Quotation of the Day…

by Don Boudreaux on September 15, 2011

in Myths and Fallacies, Reality Is Not Optional, State of Macro

… is from page 14 of UCLA Econ Department Chairman Roger E. A. Farmer’s 2010 book How the Economy Works:

Keynesian economists in the Obama administration and their supporters in academia and in the media have not provided an internally consistent theory that explains why the free market fails to deliver full employment.

Keynes’s book, The General Theory, did not provide such a theory.  The book is difficult to read, internally incoherent, and inconsistent with a body of economic theory that has been widely accepted for at least 200 years.  More important, it is inconsistent with the existence of the stagflation that we observed in the 1970s.

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{ 59 comments }

doug September 15, 2011 at 2:53 pm

How the Economy Works

Two parties freely enter into an agreement whereby one performs and action and the other renumerates. And they are both better off.

vidyohs September 15, 2011 at 5:40 pm

That needs the approval and supervision of a government agent acting under law passed by congress.

Can’t be just engaging in free shit now?

doug September 15, 2011 at 2:54 pm

How the Economy Works

Two parties freely enter into an agreement whereby one performs an action and the other renumerates. And they are both better off.

doug September 15, 2011 at 3:01 pm

Two parties freely enter into an agreement whereby one party performs an action and the other party pays. And both are better off.

Methinks1776 September 15, 2011 at 4:42 pm

There seems to be an echo in here :)

vidyohs September 15, 2011 at 5:40 pm

here

Richard Stands September 15, 2011 at 7:30 pm

Here…

vidyohs September 15, 2011 at 9:32 pm

I stopped by the Chevrolet Dealership yesterday, for a look at the new Silverado 2011, 1500 pickup. Just for fun, I took it out for a test drive. I wanted to sense that new “feel” before they become extinct.

The salesman (a black man wearing an Obama “change” lapel pin) sat in the passenger seat describing the truck and all its “wonderful” options.

The seats were of particular interest. He explained that the
seats directed warm air to your butt in the winter and directed cool air to your butt in the summer heat.

Feeling like messing with him, I mentioned that this must be a
Republican truck.

Looking a bit angry, he asked why I thought it was a Republican truck. I explained that if it were a Democrat truck, the seats would blow smoke up your ass year-round.

I had to walk back to the dealership. Damn guy had no sense of humor.

brotio September 15, 2011 at 11:15 pm

LMAO!

John Galt September 15, 2011 at 9:06 pm

Through these three iterations of the same thought, each with decreasing rates of error, I calculate an approaching new national anthem, to be spoken in the stadiums of a world beyond empire…

Will everyone please rise and place their hands over their wallets and smart devices during the “Freedom Pledge”

I pledge my allegiance to the legitimate authorities. And to their protection of life, liberty, and property. One harmony from many plans. Free of theft and aggression. With dignity and prosperity for all.

Harold Cockerill September 16, 2011 at 7:46 pm

The error is still there though. It should be “two parties freely enter into an exchange”.Sometime one or both aren’t better off which is how you learn which exchanges to enter into.

Unless you get bailed out which interferes with the learning.

Daniel Kuehn September 15, 2011 at 3:17 pm

Farmer presents himself as presenting a better version of the General Theory. People shouldn’t mistake this quote as him rejecting Keynes because, he considers himself to be following in the tradition of Keynes. Farmer knows Phelps’s work as well as anyone, so he knows there’s no great obstacle to explaining stagflation with Keynesian economics. What can’t explain stagflation is a naive version of the Phillip’s curve.

And what has Farmer been pushing the last couple years? Shifting Beveridge curve, Phillips curve, and the role of liquidity in determining the relationship between both. And his conclusion – central bank ought to adjust interest rates AND use quantitative easing to guarantee full employment. This is not a man that thinks Keynesianism is a bad idea. This is a man that thinks he’s fleshed out a better version of Keynesian relationships that have been around for decades (and I suspect he’s right on that self-assessement).

I think all he intending with this passage you’ve quoted is to bracket off pre-1970s Keynesianism as some naive Phillip’s Curve story. It obviously wasn’t but it’s a nice way of framing the value of his contribution (just like Keynes framed his contribution with his straw man take on Say’s Law and just like Buchanan framed his contribution wiht his straw man take on Keynes and just like almost everybody frames their contribution with a straw man version of someone else).

But one thing is for sure – Farmer does not think Keynes isn’t relevant to understanding what’s currently going on. Farmer just thinks Keynes needs Farmer’s help :)

Price B. September 15, 2011 at 7:06 pm

+100 internet points.

You may redeem them for captioned felines.

Roger Farmer September 16, 2011 at 12:30 am

Daniel Kuehn gets my position exactly right. There has been far too much polarization of ideas on both the left and the right and we all are the losers when informed debate degenerates into dogmatic appeal to religious texts. I do not think that Keynes’ remedies were the right ones; but it is naive to think that a society with a minimal state will automatically deliver economic prosperity. My own work seeks to develop alternative institutions within which market forces can be given maximum rein.

SaulOhio September 16, 2011 at 5:58 am

Whenever I hear a phrase like “dogmatic appeal to religious texts” in this kind of debate, I see it as a code for “believe what I am saying, because its God’s own word”.

Accusing other people of dogmatism is often the first sign of dogmatism. Try discussing the ideas themselves.

Here is the key to understanding what the problem is with your prescription for fixing the economy: “The correct response to the crisis is to set in place, in every country in the world, an institution to control the value of national stock market wealth by targeting the rate of growth of an index fund.”

You would have a single institution controlling what can only be determined by the voluntary contributions of all participants of the market: value.

Value is something that cannot be studied in such a scientific manner. It is determined by the human consideration of changing circumstances of reality within the context of the needs and desires of those human beings. Each person determines values for himself (I do not cal this subjective like Austrian economists do. Along with Ayn Rand, I call it Objective. But that’s for another discussion.)

A single institution, probably governmental or quasi-governmental, cannot do anything but distort price signals.

You recommend targeting some rate of growth of an index fund. How do know what the right target is?

I agree with George Selgin about what is called a “productivity norm”. The value of money must be kept stable enough that it also reflects the fall of value of goods, services and commodities as the economy becomes more productive and the supply of those goods, services, and commodities increases. This can only be done automatically, by something like a gold standard or otherwise stable supply of money. Anything else resembles taking readings from a measuring device after altering the reading yourself to fit a theory you have.

Its like you are measuring the pressure inside a boiler. Your theory says the pressure should be at such and such a level, but your pressure gauge indicates a higher pressure. So you “recalibrate” the gauge till it reads what your theory says it should. Then you take your reading. That is what you do when you tamper with the value of money by targeting some index (like the consumer price index). In order to maintain stable economic growth, the prices in your index need to reflect changes in productivity, as well as changes of the value of different commodities relative to one another.

Roger Farmer September 16, 2011 at 1:59 pm

The debate is too often couched in terms of free markets versus state control. But markets cannot exist outside of the institutional supports provided by government. These include the courts, the police and the army, institutions that are typically accepted as necessary by even the most ardent supporters of free markets. But should we move beyond these minimalist institutions?

Once one recognizes that the courts are legitimate institutions, it becomes necessary to provide a mechanism to define what contracts are enforceable and what are the boundaries that legitimize property rights. Slavery for example, was a legitimate institution at the inception of the American experiment in democracy. It is now widely considered to be repugnant. The boundaries change. What is obvious to men and women in one era is by no means clear to others.

Democratic countries evolve. Not all new institutions are successful and reasonable men and women can and do disagree about the proper boundaries to state intervention in markets. Central banks, like the Fed in the US, developed over the course of two centuries in response to a series of financial crises, similar to the one we are now experiencing.

Is there an alternative to the active management of the money supply by a committee of experts? Perhaps. But a system in which the value of a nation’s currency is subject to the exigencies of gold discoveries is manifestly not the solution. The gold standard was discarded by previous generations because it failed to generate price stability and the fact that the US adhered to the gold standard in the early years of the Great Depression is one of the major reasons that unemployment in that period was so devastatingly high.

It is tempting to pose the following dichotomy. Is high unemployment a systemic problem of unregulated markets? Or is it caused by over active government intervention? This is an overly simplistic way of organizing a complicated question. Every system of trade exists within a set of legal institutions. Some institutional arrangements lead to higher welfare for most citizens than others. The right question to ask of a democracy is: Which set of minimally invasive institutions will lead to the highest standard of living for the largest possible number of citizens?

Harold Cockerill September 16, 2011 at 8:16 pm

I think the main reason earlier “governments” (not generations) discarded the gold standard is the standard interfered with their ability to inflate their currency. The gold standard is imperfect but forces governments to control the printing of money lest gold flee the country.

A gold standard also make it hard to sustain a war effort. In the absence of the ability to just print and spend the government is forced to raise taxes to pay for a war. That makes war unpopular. Can’t have that.

Chuclehead September 17, 2011 at 1:26 am

“But markets cannot exist outside of the institutional supports provided by government.”
Ever heard of black markets?

“My work provides a new and coherent approach to macroeconomics that explains how a lack of confidence can lead to persistent unemployment. It supports the purchase of equities by central banks to reduce asset-price volatility, restore the value of wealth, and prevent a future market crash.” Oh, that going to end well.
Do me a favor, and try this in Europe first.

Chuclehead September 17, 2011 at 1:52 am

“But markets cannot exist outside of the institutional supports provided by government.” I would add that the desire of man to exchange for their mutual benefit is so strong that markets emerge despite institutional (barriers) support (interference) of governments.

“Is there an alternative to the active management of the money supply by a committee of experts?” Is there a example of active management of the money supply by a committee of experts that did not debase the currency? Is there a example of a omniscience committee of experts? Your premise still requires central control of a economy with 320 million moving parts, and that is the fatal conceipt.
You have completed the curious task of economics and demonstrated to us how little you really know about what you imagine you can design.

SaulOhio September 17, 2011 at 7:27 am

I have heard this argument before. Yes, government needs those institutions, but it is fairly clear where the line ought to be drawn. For example, slavery was NEVER a legitimate institution. It was based on force. People were forcefully taken from their homes, forcefully shipped to other countries, and forced to work for others for nothing, with no rewards, no compensation, nothing but the bare necessities of existence, treating them like livestock instead of human beings.

The boundary between what is legitimate and what is not is defined in terms of the use of force.

It was state sponsored banks that CAUSED the early crises, as the Fed was central in the cause of THIS one. Have you read George Selgin’s “Central Banks as Sources of Financial Instability”? He pretty much proves that the central banks came first, caused the instability, then the idea evolved that central banks should be the solution to that instability.

As Harold Cockerill says, the gols standard was abandoned, not because of its instability, but because governments wanted to inflate the currency.

As for the gold standard and the Great Depression, have you read Greenspan’s “Gold and Economic Freedom”? Both America and Britain has been violating the gold standard for years, printing paper money not sufficiently backed by gold. Both America and Britain had central banks which were manipulating interest rates and the money supply by printing paper. Greenspan called this a “mixed gold standard”.

“The irony was that since 1913, we had been, not on a gold standard, but on what may be termed ‘a mixed gold standard’; yet it is gold that took the blame.”–Alan Greenspan

Your “minimally invasive institutions” tend to become dominating institutions. Any interference in the economy (other than protection of rights) leads to even more. The “minimally invasive” interventions cause problems that new interventions are called on to solve.

You look at the instability caused by the Fed, one government intervention, and so you call for the creation of another government institution to solve that problem. A perfect example.

SaulOhio September 17, 2011 at 7:28 am

Sorry. That second sentence should be “Yes, the ECONOMY needs those institutions…”

SaulOhio September 16, 2011 at 6:00 am

I do agree, however, Don shouldn’t have taken that quote and made it look like you were entirely opposed to Keynes.

Daniel Kuehn September 16, 2011 at 7:56 am

Thanks for the vote of approval – I’m looking forward to reading your Expectations, Employment, and Prices. I’m a first-year PhD student, though, and I think it would probably help to finish my math econ course before reading it for better comprehension! So maybe over Christmas. But I’ve enjoyed the summaries you’ve provided on VoxEU, youtube, your website, and elsewhere.

anthonyl September 16, 2011 at 9:39 am

Is substituting one institution for another really going to free the reins of a market? The market is always there and it is always working. If someone doesn’t think it’s working well enough isn’t that the conceit? Wasn’t Mises’ point that government could not make the maket work better than an unhampered market? Wasn’t Hayak’s major discovery that emergent solutions are always best for all?

joe September 15, 2011 at 4:02 pm

Maybe a simpler way of thinking about it, suppose you had a basic “free market.” The question is “can you improve the lives of of people or create a more prosperous world by appointing a committee (somehow) with the authority to use whatever violence needed to require compliance with it’s edicts? And further ask yourself what would this committee demand? What “rules” would make the market overall “richer?” Blocking free trade? Outlawing employing people with low productivity? Requiring, at gunpoint, that an employer “negotiate” with a particular labor group and blocking this employer from purchasing labor from any competing group of workers? Rules requiring fitted sheets in hotels? etc etc.

What can an all powerful government “do” to “improve the free market?” Anything?

kyle8 September 15, 2011 at 6:02 pm

The committee for public safety?

vikingvista September 15, 2011 at 8:45 pm

Suicide.

Greg Webb September 15, 2011 at 4:59 pm

“Keynes’s book, The General Theory, did not provide such a theory. The book is difficult to read, internally incoherent, and inconsistent with a body of economic theory that has been widely accepted for at least 200 years. More important, it is inconsistent with the existence of the stagflation that we observed in the 1970s.”

This is a good, short analysis of The General Theory. However, it has been a marvelous propaganda tool for corrupt politicians and their cronies.

Invisible Backhand September 15, 2011 at 7:58 pm

Economic textbooks are not holy scipture.

Invisible Backhand September 15, 2011 at 7:58 pm

“scripture”

Greg Webb September 15, 2011 at 11:26 pm

And, The General Theory was not even a good economics textbook.

Pom-Pom September 16, 2011 at 12:13 pm

exactly. it was an absolutely horribly written book.

SaulOhio September 16, 2011 at 7:56 am

In my experience, the fact that they are not scripture is only pointed out by those who actually act as if they are.

Seth September 15, 2011 at 10:39 pm

I owe this to the authoritative-sounding and melodiousness of:

“The General Theory” and “John Maynard Keynes”

Jim Rose September 15, 2011 at 6:12 pm

i thought Farmer was a keynesian of a certain ilk?

Jim Rose September 15, 2011 at 6:15 pm
Dan J September 15, 2011 at 8:23 pm

How many people really think Obama admin cares about economic theory, as opposed to using it as a tool, while the pundits argue over the merits? Doling out govt money is not on a basis of Keynes economic theories, but on political practice of moving along an agenda. They could care less about Keynes or Hayek. They care about Karl Marx.
Crony capitalism and ‘pay to play’ schemes is the tools for getting what you want. That is all.

Greg Webb September 15, 2011 at 11:29 pm

Dan J, President Obama is a corrupt, applause-seeking politician. I doubt that he understands economics or much ofanything else.

Jim Rose September 15, 2011 at 9:17 pm

dan j,
your remarks reminds of Freidman 1989 german essay on keynes:

“Marvelously simple. A key that apparently unlocks the mystery of long-continued unemployment: inadequate autonomous spending or too low a propensity to consume. Increase either, or both, being careful simply not to go too far, and full employment could be attained.

What a wonderful prescription: for consumers, spend more out of your income, and your income will rise; for governments, spend more, and aggregate income will rise by a multiple of your additional spending; tax less, and consumers will spend more with the same result.

Though Keynes himself, and even more, his disciples, produced much more sophisticated and subtle versions of the theory, this simple version contains the essence of its great appeal to non-economists and especially governments.

Here was one of the most famous and respected economists in the world informing governments that the way to full employment was paved with higher spending and lower taxes.

What more attractive advice could politicians wish for? Long regarded public vices turned into public virtues!”

reprinted at Federal Reserve Bank of Richmond Economic Quarterly Volume 83/2 Spring 1997

nailheadtom September 15, 2011 at 10:53 pm

About this unemployment thing: Nobody has knocked on my door offering to clean the house, wash the dishes, wash my car or mow the lawn for money. My usual gauge of economic desperation is the number of “Room for Rent” signs in the neighborhood; there aren’t any. The streets seem to as filled with traffic as ever, sporting events are well-attended, if somebody hadn’t mentioned “unemployment” in the media, would anyone be aware of this crisis?

JCE September 16, 2011 at 12:07 am

Jesus christ!! How did that guy get to be department chair?!?! Keynes proves in the GT that the ‘free market’ fails to deliver full employment because when an economy uses money to mediate transactions, say’s law doesn’t hold
Go and read Nick Rowe, for God’s sake!!!!!!

Roger Farmer September 16, 2011 at 12:23 am

Daniel Kuehn gets my position exactly right. There has been far too much polarization of ideas on both the left and the right and we all are the losers when informed debate degenerates into dogmatic appeal to religious texts. I do not think that Keynes’ remedies were the right ones; but it is naive to think that a society with a minimal state will automatically deliver economic prosperity. My own work seeks to develop alternative institutions within which market forces can be given maximum rein.

Economic Freedom September 16, 2011 at 2:22 am

but it is naive to think that a society with a minimal state will automatically deliver economic prosperity.

Naive, perhaps, but empirically and historically true nevertheless. Let’s ignore history and empirical evidence and instead put faith in Roger Farmer’s vision of “alternative institutions” that give “maximum rein” (whatever that means) to his understanding of “market forces.”

Methinks1776 September 16, 2011 at 6:55 am

but it is naive to think that a society with a minimal state will automatically deliver economic prosperity.

There is ample evidence that the state cannot deliver prosperity.

I will take a probability lower than 100% that a society with a minimal state will deliver prosperity over the 100% probability that an overactive state, run by self-interested politicians, will thwart every effort of people in society to create it.

Daniel Kuehn September 16, 2011 at 7:45 am

I’ll take that probability too, but I’m not sure those are our choices (thank God).

Methinks1776 September 16, 2011 at 8:58 am

I’m not surprised you’re not sure. We’re already at option 2 while you’re still pretending you have a choice.

SaulOhio September 16, 2011 at 8:04 am

Who is debating by a “dogmatic appeal to religious texts”? Why are you using that kind of rhetoric, which I useually see being used by Keynesians against their free market adversaries.

What many free market economists, including Austrians and Chicago School, are doing is pointing out the very serious problems with a book that SOME people use as a religious text. They cite the General Theory to show that Keynes’ ideas are incoherent. When they argue for their own ideas, I see them cite historical examples, data, and real evidence, and sometimes departing from their own school’s theories. From what I have seen, I am sure you do, too. Why use that “dogmatic” “religious” attack rhetoric?

Daniel Kuehn September 16, 2011 at 8:27 am

Funny – you don’t seem to come down on Don or Russ when they slips phrases like that in.

SaulOhio September 16, 2011 at 1:11 pm

I haven’t noticed them do it, except maybe a few times when they observe people actually behaving religiously or dogmatically. They point out the evidence those people ignore.

Lord Maynard Clippy September 16, 2011 at 12:37 am

It looks like you’re ruining a currency.

Would you like help?

Economic Freedom September 16, 2011 at 2:27 am

[Here's an interesting article by Peter Schiff:]

http://tinyurl.com/3v4m8nx

How the Government Can Create Jobs
By: Peter Schiff | Tuesday, September 13, 2011

Testimony by Peter D. Schiff

Offered to the House Sub-Committee on Government Reform and Stimulus Oversight

September 13, 2011

Mr. Chairman, Mr. Ranking member, and all distinguished members of this panel. Thank you for inviting me here today to offer my opinions as to how the government can help the American economy recover from the worst crisis in living memory.

Despite the understandable human tendency to help others, government spending cannot be a net creator of jobs. Indeed many efforts currently under consideration by the Administration and Congress will actively destroy jobs. These initiatives must stop. While it is easy to see how a deficit-financed government program can lead to the creation of a specific job, it is much harder to see how other jobs are destroyed by the diversion of capital and resources. It is also difficult to see how the bigger budget deficits sap the economy of vitality, destroying jobs in the process.

In a free market jobs are created by profit seeking businesses with access to capital. Unfortunately Government taxes and regulation diminish profits, and deficit spending and artificially low interest rates inhibit capital formation. As a result unemployment remains high, and will likely continue to rise until policies are reversed.

It is my belief that a dollar of deficit spending does more damage to job creation than a dollar of taxes. That is because taxes (particularly those targeting the middle or lower income groups) have their greatest impact on spending, while deficits more directly impact savings and investment. Contrary to the beliefs held by many professional economists spending does not make an economy grow. Savings and investment are far more determinative. Any program that diverts capital into consumption and away from savings and investment will diminish future economic growth and job creation . . .

kyle8 September 16, 2011 at 8:20 am

Your argument in your last paragraph is one I agree with and it is the reason that a temporary tax cut is of no real value in improving the economy because of it’s temporary nature it does not spur investment.

Also it is the explanation why a low wage tax cut has less stimulative effect than a cut in upper marginal rates. Much more investment is done at the upper edges of the wage scale than the lower end.

SaulOhio September 16, 2011 at 6:04 am

The big problem with Roger Farmer and Keynes is believing there is a need to explain why the free market fails to deliver full employment, since the market has not been free to do it. We have had central banking messing with the money supply, Herbert Hoover pressuring businessmen to keep wages high, welfare state programs paying people to stay unemployed, minimum wage, and so on and on and on. We already have an explanation why real world economies fail to provide full employment.

anthonyl September 16, 2011 at 9:47 am

Spot on!

kyle8 September 16, 2011 at 8:17 am

When was the last time we even had anything like a free market? 1870 ?
1840?

anthonyl September 16, 2011 at 10:00 am

Markets are always free! They are always there, they always work. If governments want to change incentives, they will reduce prosperity. No one can mess with markets the can only mess with overall prosperity. The new poverty figures show this. Markets always outperform institutions. I wish we could get away from using the term “free-”market. By creating policies that hamper human freedom humans only make themselves less free.

Harold Cockerill September 16, 2011 at 8:31 pm

Jackson was president.

Mark September 16, 2011 at 3:50 pm

The purpose of money is as a medium of exchange and as a store of value. When Government controls money as a means to transfer wealth then money loses its purpose and the market does not receive the correct signals on how to allocate capital.

Harold Cockerill September 16, 2011 at 8:36 pm

And as production is supposed to precede the creation of money (as that’s what the money represents) the signal of more money is higher production. If the production isn’t really there that fact eventually works its way through the system.

The technical term for that is clusterf*ck.

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