Understanding Politics: Point/Counter-Point

by Thomas McQuade and Chidem Kurdas

Our previous post and the ensuing discussion raised points for and against the appropriateness of understanding markets as complex adaptive systems. We discuss here whether the same approach can say something useful about modern political systems, taking the US as the illustrative example.

Thomas: I think it could be useful to apply concepts from complex systems to understand governmental arrangements. I’ll concentrate here – with a very broad brush – on the legislative branch. Congress and its agencies can be seen as a social arrangement in which the participants pursue their particular aims via repeated, structured interactions. This process adapts to inputs from voters, lobbyists, and others. A body of legislation and associated directives is an emergent effect.

Two interrelated aspects of this particular system stand out immediately—its concentration of power and the relatively weak feedback constraining the exercise of this power. In these respects, it differs markedly from markets and science. 

The Amazing Brad DeLong

by Mario Rizzo  

I don’t know where Brad DeLong acquired his philosophy of economics. DeLong responded to an article by Jean-Claude Trichet, president of the European Central Bank, on “austerity.” The following is part of what the Financial Times edited out of the published version. DeLong posted it on his blog. He says there are two types of economists:  

“One type chooses, for non-economic and non-scientific reasons, a political stance and a political set of allies, and twiddles and tunes their assumptions until they come out with conclusions that please their allies and their stance. The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones and the skeleton that emerge will teach lessons and suggest principles that will be useful to voters, bureaucrats, and politicians as they try to guide our civilization as it slouches toward utopia. (You will not be surprised to learn that I think that only this second kind of economist has any use at all.)”  

Tyler Cowen’s “Risk and Business Cycles”

by Mario Rizzo

I am happy to report that Tyler Cowen’s book, Risk and Business Cycles: New and Old Austrian Perspectives  is now available, as of July 15th, in a reasonably-priced paperback edition from Routledge. (I am sure that Amazon will be making it available soon.)

This is not an orthodox Austrian approach. In fact, Cowen criticizes that version. However, the “new Austrian” inspired version he presents seems especially relevant in view of the widespread, but not uiversal, agreement that the pre-recession period of very low interest rates contributed to the search for yield and greater risk taking. As the title indicates, Cowen’s theory emphasizes the importance of low interest rates on risk-taking.

This book appears in the Routledge series, “The Foundations of the Market Economy” edited by Larry White and me. Tyler’s book is well worth reading as are many books in this series (now approaching thirty books).

Now you can afford to buy it.

Understanding Markets: Point/Counter-Point

by Thomas McQuade and Chidem Kurdas

Though it should be obvious to all that markets are of immense benefit to humanity, any appreciation of these institutions is almost always hedged with a perceived need to constrain and regulate—in short, to subject them to conscious outside control.  The reasoning is understandable: the unconstrained pursuit of self-interest can only lead to chaos.

But the preference for constraint through centralized direction betrays a profound misunderstanding of the way markets work.   

Can we explain that claim any better than the volumes already written on the topic?  We find that, when we discuss the issue, we agree on the basics, but differ in emphasis and details—and details matter.  Here is part of our discussion, in point/counter-point format.

Summer Reading III

by Jerry O’Driscoll

According to Reinhart and Rogoff, “for the advanced economies during 1800-2008, the picture that emerges is one of serial banking crises.” In This Time is Different, the authors bring us up to the present by examining the history of banking crises. Banking crises are not only frequent , but often accompanied by other kind of crises.  These include exchange rate crises, domestic and foreign debt crises and inflation crises.  The current financial crisis is still unfolding, but we have already seen the clustering of crises.

They observe that banking crises are often preceded by surges in capital flows.  This finding may be controversial, but they detail it at length.

Banking crises are often associated with an asset bubble in housing. They compare the current housing and banking crises to others stretching back to one in Norway during 1898-1905. They devote considerable time to inflationary crises, which are quite common aftermaths both in earlier and more recent history (1500-1799 and 1800-2008).

That brings them to the subprime meltdown and what they term “the Second Great Contraction” (after the great Contraction, 1929-33).  It is an excellent and thorough presentation. They note historical studies calling into question the Fed’s policy of “benign neglect” toward the housing bubble under Greenspan and Bernanke.

The history of the aftermath of banking crises is sobering.  One salient fact: in the aftermath of 21 banking crises involving a housing boom and bust, real housing prices declined on average 35.5% over 6 years. By that record, we are but halfway through the housing bust. They find that “for banking crises, real housing prices are nearly at the top of the list of reliable indicators” (p. 279).  Once again, the Fed’s attitude toward the boom in housing prices is called into question by historical experience.

I recommend this book to all for serious summer reading.

The Dismal Jobs Picture

by Jerry O’Driscoll  

Steve Horwitz has stimulated a lively discussion of the slow recovery in jobs at Coordination Problem.  There are two letters in today’s Wall Street Journal addressing the issue.  One letter references an earlier article in the July 10^th Journal. 

The article is titled “Debt, Bank Troubles Leave U.S. Trailing in Job Growth.” It has charts showing how the U.S. is lagging shockingly in the jobs recovery compared to other major economies, and select developing countries (those reporting jobs numbers in a timely fashion). The only problem with the article is that it can’t explain the lag with the factors it adduces. Other countries with banking and debt problems are doing better than the U.S. in the jobs picture.

Germans against Hitler: Claus von Stauffenberg

We took this challenge before our Lord and our conscience, and it must be done, because this man, Hitler, he is the ultimate evil.
Claus von Stauffenberg  

July 20, 1944 is an important date in history. It is the date of the failed attempt to assassinate Adolf Hitler. It was by no means the only attempt but it is, perhaps, the most famous because the plot was the most far reaching. It is also the date that Claus von Stauffenberg, the leader, and other plotters were executed.  Each year on this date there is a memorial ceremony in Berlin.  

“Every year, on July 20, the Memorial to German Resistance, located at the military building complex in Berlin known as the Bendlerblock, commemorates the few Germans who had the courage to go against Hitler and the Nazi regime. Taking place in the courtyard of the building complex at which the museum is located, the ceremony serves as a reminder of the events that occurred there on the night of July 20, 1944, when a firing squad executed military officers involved in the plot: Colonel Claus von Stauffenberg, First Lieutenant Werner von Haeften, General Friedrich Olbricht, and Colonel Albrecht Ritter Mertz von Quirnheim.”

On July 20th we should contemplate the courage to oppose tyranny. 

 

When Nudging Isn’t Enough

by Glen Whitman

In a New York Times op-ed, George Loewenstein and Peter Ubel argue that policymakers are relying too heavily on behavioral economics, when traditional — that is, rational choice — economics would often serve them better.

On cursory reading, you might think this op-ed repudiates the facile use of behavioral economics to guide policy. But in fact, the authors encourage us to go further down that road. They do so by questioning the efficacy of behavioral policies while implicitly accepting behavioral welfare analysis.

Just Lend And Be Done With It!

by Mario Rizzo  

Recently, there have been reports in the Wall Street Journal and the Financial Times that Ben Bernanke and others are concerned that banks have not been lending “enough” to small businesses. The accusation is that lending standards are too strict. 

As Jack Hopkins, the director of the Independent Community Bankers of America, says in the WSJ article linked above:  

“I keep hearing remarks that credit standards have tightened, and I don’t believe that… I need to make loans to survive, to make money.” 

So what happened? The WSJ reports:  

“Some lenders argued that current lending standards are a return to more-normal conditions following a period of laxity.” 

Summer Reading II

by Jerry O’Driscoll  

Summer reading is eclectic and before getting to my second installment of notes on This Time is Different, I want to recommend a non-economics book. A Chance in Hell by Jim Michaels is a riveting account of how the military and political situation turned in Anbar province in Western Iraq. It is first and foremost an account of courage: that of a minor Sunni Sheik, Abdul Sattar Bezia, who led an uprising against al-Qaeda, and the American officers, led by Col. Sean MacFarland, who backed him.

 Together they snatched victory from defeat in the battle for Ramadi. The much-discussed troop “surge” came only one year later, and Ramadi was already largely won.  It is questionable whether the elements that made for that victory can be replicated in Afghanistan.  But reading this book is the best way to understand what did happen.   

On to financial crisis.