Ghost of Socially Useful Labor Haunts G20

by Chidem Kurdas

French president Nicolas Sarkozy reportedly wanted  the G20 leaders to introduce a special tax on all financial transactions, known as the Tobin tax. Mr. Sarkozy took the idea from Adair Turner, the head of the British Financial Services Authority. Lord Turner suggested last month that the tax might be used to shrink the financial sector, which has grown too big and is in part “socially useless.”

The argument that activities like securities trading add no social value and the labor is better channeled into other areas has now become popular. Hence the resurgence of James Tobin’s 1970s proposal of a tax on foreign exchange transactions to discourage speculative trading. But the notion of socially useful work dates back centuries. In fact, it reached its zenith with Marxian labor theory and Soviet planning.

According to Soviet ideology, any work in state-run factories or farms was socially useful, whereas private economic activities were likely motivated by greed and could harm public well-being. Another belief was that manufacturing and agriculture made “real” contributions but services like wholesale and retail trade did not.

This real vs. trade distinction is now to be found in commentaries on the financial sector. Thus a pundit writes that a Tobin tax “would squash the profitability of much of the short-term trading which swells investment bank profits without doing anything to create value in the real economy.”

Reflating the Bubble, Part II

by Mario Rizzo

In a recent post I criticized the extension of the Fed’s policy of buying mortgage-backed securities. Then I was told by a quite-knowledgeable economist that I may have misread the report in the Wall Street Journal. The first sentence states:

The Federal Reserve, in a move aimed at keeping interest rates low for home buyers through early next year, decided to extend and gradually phase out its purchase of mortgage-backed securities. (Emphasis added)

So while it is true that the Fed is extending the program, it also plans to phase it out. I replied (in private email) that I preferred to pay attention to what the Fed is actually doing rather than to what it is promising to do.

Ludwig von Mises (1881 – 1973)

by Mario Rizzo

Tuesday, September 29th is the birthday of one of the great economists of our time, Ludwig von Mises. He was responsible for one of the two greatest accomplishments of twentieth-century economics. This is the demonstration that rational economic calculation is impossible under socialism, that is, in a world without market prices. For a long time economists believed that his argument had been defeated by Oskar Lange and Abba Lerner. But when the socialist economies of Eastern Europe and the Soviet Union collapsed, a re-evaluation occurred. Many former socialists conceded that Mises had been right all along.

I had the good fortune to meet Ludwig von Mises in 1969 when I was an undergraduate student. He gave a lecture at Fordham University. The lecture was chaired by my friend Jerry O’Driscoll who was also a Fordham student at the time. I remember Jerry struggling to keep the microphone close to Mises as he lectured. Mises had a way of moving back and forth in his chair as he spoke. Mises autographed my copy of Human Action that day.

We had asked him to speak on the epistemological problems of economics. He said he would rather speak on inflation. We compromised. He said he would speak on the epistemological problems of money. The day arrived, and he spoke on inflation. We were happy anyway.

I did not really know Mises but he seemed like a kindly and gentle man. Murray Rothbard used to refer to him as “sweet old Mises.”

He carried the torch of classical liberalism during many dark decades. He also resisted the Keynesian fever of his time. We are in his debt.

(For those who care, the other great accomplishment of twentieth-century economics is due to F.A. Hayek. This is the argument that knowledge in society is decentralized and that market prices enable us to make use of knowledge that we do not and cannot possess as individuals.)

Moral Relativism

by Gene Callahan

I’ve long been chagrined about the fact that, whenever someone points out that it was wrong, say, for the United States to annihilate a quarter of a million civilians in Japan in 1945, that person is accused, by some “patriot,” of “moral relativism,” as if condemning an act equally whoever does it is “relativism”! So I was very happy to see Glenn Greenwald making the same point today:

“Perhaps the ultimate confusion is that ‘the Left’ has long been accused of ‘moral relativism’ for pointing out the use of these terms when the essence of ‘moral relativism’ is judging an act not based on what it is, but on who is doing it. It’s the adolescent self-love of believing that ‘X, by definition, is good when I do it and bad when you do it.’”

Richard Posner on the Precipice

by Mario Rizzo   

Richard Posner’s latest conversion is both charming and alarming. It is charming because it exhibits a youthful enthusiasm for a newly-discovered idea: Keynesianism. He just recently read John Maynard Keynes’s book The General Theory of Employment, Interest and Money. Posner’s tone echoes that of Paul Samuelson:

“To have been born as an economist before 1936 was a boon—yes. But not to have been born too long before!”

Then Samuelson quotes William Wordsworth:

“Bliss was it in that dawn to be alive,
But to be young was very heaven!”

Reflating the Bubble?

by Mario Rizzo  

The Fed has decided to extend, at least through early next year, its program of purchasing mortgage-backed securities. The Wall Street Journal reports:  

“The Fed’s action signals its belief that the economy, while in recovery, remains fragile and that housing, which has seen some improvement in recent months, has only started to pull out of its slump.”  

What is the objective of their action? When will they know they have succeeded?

What Kind of Doctor Is This?

by Gene Callahan

Let’s say you are suffering from a moderately severe cold; you’re operating at, say, 90% of your peak energy level, and so you go the doctor to see if he can help get you back to 100%. After examining you, the doctor says:

“The point of our therapy is to approach the current malady in the spirit that we’ll do whatever it takes to turn things around; if what has been done so far isn’t enough, do more and do something different, until health starts to flow and the patient starts to recover.”

Wouldn’t you be inclined to sprint out the door?

The Political Element In Empirical Data?

by Mario Rizzo  

In a recent article in the Financial Times Joseph Stiglitz argues for a more comprehensive measure of social well-being than Gross Domestic Product (GDP).  

As all principles of economics students know, GDP leaves out many interesting things. When I was a student the prime example was: When a man marries his paid housekeeper GDP falls. I am not sure how to adjust this if the housekeeper is also a man and they move to a state with gay marriage. Humor aside, you get the point. GDP misses stuff.  

Nevertheless, Stiglitz has bigger fish to fry. This is just a sample:  

“What we measure affects what we do. If we have the wrong metrics, we will strive for the wrong things. In the quest to increase GDP, we may end up with a society in which most citizens have become worse off. We care, moreover, not just for how well off we are today but how well off we will be in the future. If we are borrowing unsustainably from this future, we should want to know.” 

Did I get all the “we’s”?

“Causes of the Crisis Blog”

by Sandy Ikeda

Following up on its recent issue on the financial crisis, Critical Review has started a blog with contributors to that issue doing the posting.  So far they have “disputed the theory that bankers’ bonuses, irrational exuberance, or capitalism caused the crisis. And four posts have debated the role of economic theory in failing to understand the crisis.”

Contributors listed under the fold.

Thomas Friedman Is Wrong

by Roger Koppl

Thomas Friedman defends “one-party autocracy” as represented by China. Presumably, his defense is a sardonic. He is trying to smack down the Republican Party in the US for “standing, arms folded and saying ‘no.’” Sardonic tone notwithstanding, he says something revealing. “It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power. China’s leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that, including boosting gasoline prices, from the top down.”