Austrian Economics Meets The New Decade In The New Century

by Mario Rizzo

My survey article, “Austrian Economics: Recent Work” has now been published by The New Palgrave Dictionary of Economics. You can find the site here.

You need either an individual subscribution or access to an institutional subscription to get to the article. However, you can look here for the almost-final version. There is also my blog discussion here.

As I have said many times, the boundaries between Austrian economics and other schools of economics are fluid and not precisely defined. I do not view the policy conclusions of particular Austrian economists, regardless of their status, as having the same defining features as their analytical or theoretical contributions. Policy is part of the art and ethics of economics and not just the science as John Neville Keynes argued in 1890. It is not, and cannot, be the straightforward implications of economic theory.

I am a classical liberal, but that is not equivalent to being an Austrian economist (in my broad sense of the term!). I do not belittle the other roads to classical liberalism. When we talk about Austrian economics we are not talking about liberalism and when we talk about liberalism we are not necessarily talking about Austrian economics.

In The Economics of Time and Ignorance Jerry O’Driscoll and I explored the interrelations between Austrian economics and Post Keynesian economics. This was not meant to be an exclusive, exhaustive or even definitive connection. We wanted to shock Austrians out of the self-satisfied slumber that some were in.

In the years that have passed, there have been other connections with New Institutional Economics, experimental economics (in the hands of the great Vernon Smith), public choice-constitutional economics (in the hands, especially, of James Buchanan and Richard Wagner), and so forth.

I look forward to the new contributions of Austrians of every stripe. Some will be good and some will be poor. This is way of science. Errors all over the place. Gems of insight here and there. The process goes on.

Banking 666: Advanced Analysis

by Mario Rizzo

This is your final exam.

Question: Suppose you are a profit-maximizing bank, which course of action do you take: (a) Lend $1 million to Herman Dilbert’s Chicken Finger Brasserie or (b) Buy $1 million in 10 year 3.5% Treasuries?

Answer under the fold.

Interesting New Journal

by Roger Koppl

Michael Barber is editor of a new journal of interest to Austrian economists, namely Schutzian Research: A Yearbook of Mundane Phenomenology and Qualitative Social Science.  The first issue came out on 9 November 2009.

Here is what they say on their website:

Schutzian Research is an annual journal that seeks to continue the tradition of Alfred Schutz. It seeks contributions that are philosophical, cultural-scientific, or multidisciplinary in character. We welcome a broad spectrum of qualitative and interpretive work, comparable with Schutz’s orientation but not necessarily derived from it. The journal is multilingual in character, with abstracts in English. All submissions will be blindly reviewed by at least two experts in the appropriate field.

Presumably, economic research would be “cultural-scientific.”

Pigou is the new Keynes

by Sandy Ikeda

A full-page article in today’s Wall Street Jounal begins:

At the Heavenly Models home for deceased economists, an award is being presented to the resident whose work best explains financial crises, global warming, and other pressing issues of today.

The winner, according to author John Cassidy, is A.C. Pigou, the new flavor of the day.

The article implies that Pigou was the first to articulate the concepts of externalities and market failure.  I’m not sure that’s right, though I haven’t gotten around to reading The Economics of Welfare, but I believe we do have to credit him with the Pigou tax.  So in some ways he’s been almost as dangerous as his “smarter colleague,” although I’ve always felt sympathy for someone who was so much in Keynes’s shadow.

The article also has a sidebar quoting Mises (as well as Friedman, Kindleberger, and of course Keynes) apparently calling last year’s economic crisis.

Seizing the Commanding Heights

by Jerry O’Driscoll  On the Opinion page of yesterday’s Wall Street Journal, George Melloan spells out how government stimulus is stifling lending, crowding out private investment and impeding economic recovery.  He writes that “the credit market has been tilted to favor a single borrower with a huge appetite for money, Washington.” It has done so in a number of ways.   First, the Fed announced that it will evaluate bankers’ pay on the basis of how well they manage risk.  How better to be a good risk manger in a bureaucrat’s eyes than to take no risk?  Purchasing Treasury obligations and federal agency paper is the sure way to avoid risk.  The Fed has a second policy to make that strategy profitable: zero interest-rate borrowing to finance Treasury and agency debt yielding 3%.or more.  The Fed continues to signal it will keep rates low, diminishing interest-rate risk.   These policies are choking off the supply of credit to the private sector, espcially small business.

Dallas Fed President Calls for the End of Too Big to Fail

 by Jerry O’Driscoll  

Thursday at the Cato Monetary Conference, Dallas Fed President Richard Fisher called for the end of of the too-big-to-fail doctirine.  He identiifed the largest financial institutions as the source of excessive risk taking.  He also repeated his claim that these institutions interefere with the conduct of monetary policy. 

Fisher offered a middle ground between two strategies discussed on ThinkMarkets: steeper capital requirements or beaking them up.  He advocated forcing the largest banks to give up some of their riskiest operations.   In effect, that is forcible downsizing. 

This is a noteworthy call coming from within the Fed itself.

Inflation Alert

 by Jerry O’Driscoll  

Yesterday was Cato’s annual monetary conference and Allan Meltzer gave the keynote address.  Today at cato.org you can listen to a 7-minute Podcast of an interview with Meltzer summarizing his presentation.  He has just completed the last 2 volumes of his history of the Fed.  

Meltzer delivers a tough message: no nation that is spending as we are, running deficits as large as we are, along with a loose monetary policy, has escaped inflation.  We must cut the deficits by cutting spending.  He talks of a $500 billion spending cut.  And he offers an innovative approach as to how, using applied Public Choice theory. 

What About The Fed?

by Jerry O’Driscoll

I have been active in criticizing recent Fed policy, but avoided the controversy over Fed governance (“Audit the Fed”).  I worked for the Dallas Fed for 12 years and believed then, and continue to believe, that there is a legitimate private banking function that the Fed performs.  It was born as a bankers’ bank, a successor to the private clearinghouses.  As explained by Richard Timberlake, legal ambiguity surrounded some of the activities of the private clearinghouses (e.g., provision of reserves in times of distress). The Fed was the compromise.

A Positive Program for Laissez-Faire?

by Mario Rizzo

I am deeply impressed by Henry Kaufman’s opinion piece in today’s Wall Street Journal. I think he makes a very good case for  breaking up financial institutions deemed too-big-to-fail as opposed to the regulatory alternatives being contemplated. As much as it pains me to think about the government regulating the size of any firm, this may be an option that is far, far better than the politically feasible alternatives.  You can imagine the horrors that are out there being proposed.

Many of my readers will disagree but I am very willing to be persuaded otherwise.

New Paternalism on the Slippery Slopes, Part 3: Hyperbolic Discounting

by Glen Whitman

New paternalists often rely on the phenomenon of “hyperbolic discounting” to justify their policies. Hyperbolic discounting is difficult to define in a non-mathematical way. It is sometimes summarized as excessive impatience, but that’s an over-simplification. A person with a high-but-consistent rate of time discounting would not be a hyperbolic discounter. What hyperbolic discounting really means is having inconsistent rates of time-discounting. One consequence is that a hyperbolic discounter may exhibit “time inconsistency,” a tendency to make choices and then reverse them. After explaining hyperbolic discounting (in more technical terms that I have here), Mario and I explain how paternalists have made unjustified leaps in their use of the concept (pp. 699-700):

In short, hyperbolic discounting means that people at first make long-term plans for saving or dieting but then, when the time comes to implement these plans, they succumb to the desire for short-term gratification. For the new paternalists, this type of behavior suggests an opening for paternalist intervention or correction. Examples include the previously mentioned proposal to automatically enroll people in savings plans, and to impose a sin tax (on unhealthy foods, cigarettes, and so forth) to provide additional incentive for impatient people to resist their temptations.