Keynes versus Hayek: Past is Prologue

KEYNES HAYEK 1932 Cambridge vs.LSE

by Mario Rizzo  

My friend economist Richard Ebeling has discovered two extremely important letters. (Click the link above.)

In 1932 before John Maynard Keynes’s General Theory was written, these letters appeared in The Times of London regarding the appropriate economic policies for Britain to follow during the slump.  

There are a number of things that catch the eye.

Paul Krugman, Ipse Dixit 2

by Mario Rizzo  

Some time ago I wrote a post with this name.  

Now Paul Krugman is at it again with his ex-cathedra pronouncements. He says that because of the recent planned move by European countries in the direction of austerity and the talk in the US about austerity, we are on the verge on a “third” great depression in American history. 

It is hard to know how to respond. Krugman has no evidence.

“In the Long Run We Are All Dead” What Does It Mean?

by Mario Rizzo 

Paul Krugman continues to invoke Keynes’s famous statement. I wish Krugman and others would give some serious thought about what it is supposed to mean and the errors it involves.   

In the first place, Keynes was complaining about the “classical” economics, that is, the ideas of the economists before him who believed that the market, if unhampered after a recession, could reduce or eliminate the unemployment associated with the business cycle.  

Of course, this puts many economists – with different ideas – in the same category and treats the issue of cyclical unemployment in a grossly simplified way. But this, in general, is how Keynes treated those who disagreed with him. Keynes, the polemicist, was without inhibition. 

Some basic methodology is in order. When economists talk about “the long run” they do not mean calendar time. Yes, that’s right.

Grounding Oil Spill Politics

by Chidem Kurdas

BP flounders, the Obama administration hastily reverses its deep-water oil drilling policy and bans what it previously wanted to expand and another regulator proves itself worse than useless. Better – or at least more realistic – decisions should be made about a valuable common resource like offshore oil. For that, we need a different institutional setup.

Elinor Ostrom, who shared the Nobel Prize in economics last year, pioneered public choice research as to what makes for well governed commons—click for a review by Alex Tabarrok of George Mason University.  Professor Ostrom’s concept of bottom-up “thick rationality,” Mario Rizzo wrote in ThinkMarkets, “recognizes the importance of local knowledge and diverse approaches in the management of resources.”

Those insights are relevant for the Gulf of Mexico debacle. 

An Austrian in Rome

by Mario Rizzo

I am not sure how the following fits into the broader scheme of ThinkMarkets. However, it does reflect more or less what I have felt in visiting Rome.

…[Sigmund] Freud actually entered the Eternal City in 1901, nearly five years after his father’s death, not “to take vengeance on the Romans,” but as intellectual pilgrim and psycho-archeologist, in the footsteps of Wickelmann. He wrote, “It was an overwhelming experience for me, and, as you know, the fulfillment of a long-cherished wish. It was [also] slightly disappointing.” Freud described his varied reactions to three Romes: the third, modern, was “hopeful and likeable”; the second, Catholic Rome, with its “lie of salvation,” was “disturbing,” making him “incapable of putting out of my mind my own misery and all the other misery which I know to exist.” Onlyn the Rome of antiquity moved him to deep enthusiasm: “I could have worshipped the humble and mutilated remnant of the Temple of Minerva.”

(Note: The temple is to Minerva, Medica [the Doctor]. She was the virgin goddess of poetry, medicine, wisdom, commerce, weaving, crafts, magic, and the inventor of music.)

From: Carl E. Schorske, Fin-De-Siecle Vienna: Politics and Culture (New York: Vantage Books, 1961), p. 202

The BP and MMS Spill: More of the Story Begins to Emerge

by Mario Rizzo  

Sometimes, amid the yakking and incessant moralization, a fact or two will emerge that is big with meaning. From today’s Wall Street Journal:   

BP has come under heavy fire from Congress and environmental groups for its lack of readiness to handle a worst-case spill. But that criticism has overlooked a key fact: BP was required by federal regulators to base its preparations on Interior Department models that were last updated in 2004.

…

The government models… assumed that most of the oil would rapidly evaporate or get broken up by waves or weather. In the weeks since the Deepwater Horizon caught fire and sank, real life has proven these models, prepared by the Interior Department’s Mineral Management Service, wrong.

…

The government’s optimistic forecasts reinforced the oil industry’s confidence in its spill-prevention technology, leading to decisions that left both oil companies and the government ill-prepared for the disaster that has unfolded in the Gulf since April 20.

Therefore, it should be clear that this Gulf oil spill is not simply the BP spill but it is the joint result of BP and the Interior Department’s Mineral Management Service’s actions or omissions.

This should also make us think about the relative feasibility of comprehensive regulation and a strict liabilty regime for dealing with this kind of problem. Richard Epstein discussed this recently in the Wall Street Journal.

We want the party with the greater knowledge about the situation to be incentivized to act upon it. The current system opens up all sorts of opportunities to ex ante cozy relationships between regulators and the regulated. Of course, every once in awhile, things don’t work out as expected.

Obama as King Canute

by Mario Rizzo  

President Obama, always alert to the laws of economics, is complaining, in effect, that loading up private health insurance with even more mandates seems to be causing rises in premiums.  

As The New York Times reports: 

“President Obama, whose vilification of insurers helped push a landmark health care overhaul through Congress, plans to sternly warn industry executives at a White House meeting on Tuesday against imposing hefty rate increases in anticipation of tightening regulation under the new law, administration officials said Monday… Mr. Obama will appear in the East Room, where he will highlight new regulations to protect consumers from discriminatory insurance practices, end lifetime limits on coverage and ban unjustified revocations of coverage …Mr. Axelrod likened them to “essentially a patients’ bill of rights, the strongest in history.”

BP Shakedown?

by Mario Rizzo  

I do not know, at this point, whether BP was negligent or grossly negligent in its drilling and related activities leading to the Gulf oil-spill. They may well have been but I leave that to further investigation.  

It seems, however, the federal government’s regulatory policy was and continues to be a mess, as Chidem points out. The moral outrage of the Congress and the Administration in view of their “gross negligence” or worse is absurd, but not unusual.  

Nevertheless, these are not the only issues.  

Congressman Joe Barton (R. Texas) accused the Obama Administration of a “shakedown,” that is, some form of extralegal extortion, in getting BP to set up a $20 billion compensation fund. He was forced to apologize by his political masters. 

What Oil Leak Politics Says

By Chidem Kurdas

In the Obama administration’s script for passing around oil-spill blame, the drilling regulator Minerals Management Service shares the stage with chief villain BP. The disaster is said to have exposed the weakness of MMS, a problem the president has now tackled by appointing a new head for the agency.

One can understand why Mr. Obama wants to confine government failure to this little bureaucracy – long reported to be corrupt – inside the Interior Department. It is a slick move, but the hypocrisy is breathtaking and corrosive of what confidence there is in the government.

Just weeks before the Deepwater Horizon rig imploded, the entire administration and Congressional Democrats demonstrated casual disregard for the environment. In effect, they provided evidence that wheeling and dealing for the proposed climate change law creates risk of additional damage to the planet. 

Jeffrey Sachs and the Keynesian Conundrum

by Mario Rizzo  

In a very interesting Financial Times opinion piece (June 8^th) Jeffrey Sachs of Columbia University explains his problems with Keynesian calls for more stimulus. He says we should now focus on longer-run policy considerations, including reducing the fiscal deficit. While I have difficulties with some of Sachs’s prescriptions (like higher taxes for the “rich”), I believe his article is a welcome breath of fresh air.  

Nevertheless, it raises some problems on which Keynesians need to focus.