Politically Feasible

by Mario Rizzo

Many years ago, the distinguished economist, William H. Hutt, wrote a pamphlet called “Politically Impossible?” He argued that economists should not seek political relevance by proposing only those policies that they perceive as politically possible, practical or feasible. They should speak truth to power, so to say, and advocate those policies that they perceive to be in the “public interest.” (Interestingly, it is often considered a key element of the economic rationality of agents to be able to distinguish the desirable from the feasible.) Continue reading

Austrian Law and Economics: The Definitive Collection

by Mario Rizzo

Edward Elgar has announced the publication of a two-volume collection of Austrian law and economics articles. The marks the first definitive collection of articles in this field. It is a book for your university or public library. Please recommend it! 

THE BIG BOOK

 
Edited by Mario J. Rizzo, Department of Economics, New York University, US

August 2011 1,488 pp Hardback 978 1 84542 753 5 Regular Price $790.00  Web Price $711.00 

Description
The use of economics to study law was pioneered by the Austrian School of Economics. The nineteenth century founders of the school believed that economics could contribute to understanding the spontaneous development of common law as well as the nature of legal rights. For this insightful two-volume collection Mario Rizzo has selected key papers from today’s vibrant Austrian School, focusing on the study of property, market-chosen law, slippery-slope analysis, entrepreneurship, institutions, decentralized social knowledge, and the evolution of legal institutions.
These volumes represent the cutting-edge Austrian contributions to economics and will be an essential reference source for both students and researchers. Continue reading

How to Teach the History of Economic Thought

by Gene Callahan

I was recently asked about a good textbook to use in teaching the history of economic thought. Well, last year I had used William Barber’s book, and found it wholly adequate. But as I was teaching the course, I became somewhat uneasy about the textbook approach. I started to feel I was giving what Michael Oakeshott referred to as a “museum tour” of that history: “Over there, on your left, is Aristotle… he held exchange should take place when values exchanged are equal. There, on the right, is Adam Smith. Do you see the extensive division of labor in his diorama? Just past him is David Ricardo…” Continue reading

In Defense of the Koch Brothers and Academic Freedom

by Mario Rizzo

Recently, there has been a ruckus, as discussed in today’s Wall Street Journal,  over some grants to Florida State University from  Charles and David Koch to support professorships in economics. The objections seem to be that the Koch money will be used to support right-wing ideologues who, presumably, will indoctrinate the students. Furthermore, this would seem to be a violation of academic freedom – or so the critics argue – because the Kochs like to promote free-market ideas and not pro state-control ideas. Continue reading

Is Economics a Public Good? How Would We Know?

by Mario Rizzo

What is the economic justification for using tax money to subsidize the production of economic research? The standard answer is that academic economists produce a public good. In other words they produce knowledge for which they do not charge and for which it is not feasible to exclude non-payers.

Let’s accept this basic paradigm and see where it takes us. Continue reading

More Scholarship, Less “Science”

by Mario Rizzo

Once upon a time, in a land far away from New York civilization, a famous economist told a good friend of mine that “we” need more scientists and fewer scholars in the economics profession. He was serious.

This is the time of year that many Ph.D. dissertations are being defended in graduate departments of economcs. We have many would-be scientists and almost no scholars. I think we need more scholars and fewer scientists. Continue reading

Are market rates below the natural rate again?

by Andreas Hoffmann and Mario Rizzo

We know from Wicksell’s (1898) Interest and Prices, there is something important about the interest rate that balances saving and investment in an economy over time. This equilibrium interest rate is called the “natural rate of interest”. When market interest rates are below the natural rate, an unsustainable credit boom which distorts the production structure in the economy and inflation are the result.

In line with this idea, most economists agree – today – that the Fed held interest rates “too low for too long” following the burst of the dot-com bubble. As expected, this contributed to a credit boom in the US economy. With the emergence of the crisis, the Fed lowered interest rates to stabilize the price level, financial system and output. Yet, a year of recovery is over and interest rates are still low. What about the natural rate today? Continue reading

The Good Sense of Ronald Coase

by Mario Rizzo  

Ronald Coase was recently interviewed by Wang Ning on the occasion of Coase’s 100th birthday and to discuss the Ronald Coase Society in China. There is a good deal that is interesting about the interview, especially to those interested in China. However, here I’d like to point to a number of statements Coase makes of more general interest. Continue reading

Phil the Economic Literacy Turtle

by Gene Callahan

My family recently acquired “Phil the High-Yield Turtle.” This came about because a friend of my wife, whom we will call Bill and who happens to trade high-yield bonds, saw Phil being sold on the street, presented in rather bad circumstances by his owner, and felt sorry for him. Bill took Phil and kept him (in much better conditions) in his office for several months before realizing that Phil was running out of space and needed a new home — at which point my wife volunteered to adopt him and… now we are Phil’s caretakers!

Well, Bill’s motives were certainly admirable: he wanted to help an animal he thought was in distress. Unfortunately, Bil”s attempt is likely to have the opposite effect to that he desired, since, by newly entering the market for turtles, Bill shifted the demand curve to the right. And that will increase the quantity supplied. In short, even if Bill had been moved enough and generous enough to buy every single abused turtle on the market, he simply would motivate the sellers to immediately replenish the supply. (Do you recall Milo Minderbinder trying to corner the Egyptian cotton market in Catch-22?)

In fact, the horrible thought came to me that this market could be largely driven by mercy purchases. And furthermore, such purchasers give the vendors a motive to make the conditions in which the animals they are selling are kept as bad-looking as possible!

The Sensory Order

by Roger Koppl

Over at Marginal Revolution, Tyler Cowen recently said The Sensory Order is “Hayek’s most overrated book.”  In part he was complaining that “many call it his most underrated book.”  Unfortunately, he does not name names.  In any event, Tyler has other gripes including the mistaken suggestion that the science in it was not current.  As I said in a comment, “I don’t understand why TSO gets lukewarm to negative reactions from serious people who are otherwise keen on Hayek.”  The most salient example of TSO bashing may be that of Dan D’Amico and Pete Boettke, who criticize “neuro-Hayekians.” Let me go on record as an enthusiast for The Sensory Order.  The latest expression of my enthusiasm is forthcoming in JEBO. Continue reading

Changes in Teaching Economics?

by Mario Rizzo  

The Economist asked how the teaching of economics might change in the wake of the financial crisis and the recession.  

Predictably, some economists said they would teach more about the (shadow) banking system and economic history. That is good. But most will simply tweak their courses. 

The vast majority of economists know what they have been taught. The active researchers also know the models or frameworks that have governed their research. Most are not about to shake up the world of ideas that has been good to them.   Continue reading

Krugman Mangles Smith

by Gene Callahan

Here’s Paul Krugman, explaining the meaning of Adam Smith’s pin factory, and why it opposes Smith’s invisible hand metaphor:

“What may not be obvious is the way these two concepts [pin factory and invisible hand] stand in opposition to each other. The parable of the pin factory says that there are increasing returns to scale — the bigger the pin factory, the more specialized its workers can be, and therefore the more pins the factory can produce per worker. But increasing returns create a natural tendency toward monopoly, because a large business can achieve larger scale and hence lower costs than a small business. So in a world of increasing returns, bigger firms tend to drive smaller firms out of business, until each industry is dominated by just a few players.”

And, of course, this monopolistic competition wrecks the operation of the invisible hand, per Krugman. Continue reading

“There is no such thing as macroeconomics.”

by Jerry O’Driscoll

Not my words, but those of Armen Alchian, as reported by William Allen in Econ Journal Watch.  Allen has written his memoirs and a history of UCLAs economics department in “A Life Among the Econ, Particularly at UCLA.” To a great extent, it is the story of Alchian and the core group around him in the 1950s, 60s and 70s.  Allen was co-author with Alchian of University Economics, an influential undergraduate textbook that inspired Paul Heyne’s Economic Way of Thinking.

My own way of thinking was influenced as much by the UCLA tradition as by Mises and Hayek. Mises and Hayek had an important influence on that tradition, however. An emphasis on decision making under uncertainty and incomplete information was its hallmark. All social phenomena could be analyzed by economics, and the economic analysis was micro.

Alchian didn’t deny there were aggregate economic phenomena, only that theory must be microeconomic.  In substance, that was Hayek’s view.

Graduate macro classes had as much micro in them as designated micro class. Alchian wrote many of the macro prelim questions, wrongly attributed by students to Axel Leijonhufvud.

Among the luminaries who came and stayed in this period were Harold Demsetz and Robert Clower.  Among those who came and left were James Buchanan, Sam Peltzman and Thomas Sowell. My dissertation committee consisted of Leijonhufvud (Chair), Peltzman and Sowell.

Broadening Economics Education

by Mario Rizzo  

Policy Ideas in the History of Economic Thought

It is no exaggeration to say that if a bright undergraduate wants to get into a top Ph.D. program he needs to take a good deal of mathematics. Many advisors will recommend a minor in mathematics or even a double major in mathematics and economics.  

As a result of all this, many of the best undergraduate economics students are mechanical problem solvers. They are in a kind of self-referential bubble, but to a much lesser degree, of course, than are top-department Ph.D. students. They expend tremendous amounts of energy with very little payoff in understanding how real economies work. 

However, things would not be so bad if students also took courses that emphasized the broader, historical, institutional, and, dare I say, philosophical aspects of economics. But the intellectual opportunity cost is wrongly perceived as being too high. (Perhaps the career opportunity cost is high, but that is a separate question.)  

Absorbing a broader perspective would encourage tolerance for a variety of methods and a greater appreciation for the complexities of economic policy. It would also increase respect for economists of a previous age who knew so much.  

So enter my course, “Policy Ideas in the History of Economic Thought.”  (See link above.) Continue reading

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.)”   Continue reading

Understanding Efficient Markets

By Chidem Kurdas

Headline topics like derivatives are part of the larger issue of how markets function.  About this big question there’s been profound confusion in the past two years.  Peter Boettke’s article in the Winter 2010 issue of the Independent Review clarifies the muddle.

A particular mathematical interpretation of what an efficient market is has hogged the limelight.  Continue reading

The Fundamental Transformation in Breaking Dawn

by Glen Whitman

If you’re on Team Edward, you might think the fundamental transformation in Twilight: Breaking Dawn is a person getting turned into a vampire. Or if you’re on Team Jacob, you might think it’s a boy morphing into a wolf. But if you’re an economist, it’s the conversion of undifferentiated assets into relationship-specific assets.

That came out more boring than I planned. But it’s true! On Deadline Hollywood, Nikke Finke reports that several supporting actors played hardball during negotiations for the final installments of the Twilight series:

Really, my eyes glazed over at the recent ruckus that those secondary actors were demanding as much as $4 million each to do the 4th and 5th installments of the Twilight Saga. … I’m all for higher pay for thesps, and Summit has tons of cash to spread around. But in this case Summit gave these actors their big break, and offered them 10 times what they’d made in the first movie, and could have replaced every one of them with hungry unknowns had it not been for the execs’ fears of offending fans.

We’ve seen this happen before, of course, most notably when the six leads on Friends wangled $1 million each per episode in their final season. In economics jargon, stories like these illustrate what Oliver Williamson dubbed the fundamental transformation (see p. 176). Continue reading

Taxi Tipping: Why?

by Mario Rizzo  

Every so often people become annoyed about tipping expectations, especially in New York. It is hard not to become annoyed because prices here are already so high relative to other parts of the country. And it is also often the case that service, regardless of what you do ex post, is perfunctory.  

Why am I tipping the cab driver whom I shall not see again? I tip cabdrivers very small amounts because they really don’t do anything more than drive the cab. They are not especially careful drivers. Frequently, they don’t know where things are and you then must give them instructions. Furthermore, there are now all sorts of surcharges for evenings, rush hours, and even a tax to support the inefficiently-run mass transit system that I am not taking when I ride in a taxi.   Continue reading

Liberty by Design

by Roger Koppl

Those of us who love liberty and fear the state support “deregulation.”  We want to unwind the bramble of regulations constraining the dynamic entrepreneurial economy.  But we have not thought enough about how to unwind the unwieldy regulatory apparatus of the current system.  It is one thing to show how a “truly free market” would work.  It is quite another to show how to get from the current regulatory mess to something we are happy call a “free market.”  Continue reading

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.

Bleeding the Economy

by Roger Koppl

At the Cobden Centre‘s website (and here), Steve Baker discusses recent Fed signals in the context of Big Players theory.  The more active the Fed (or other central bank), the greater the fraction of entrepreneurial attention devoted to Fed watching rather than productive activity.  As Baker says, “traders must pay attention to the Big Player and not the fundamentals.” Continue reading

Samuelson’s Legacy and that of Mises

by Roger Koppl

One of our all-time greats, Paul Samuelson, has passed.  We should mourn the passing of a great mind and fellow human being.  He influenced so many economists so deeply that it easy to underestimate his influence.  Barkley Rosser makes the key point at Econospeak.  “His influence is so great in so many areas that the key papers by him that lie behind the standard textbook accounts in many areas do not even bother to cite them.”  Barkley adds the interesting comment that Samuelson “himself was generally personally aware of the flaws and limits of many of his own ideas” whereas the “sons of Samuelson” have been “more simplistic.” Continue reading

The Death of Paul Samuelson and Selection Bias

by Mario Rizzo  

Paul Samuelson has died at the age of 94. There is already a big New York Times obituary lauding his many contributions and more will inevitably follow. Many economists will want to use this occasion to demonstrate how much they appreciate economics as a science and how this appreciation transcends ideological divides. This will reassure them that all is well in the queen of the social sciences.

Of course, I’d like to strike a discordant note. Continue reading

The New Interventionist Economics

by Roger Koppl

Two recent posts on this blog (here and here) raise the issue of animal spirits and where macro is headed.  I’ve recently completed a draft manuscript saying we are headed for “BRACE” economics.  I say the “New Interventionist Economics” will be characterized by five features:

Bubbles

Radical Uncertainty

Animal Spirits

Complexity Dynamics

Extra-Market Control

(giving the BRACE acronym). Continue reading

Goldman Critics vs. Little Goldmans

by Chidem Kurdas

Goldman Sachs has become exhibit number one in attacks on Wall Street and capitalist greed. Last week’s announcement that the bank had strong third-quarter earnings and is on track to pay big bonuses added to the media feeding frenzy.

Let’s look at the logic – to the extent there is logic – in the mass fury.  The assault on Goldman contains at least three, related but distinct, complaints.

Continue reading