Some Links

by Don Boudreaux on June 10, 2011

in Environment, History, Monetary Policy, Myths and Fallacies, Population, Regulation, Scientism

George Selgin expands even further our knowledge of banking (and of history and of economics).

Man, the June 2011 issue of The Freeman is loaded with good stuff.  But I want here to single out Bob Higgs’s deeply profound analysis – “James Buchananian,” I would say – of how economic theory often sets itself up to be used (and misused) to unleash mischief.  Here’s a central selection:

Had economic theorists [in the 1960s] rested content with using the microeconomics of the Neoclassical Synthesis strictly as a conceptual device employed in abstract reasoning, it might have done little damage. However, as I have already suggested, this type of theory cried out for application—which, in practice, was nearly always misapplication. The idealized conditions required for theoretical general-equilibrium efficiency could not possibly obtain in the real world; yet the economists readily endorsed government measures aimed at coercively pounding the real world into conformity with these impossible theoretical conditions.

Closely examined, such efforts represented a form of madness. As the great economist James Buchanan has observed, the economists’ obsession with general equilibrium gives rise to “the most sophisticated fallacy in [neoclassical] economic theory, the notion that because certain relationships hold in equilibrium the forced interferences designed to implement these relationships will, in fact, be desirable.”

Speaking of “Buchananian” political economy, one of Jim’s premier students from Jim’s time at the University of Virginia, Dick Wagner (one of my colleagues at GMU Econ), explores in this paper the complexity of political fiscal-decision-making in democratic societies.

Jonah Goldberg takes on the dangerous and fact-challenged notions that motivate Thomas Friedman’s recent – and indescribably awful – New York Times column entitled “The Earth is Full.”  If time allows, I plan my own response to Friedman’s historically uninformed and economically idiotic fear-mongering.  Where O where is today’s Julian Simon?!

John Stossel raises awarness of the need for a cure for the cancer of government regulation.

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Lars Van Buren June 10, 2011 at 6:31 pm

Oh my have you seen this website about Hayek?! They made a documentary of this rare interview of Hayek in 1981. It’s fascinating. I’ve never seen Hayek speak so candidly and poignantly. LOVED IT!!!! check it out TheHayekProphecies.com

Lars

HaywoodU June 10, 2011 at 7:05 pm

You should check out cafehayek.com. It is rich in the fundamentals which Hayek exposed.

I LOVE IT!!!!

MWG June 10, 2011 at 6:46 pm

There was some discussion over at Reason regarding the Tom Friedman column. As someone who (Barf, Barf) enjoyed a few of his books before my more libertarian days, all I can say about his columns over the last couple years is…barf.

Molon Lobe June 10, 2011 at 8:44 pm

How can governments hope to regulate an economy? They lack the experience required to understand how industries function. Government intervention always distorts free market results to the disadvantage of consumers and producers.

kyle8 June 11, 2011 at 6:53 am

An entire army of Bureaucrats, politicians, and academics would disagree with you. Funny how ideas that seem so inherently true are not shared by those who have a fiduciary interest in big government.

Emil June 11, 2011 at 8:46 am

And probably most people (including myself) who have worked for the private sector and have had to deal with this army of bureaucrats, politicians and academics would agree that they are incredibly incompetent

Dan H June 11, 2011 at 9:08 am

“Personally I liked the university. They gave us money and facilities! We didn’t have to produce anything! You don’t know what it’s like ‘out there’! I’ve worked in the private sector… They expect RESULTS!”
– Dan Akroyd as Dr. Ray Stanz in ‘Ghostbusters’

Methinks1776 June 11, 2011 at 10:39 am

The incentive is to cover their behinds, not to do a good job for the customer. “A good job” in bureaucracies is defined as hanging on to your job, which usually entails finding the right behind to smooch.

Methinks1776 June 10, 2011 at 9:00 pm

Also, on Judge Napolitano tonight – Don Boudreaux.

Mesa Econoguy June 11, 2011 at 2:45 am

Paisano et cajun et veritas.

Damn good cookin!

Vikram June 10, 2011 at 9:48 pm

Prof. Don,

This was difficult to re-post on my Facebook wall.

Because of 3 distinct but excellent topics. :-(

V

Vikram June 10, 2011 at 9:57 pm

Also I strongly believe that Gandhi is vastly overrated by the world.

Gil June 11, 2011 at 12:17 am

So is Mother Teresa.

Vikram June 11, 2011 at 2:40 am

Oh yes !!!

Nehru is the most overrated of them all.

Bellikoth R Shenoy is the most ignored.

Dan H June 11, 2011 at 9:12 am

^Like… went to 13 years of Catholic School. I remember senior year at my all-male Catholic high school when I finally got sick of some religion teacher praising Mother Teresa and I finally stood up and said “Ohh come on. This is BS! Mother Teresa wouldn’t be able to do what she does if there weren’t people like my father and the rest of our parents donating money to the church or sending money to her mission. Are you somehow suggesting that Mother Teresa is holier than my father because she’s on the receiving end?”

Gil June 11, 2011 at 11:52 am

Mother Teresa is overrated because she was rather similar to Gandhi in that she was pro-poverty and pro-suffering as according to traditionalist Catholic faith. She did little but to tend to the poor while the charity donations piled up in a bank account doing nothing let alone wanted to help the poor escape poverty.

Dave Killion June 10, 2011 at 10:12 pm

Isn’t Matt Ridley today’s Julian Simon?

Don Boudreaux June 11, 2011 at 10:58 am

Matt and Bjorn Lomborg are probably the closest scholars we have today to Julian Simon.

Sam Grove June 11, 2011 at 12:01 pm

And Bjorn Lomborg got started on his current vector in attempting to disprove Julian Simon.

DG Lesvic June 10, 2011 at 11:48 pm

Let me try to fill in what, to some, may be blanks in Prof. Higgs’ critique of General Equilibrium Theory.

Strictly speaking, its Austrian School opponents are general equilibrium theorists themselves, assuming equilibrium throughout and not just within limited segments of the market. To the Austrians and their opponents alike, there is a general equilibrium. The difference is that, to the Austrians, it is merely a theoretical concept, and, to their opponents, an actual state of affairs.

To the Austrians, it is never reached in practice, for, with constant change in supply and demand, a new equilibrium point is constantly being established before the previous one could be reached. But, though purely imaginary, it was nonetheless an essential starting point for analysis.

As Prof. Rothbard explained, the final equilibrium position was “like the mechanical rabbit being chased by the dog. It is never reached in practice and is always changing, but it explains the direction in which the dog is moving.”

But, while, in the Austrian School, the final state of rest and equilibrium is an imaginary construction, in the so called General Equilibrium School, it is an empirical reality, and a starting point not just for logical but mathematical analysis. For, the supply/demand relations in a final state of rest and equilibrium would be constant relations, like those between purely mechanical elements, from which you could calculate the change in one that would bring about the change in another that you desired.

It is one thing to postulate a final state of rest and equilibrium and another to observe it or to know when you have done so, and then to know when you have departed from it. These problems are never even considered. The New theorists simply leap from the premise that the market is imperfect to the conclusion that interference with it is perfect.

But the market’s “imperfection” consists precisely in its adaptation to change, and New Theory intervention’s “perfection” in a hpothetical termination of change and of life itself.

DG Lesvic June 11, 2011 at 12:11 am

In that last sentence, I should have said

New Theory intervention’s “perfection” in what is supposedly an actual termination of change and of life itself.

DG Lesvic June 11, 2011 at 12:17 am

No, that wasn’t right either. It should be this.

But the market’s “imperfection” consists precisely in its adaptation to change, and New Theory intervention’s “perfection” in what would be a termination of change and of life itself.

DG Lesvic June 11, 2011 at 1:46 am

Here’s how it will appear in my book.

General Equilibrium Theory

Strictly speaking, the Austrian School opponents of so called General Equilibrium Theory are general equilibrium theorists themselves, assuming equilibrium throughout and not just within limited segments of the market.

The difference is that, to the Austrians, equilibrium is merely a theoretical concept, and to the General Equilibrium, Neoclassical Synthesis (of micro and macro), or New Welfare School economists, it is an actual state of affairs.

To the Austrians, it is never reached in practice, for, with constant change in supply and demand, a new equilibrium point is constantly being established before the previous one could be reached. But, though purely imaginary, it is an essential starting point for analysis. As Prof. Rothbard explained, the final equilibrium position is “like the mechanical rabbit being chased by the dog. It is never reached in practice and is always changing, but it explains the direction in which the dog is moving.”

But, while, in the Austrian School, the final state of rest and equilibrium is an imaginary construction, in the New Welfare School, it is an empirical reality, and a starting point for mathematical analysis. For, the supply/demand relations within the final state would be constant, like those between purely mechanical elements, and from which you could calculate the change in one that would bring about the change in another that you desired.

It is one thing to postulate a final state of rest and equilibrium and another to realize it and actually calculate anything from it. The New Welfare theorists have never bothered to explain how that could come about. They’ve simply leaped from the premise that the market was imperfect to the conclusion that their interference with it would be perfect. If the one was imperfect, the opposite had to be perfect.

But the “imperfection” of the market consisted in its adaptation to change, and the “perfection” of the New Order in the absence of change, a world without action, without real human beings, and life itself.

It would be the brave new world and Welfare of the cemetary.

kyle8 June 11, 2011 at 6:50 am

Dr. Boudreaux, you are the new Julian Simon.

indianajim June 11, 2011 at 8:55 am

It is worth repeating from above: “the most sophisticated fallacy in [neoclassical] economic theory, the notion that because certain relationships hold in equilibrium the forced interferences designed to implement these relationships will, in fact, be desirable.”

The key word in the above to me is “certain” in the phrase “because certain relationships hold in equilibrium”. The fallacy then, it seems to me, is Hayekian: The use of force to implement a set of relationships quantifiable by central planners is folly because the knowledge of the particular circumstances of time and place is the essential knowledge possessed only by the multitude of dispersed individuals in society.

Have others here, in the literature, or elsewhere interpreted the passage in this way too?

Don Boudreaux June 11, 2011 at 9:30 am

That’s consistent with my interpretation.

indianajim June 11, 2011 at 11:48 am

Thanks for responding.

muirgeo June 11, 2011 at 10:26 am

Listening to reports coming out of Syria by heroic people risking their lives to secretively report stories of what is happening in their country I have a new found loathing for people in our country talking about the use of force by the government. There is always room to rebel and speak out and vote against the dastardly deeds our government can perform but we are quite far from torturing 15 year olds in most horrific ways for speaking against their government. We are far far from shooting into peaceful crowds demonstrating for change. You sound like a god damn whiney spoiled brat who gets everything they want and still complains. Democracies have by far the best track record of NOT being oppressive compared to ALL other regimes. Your libertarian scheme would very likely lead to MORE oppression and less liberty. If anything modern neoliberalism has consolidated power making such realities slightly more possible. Grow up!

indianajim June 11, 2011 at 11:46 am

I loath your thoughts as much as you do mine; and that YOU do so explicitly, given your incessant postings of socialistic/fascistic tripe at the Cafe, is no small comfort to me. Thanks for the validating, via the pathetic nature of the pap you post, the veracity of the views that characterize the vast majority who visit this venue.

muirgeo June 11, 2011 at 10:01 pm

There is nothing radical about what I believe. It’s not socialism or fascism. It’s pretty much what has advanced the worlds social democracies to be the most prosperous nations of all time.

What libertarians propose IS EXTREMELY radical from anything currently in existence or ever proven to work.

I would really like for one of you libertarians to explain to me how wealth in one of your societies would not in the majority of cases result from inheritance. The idea of maximizing individual liberty is a great idea but the obsessive compulsive personality types that call themselves libertarians take the idea to an illogical extreme that THEY can’t even conceptualize into a logically organized society that would function with any reasonable chance of success or hope of actually improving the lives of most caught in such an infernal hell hole.

Sam Grove June 11, 2011 at 12:09 pm

YASAFI!

Democrats: WWI (Wilson, D) Korea (Truman, D), Vietnam (Kennedy, Johnson, D’s), Clinton’s (D) Cruise missiles to Lebanon, and now Obama D presides over the U.S. empire in a manner little changed from Bush.

I didn’t want to get into FDR and WWII, there is too much to say about that.

Ghengis Khak June 11, 2011 at 12:23 pm

Good point.

I look forward to your future posts where you apply this concept in turn to other issues like universal health care, tax rates, regulatory structures, or whatever other plans you have for us. You know, because complaining about these things makes you a whiney spoiled brat since they are much worse somewhere else in the world.

kyle8 June 11, 2011 at 12:42 pm

And yet the social and economic views that you regurgitate closely resemble the actual policies of the Assad regime. I wonder that you are not rooting for them.

muirgeo June 11, 2011 at 10:05 pm

No my views represent what has been proven to work with some tweaking away from the direction you neoliberals have set us on….towards disaster. Your position is radical, untested (well IMO it resulted in serfdom in the middle ages) and logical non-sense not applicable to the real world.

vikingvista June 11, 2011 at 2:54 pm

It isn’t just knowledge. The mechanisms that are revealed under conditions of voluntary choice collapse under conditions of coercion. People simply do not respond the same to coercion as they do to free choice.

muirgeo June 11, 2011 at 10:10 pm

Show some evidence of your mumbo jumbo non-sense. What’s your proof? Situationally you might have a point but show some evidence what you calm is applicable to the real world. You have no proof. You guys love just making claims that sound like they are sensible and then assuming they are gospel. you never back up anything you say with evidence.

vikingvista June 12, 2011 at 4:25 am

What are going on about now, idiot? Is it possible for you to form a coherent and contextually relevant thought? What is your problem? TBI?

indianajim June 12, 2011 at 3:55 pm

Great point; the processes of central planners applying force will not be the same as those of individuals because their self interests are not the the same.

WhiskeyJim June 11, 2011 at 9:34 am

Thomas Friedman was the same guy who wrote the indescribably awful book named, “The Earth is Flat,” wherein he took over 400 pages to tell us the world is getting smaller, not flatter. Which of course inspires a much different strategy and worldview.

Luckily for Mr. Friedman, we live in a constantly changing world, where he is free to mirror his own thoughts and therefore profit from the prevailing winds of elitist thinking.

Perhaps we could describe Friedman’s ever changing views as a kind of incoherent equilibrium of thought.

Stephen A. Boyko June 11, 2011 at 9:49 pm

@ Whiskey Jim

Per your email

One-size-fits-all regulations enable one-size-blinds-all regulators. You need to start with randomness segmentation. See:

http://readingthemarkets.blogspot.com/2009/10/boyko-were-all-screwed.html

Stephen A. Boyko June 11, 2011 at 10:25 am

@ Don Boudreaux

“However, as I have already suggested, this type of theory cried out for application—which, in practice, was nearly always misapplication. ”

See: “Financial Storm Humters” http://taffywilliams.blogspot.com/2011/06/financial-storm-hunters-in-search-of.html

A fundamental failure of the one-size-fits-all (OSFA) approach to governance stems from a lack of accurate information as measurements tend to be biased in support of the legacy system. Specifically, there were three corruptive information errors that were causal to the Subprime Crash:

**Misdiagnosis of renters as owners where renters received property rights that created perverse incentives relative to property foreclosures.

** Mischaracterization of the underlying economic environment that conflated risk and uncertainty resulting in mispriced subprime debt. Uncertain issues such as no-money down, NINJA MBSs[5] have neither mark-to-market valuations nor positive cash flow from which to price investments. How could uncertain securities receive an AAA-rating?

**Misapplication of governance where policymakers responded to market excesses of the Enron crisis with regulatory excesses contained in Sarbanes-Oxley of 2002. Treating an issue-specific crisis as though it were a systemic crash resulted in disproportionate governance causing normative market commerce to migrate to economic externalities that encumbered the implementation of Dodd-Frank.

Economiser June 11, 2011 at 10:53 am

I know you’ve posted on this before, but in that article Tom Friedman really does a fantastic impression of Harold Camping. The end is near!

Also, Friedman (as with all anti-freedom people) speaks in terms of “we.” “We” must consume less, “we” must pursue happiness and not economic gain. Of course, in the real world, individuals make those sorts of choices every day, based on the type of work they choose and when (or if) they choose to retire.

DG Lesvic June 11, 2011 at 2:03 pm

Our estimable host offered us essays here from George Selgin, Bob Higgs, Jonah Goldberg, and John Stossel. The first two are economics professors, the latter two not.

Our host describes the offering of the professors in the most glowing terms:

“George Selgin expands even further our knowledge of banking (and of history and of economics)”.

” I want here to single out Bob Higgs’s deeply profound analysis.”

I have never failed to understand anything that the two non-professors have had to say but have had to struggle to understand what the two professors were saying. Perhaps that’s my fault, but still the verdict of this consumer of the product. Yes to the non-professors, No to the professors.

They’d better start giving writing lessons in the universities, or better, thinking lessons. Yes, there is such a thing. It’s called Human Action.

kyle8 June 11, 2011 at 6:22 pm

Or, you might, if interested, learn some more about Economics. It really is not that difficult a subject to get a good layman’s understanding of.

DG Lesvic June 12, 2011 at 1:20 am

kyle

I agree that economics is not difficult. That’s why I’m skeptical of authors like Higgs and Selgin who make it difficult.

Confusion is complicated, economics simple.

Higgs and Selgin are confusing because they are confused.

Compare Higgs’ treatment of the subject with mine.

Which got closer to the heart of the matter, and was the clearer?

As for Selgin, lots of luck trying to figure him out.

Dan June 12, 2011 at 4:35 am

Ok libertarians….. I am not one……. Yet…….. Bachman’s interview for Townhall….. http://online.wsj.com/article/SB10001424052702304259304576375491103635726.html

Rhetoric?
I’ll take her for prez.

jjoxman June 12, 2011 at 4:14 pm

Dan,

Thanks for posting. If I believed in voting, I would seriously consider voting for her.

Dan June 12, 2011 at 4:39 am

Sorry….. It’s Wall Street Journal.

Dan June 12, 2011 at 4:40 am

‘on the beach, I bring Von Mises’ exclaims Bachman.

DG Lesvic June 12, 2011 at 5:20 am

Too bad more “Austrian” economists don’t do the same.

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