyle8 March 21, 2011 at 11:16 pm

Looking forward to reading the McCloskey book.

DG Lesvic March 21, 2011 at 11:36 pm

RE Kling vs Krugman

The Un-Keynesian, Austrian Theory of the Business Cycle is that it begins not in the market but “government,” not with saving, nor some random event sparking fear and panic, but with inflation of the money supply, lowering interest rates and encouraging longer term investment, but without increasing the supply of goods to sustain it. For want of the goods and real demand, the investments must collapse. So, rather than a crisis of confidence, there is simply malinvestment, which must be liquidated, and the sooner the better, for the longer it lasts the harder the fall.

Prof. Krugman says that this can’t explain unemployment: “The Austrian view is that…workers are unemployed as resources are painfully transferred out of an overblown investment-goods sector back into production of consumption goods… But this immediately raises the question, why isn’t there similar unemployment during the boom, as workers are transferred into investment goods production?”

But, in the Austrian Theory, properly understood, unemployment was not a direct consequence of the downturn. Its real, underlying causes, such as minimum wage laws, preceded the downturn. In a downturn without such policies, some capitalists would lose their investments, but their displaced workers would just move on to other, lower paying jobs, without any prolonged unemployment.

Then why does it occur especially during a downturn?

While a minimum wage law by itself forced wages above market clearing, full employment levels, inflation could bring real wage rates back down to those levels.

“If in the course of…inflation the rise in wage rates lags behind the rise in the prices of commodities, institutional unemployment may shrink or disappear altogether. But what makes it shrink or disappear is precisely the fact that such an outcome is tantamount to a drop in real wage rates.” Mises

And, just as inflation could bring real wages back down to market clearing, full employment levels, deflation could drive them back up again to unemployment levels. So, while the inflation masked the unemployment effect of the preceding policy, the deflation exposed it. But that wasn’t the same as causing it. It was still the preceding policy and not the deflation itself that was the underlying cause.

Without repeal of the real underlying causes, or reinflation to mask their effect, how could the market overcome them, and get the unemployed employed again? Only through more saving and investment, raising the productivity of labor. So, the Keynesian bias for spending over saving and reinflation to keep spending up deprives the market of just what it needs most in a crisis, saving. In the wake of capital consumption and the face of more destructive policy, more saving, to restore the stock of capital and keep it out of the path of an oncoming avalanche or rampaging government and available for recovery where the opportunity appeared, is just what is needed. Any “multiplier” effect of throwing it under the avalanche would be a multiplier only of the poison that made us sick in the first place.

In a contraction, by itself, it is not employment but wages that contract. Employers will still hire the cheapest labor, the unemployed, until there are no more of them. So there will still be full employment, though at lower wages, for, entrepreneurs wouldn’t waste time any more than capital.

from The Cause and Cure of the Depression at

http://econotrashtalk.org/#The Cause and Cure of the Depression

tkwelge March 21, 2011 at 11:48 pm

“So, while the inflation masked the unemployment effect of the Prof. Krugman says that this can’t explain unemployment: “The Austrian view is that…workers are unemployed as resources are painfully transferred out of an overblown investment-goods sector back into production of consumption goods… But this immediately raises the question, why isn’t there similar unemployment during the boom, as workers are transferred into investment goods production?”

tkwelge: During the inflationary boom, workers are lured out of their current jobs into the venus fly trap of the malinvestments using the new money to soak up the existing workers and encourage idle adults back into the job market. Hence, no increase in unemployment. During the recession, workers are FORCED out of their current employment in an attempt to force them back into consumer goods employment that often doesn’t pay as well, especially during a contraction of credit, hence an increase in unemployment.

tkwelge March 21, 2011 at 11:49 pm

This issue goes far beyond nominal wage rates…

vikingvista March 22, 2011 at 12:03 am

It really is a marvel that any sustainable production occurs at all.

DG Lesvic March 22, 2011 at 12:58 am

Twelve,

The problem is to explain unemployment. You tried to explain it this way:

“During the recession, workers are FORCED out of their current employment in an attempt to force them back into consumer goods employment that often doesn’t pay as well, especially during a contraction of credit, hence an increase in unemployment.”

People being forced into lower paying jobs doesn’t explain unemployment.

The contraction of credit doesn’t explain it.

It explains why some capitalists lose their capital, and their workers their jobs, but not why those workers couldn’t have moved on to other, lower paying jobs.

The only things that explain chronic massive unemployment are the unemployment policies, such as minimum wage laws, preceding the downturn, and the effects of which had been masked by inflation, and exposed by deflation.

The solution to the problem is not to resume inflation but to repeal the minimum wage laws and other unemployment policies.

tkwelge March 22, 2011 at 4:40 am

“”:People being forced into lower paying jobs doesn’t explain unemployment.”

I agree with your point. I was simply responding to Krugman. It is the government that causes the sticky wages effect, which results in the “force” that I was talking about being necessary.

kyle8 March 22, 2011 at 6:41 am

That is the clearest explanation of the boom bust cycle I have ever read.

DG Lesvic March 22, 2011 at 11:23 am

If you meant my explanation, I thank you for that.

DG Lesvic March 21, 2011 at 11:41 pm

Sorry that the links aren’t working right. Click on Book Two in blue, the on Cause and Cure.

kyliean uthnoa March 22, 2011 at 12:36 am

Can you please show links for explaining how math and hess are related? I know some but need more information.
Easy Feet

DG Lesvic March 22, 2011 at 11:40 am

While I appreciate the kind words directed to me, I can’t take any credit for the theory. It is the work of course of Hayek and Mises and our mentors here who have so ably expounded it.

But while the credit goes to the Austrian School, we must also recognize the conflict within it between the Misesian and Keynesian Austrians, such as Selgin and Horwitz.

indianajim March 22, 2011 at 12:48 pm

I’d recommend that Pete Boetke might want to take a look at a book that W.E. recommended to me in a discussion here at the Cafe. The book is by Demsetz’s 2004, entitled “From Economic Man to Economic System”. The first chapter in particular ( entitled: “Where Economic man Dwells) is closely connected to what Pete has written in the article linked above.

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