Are we all Debt Liquidationists now? … No!

by Andreas Hoffmann

A growing number of economists suggest that governments in highly indebted countries should consider liquidating debt via financial repression. In other words, they want governments to intervene in financial markets and push government borrowing costs below the rate of inflation to erode the real value of debt. In a previous post, I argued that financial repression is dangerous and a drag on growth. This post explains why we can be hopeful that, despite a rise in popularity, the debt liquidationists will not succeed in putting their ideas to work. Debt liquidation via financial repression would necessitate far-reaching regulation or drastic measures, both of which seem unlikely in the US.

Conversations Before Independence Day

by Chidem Kurdas

The July 3^rd, 1776, letter John Adams wrote to his wife, Abigail, after voting for the declaration of independence, is justly famous for his prediction that the occasion will be celebrated “by succeeding Generations, …..solemnized with Pomp and Parade, with Shews, Games, Sports, Guns, Bells, Bonfires and Illuminations from one End of this Continent to the other from this Time forward forever more.”

In fact the letter starts with a complaint about the ill effects of the decision being delayed for seven months. It ends with the admission that independence carries a high cost in “Toil and Blood and Treasure.” This is the sort of thing that gave John Adams the reputation of being grumpy.

Then you realize that his words are like gold, no matter how crotchety he gets. Between his pride in the declaration and annoyance that it took so long, he provides a model of how major national decisions should be made.

Euro Crisis from Long Perspective

by Chidem Kurdas

The European crisis, in progress for years and still showing no sign of resolution, is largely the result of elite hubris. To create the euro and ram it down the throats of populations that, left to their druthers, would have stayed with their old currencies—this was a massive, top-down social engineering project.

Capitalism Loses Against Chimera

by Chidem Kurdas

Gripes about capitalism go back 150 years and more. In the Communist Manifesto of 1848 Marx and Engels thundered that the specter of revolution haunted Europe, that the periodic reappearance of commercial crises “put on its trial, each time more threateningly, the existence of the entire bourgeois society.” They were not the first to assail the system and were followed by numerous others spanning the political spectrum.

Thus the Financial Times recently started a series on  “The Crisis of Capitalism.”  Europe suffers from a sovereign debt crisis due to over-spending by governments—why is that the crisis of capitalism? But one should not quibble. It is an old tradition. In the 1998 turmoil brought on by Russia’s default on its bonds and the failure of a large hedge fund, commentaries appeared bearing titles such as The Crisis in Global Capitalism, Global Capitalism RIP, Collapse of Capitalism, Who Lost Capitalism? and The Free Market’s Crisis of Faith.

I’ve taken those titles from a response by Michael Boskin, “Capitalism and its Discontents,” a classic that rings true 14 years later and merits re-reading. 

Is USPS as American as Pumpkin Pie?

Chidem Kurdas

The United States Postal Service is in a deep financial hole that looks to get deeper unless the institution undergoes a major revamp.  Postmaster General Patrick Donahoe says current bills in Congress do not provide enough savings to get out of the hole.

US Mail has historical roots. What would Benjamin Franklin, who was appointed the first American Postmaster General in 1775 by the Continental Congress, do in this situation? Given the flexibility that existed in his time, he could no doubt make the changes to adapt the organization to the 21^st century.  That flexibility, however, is gone. 

Energy Policy vs. Market

by Chidem Kurdas

No matter how thoroughly public policy fails, there is no end to efforts in the same area.  Energy is a case in point. Reviewing the history of US energy policy in his new book, Columbia University legal scholar Michael Graetz writes: “The book  is, then, in one sense a story of failure…” 

Patriotism

by Herbert Spencer (1820-1903)

Were anyone to call me dishonest or untruthful he would touch me to the quick. Were he to say that I am unpatriotic, he would leave me unmoved. “What, then, have you no love of country?” That is a question not to be answered in a breath.

The early abolition of serfdom in England, the early growth of relatively-free institutions, and the greater recognition of popular claims after the decay of feudalism had divorced the masses from the soil, were traits of English life which may be looked back upon with pride. When it was decided that any slave who set foot in England became free; when the importation of slaves into the Colonies was stopped; when twenty millions were paid for the emancipation of slaves in the West Indies; and when, however unadvisedly, a fleet was maintained to stop the slave trade; our countrymen did things worthy to be admired. And when England gave a home to political refugees and took up the causes of small states struggling for freedom, it again exhibited noble traits which excite affection.

But there are traits, unhappily of late more frequently displayed, which do the reverse.

The Role of the Perverse Elasticity of Credit Money

by Andreas Hoffmann

I want to bring a recent comment by Sornette and von der Backe to the attention of the reader (in Nature 471, p. 166, May 2011). Sornette and von der Backe remind us to pay more attention to disequilibria caused by the fractional reserve banking system to explain the emergence of crises. They particularly recommend a reconsideration of the Austrian School of Economics to derive short-term policy solutions. “We should relearn and expand some of the old economic wisdom about the specific role of banks.”

Kissinger on Bismarck

by Chidem Kurdas

A man described as both great and evil, Otto von Bismarck-Schönhausen makes a fascinating study,  as Jonathan Steinberg’s Bismarck: A Life demonstrates.  Henry Kissinger reviewed this biography in the New York Times Book Review, highlighting the diplomatic and political victories the unifier of Germany won through nimble maneuvers.

The review is a bravura tribute from one practitioner of realpolitik to another. Yet a closer look at Bismarck raises doubts as to realpolitik.

While admiring Bismarck’s subtle power games, Mr. Kissinger  admits that the result lacked institutional balance and “sowed the seeds of Germany’s 20^th century tragedies.” But he takes issue with the connection Mr. Steinberg draws from Bismarck to Hitler. Kissinger points to the contrast between the two characters. “Bismarck was a rationalist, Hitler a romantic nihilist,” he writes. “Hitler left a vacuum. Bismarck left a state strong enough to overcome catastrophic defeats …”

Nevertheless, Bismarck’s actions led to those catastrophes.

Japan Nuclear Crisis vs. the Titanic

by Chidem Kurdas

The Fukushima Daiichi nuclear threat and the sinking of the Titanic are both disasters caused by acts of nature – earthquake and tsunami in one case, an iceberg in the other – interacting with technology. Yet they have radically different implications. The Japanese incident has made nuclear power less acceptable, whereas the sinking of a ship, no matter how immense the casualties and spectacular the failure, did not stop shipping. 

The Genius of Weber

by Gene Callahan

This semester, I am having the pleasure of teaching Max Weber‘s The Protestant Ethic and the Spirit of Capitalism for the second time. Doing so is renewing my appreciation for one of the great works of social science.

Weber’s historical thesis is fascinating in itself, but what really makes the work is that it is a mini-study in how to historically investigate a social-science proposition, complete with asides on method were Weber explains what he is doing. He takes two situations that are in most respects the same (that of German Catholics and that of German Protestants) and notes a crucial difference (besides religion): the two populations have significantly different degrees of participation in the capitalist mode of economic organization (as of 1905).

Constitution Bashers’ Internet Fallacy

by Chidem Kurdas

There’s a ferocious backlash against the Tea Party’s reverence for the U.S. Constitution. Court decisions against ObamaCare’s compulsory health insurance provision have further stoked the hostility.

One common and obvious line of attack is that the Constitution is old-fashioned and out of synch with our world of satellites and Twitter.

Egypt Best Case Scenario via Korea

By Young Back Choi and Chidem Kurdas

Compared to the turmoil in the Middle East, South Korea appears to be an oasis of calm. But as recently as 20 or so years ago you could  still smell tear gas on the streets of Seoul. Violent demonstrations shook the city for decades—-making it look like Cairo today.

Despite continuing tensions with North Korea, Seoul is now relatively peaceful and the economy is humming along. How did South Korea get out of the cycle of angry protests and government repression? 

Insider Trading Regulatory Bubble

by Chidem Kurdas

After going easy for years on the fraudster Bernard Madoff, the Securities and Exchange Commission is now engaged in an all-out war against insider trading.  After financial crisis comes regulatory frenzy—so it has been for some 300 years. Both the SEC and the Dodd-Frank Act are right on cue in this long-running political show.

Thanksgivings Past

by Chidem Kurdas

Thanksgiving was originally a spontaneous celebration. Over time it grew into a social custom. It did not become an official holiday until Lincoln issued a Thanksgiving proclamation in 1863. Then in 1939 Franklin D. Roosevelt moved the date.

When Good Historians Go Bad

by Gene Callahan

I had posted about something that Thomas Sowell wrote on the history of economic thought over at my other blog, and received a comment to the effect that, “You can’t trust Sowell on history: he thinks that England conquered Scotland!” (Rather than the two nations having joined together in a union.)

This comment both illustrates an important misconception as well as highlights an important distinction. The misconception is that someone is a good historian if they know lots of “facts” about history, and rarely get anything wrong.

Brad DeLong Should Read More

by Mario Rizzo  

In March of this year Brad DeLong wrote a post called “More from the History of Economic Thought: John Stuart Mill Contra Say’s Law, 1844”  

It contained a long quotation from John Stuart Mill from his essay “Of the Influence of Consumption on Production,” in Some Unsettled Questions of Political Economy (1844, but written in 1829/30). The quotation purports to show that even John Stuart Mill did not believe “Say’s Law.” However, DeLong leaves out the three final paragraphs of the article. (I append them at the conclusion of this post. The italics are mine.)  

These paragraphs make clear that to say “there cannot be excessive production of commodities in general” is not to say that depressions are impossible. Mill makes clear that this is a wrong interpretation of Say’s Law: “[I]t in no way contradicts those obvious facts.” Furthermore, Mill says that the deniers of general overproduction have never claimed otherwise.  

The only meaning of a general “excess” of commodities that makes sense is a fall of their value relative to money.  In other words, people might want to hold more money as a proportion of their income. Say’s Law does not exclude this.  

What is does exclude is the possibility that production of wealth might not create the potential to demand it. In other words, we need not worry about deficient demand when commodities are produced in the proportions desired by consumers.  

Two Visions Fuel Political Attacks

by Chidem Kurdas

Apparently left-liberal pundits are convinced that people oppose government expansion either out of stupidity or cupidity—not, say, out of a sincere belief in freedom. The oft-repeated story is that ignorant and misguided masses are being led by greedy business interests. Paul Krugman’s recent column is one of  many examples in the genre where billionaires intent on ravaging the country provide the bucks while clueless Tea Partiers provide grass roots brawn.

The best insight regarding this type of criticism comes from Thomas Sowell, whose analysis of two distinct visions of human nature puts current attacks into long-term perspective. Jerry O’Driscoll referred to this work in his comment on anti-intellectualism, a charge often levied by the same left-liberal critics.

In A Conflict of Visions: Ideological Origins of Political Struggles (published 1987, new edition 2007), Professor Sowell contrasted two fundamental views that go back several centuries.

Anti-Intellectualism and Freedom

by Chidem Kurdas

Anti-Intellectualism in American Life by Richard Hofstadter, a historian who died in 1970, is very much part of politics several decades after it was written. The past two years brought many charges of anti-intellectualism by left-liberals against people on the other side of the political divide.  The latest in Hofstadter-inspired critiques is an attack on Tea Partiers by Will Bunch — The Backlash: Right-Wing Radicals, High-Def Hucksters, and Paranoid Politics in the Age of Obama.

The term anti-intellectualism does not just denote those who don’t care for intellectuals. Rather, Hofstadter presents it as an ideology, an “ism” that periodically besets American culture and deprives intellectuals of political power. This deprivation disappears under certain administrations. Thus regarding the late 19^th and early 20^th century he wrote that “In the Progressive era the estrangement between intellectuals and power … came rather abruptly to an end.”

Similarly in the New Deal: “Never had there been such complete harmony between the popular cause in politics and the dominant view of the intellectuals.” Unfortunately – from Hofstadter’s perspective – this harmony was disrupted by right-wing reaction against policies associated with intellectuals.

The Method of History

by Gene Callahan

I’m currently reading Bryan Sykes excellent book, The Seven Daughters of Eve. Well, excellently written, and, I have to assume, excellent on the genetics. But there are a couple of fundamental misunderstandings of history present in the book, that I think are worth noting, because of the frequency with which people believe them.

The first such error is that Sykes keeps referring to “prehistory,” “recorded history,” “the beginnings of history,” and so forth. These phrases are symptomatic of the error, exploded decades ago by Collingwood, that there is something especially “historical” about written records, that they represent the “recording” of history by those “witnessing” it, and that, in their absence, we only have some fuzzy “prehistory” with which to deal.

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.)

Just the “Basic Facts,” Mam

by Gene Callahan

I was recently in a conversation with a very bright economist who declared “We are in agreement about the basic historical facts here; we are just interpreting them differently.”

This is a common but very damaging misunderstanding of historical knowledge: that there are a set of “basic facts” that historians are “given” to start with, and what historians then do is apply a “theory” to fit an interpretive scheme over those facts. That this view cannot be correct becomes obvious once one realizes that no such thing as the “basic facts” this views relies upon can exist in history.

China Catch-Up and Two Freedoms

by Chidem Kurdas

China is expected to produce more than Japan this year, thereby becoming the world’s second largest economy after the US.   Chinese annual output is only $5 trillion compared to American $15 trillion and per person income is only a fraction of the US, but it is clear that China is catching up.

We’re witnesses to a gigantic experiment in political economy. Here is an authoritarian government that apparently recognizes the superiority of free markets, private property and individual enterprise in organizing an economy. It has lifted the shackles off industry and commerce, to an extent, so as to benefit from these powerful forces. Thus China is growing at phenomenal rates.

But freedom of expression and political dissent remains suppressed even as economic freedom expands. In the ever-resonant words of Milton Friedman, “Economic freedom is an essential requisite for political freedom. By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised.”

Constitutionalism: Point/Counter-Point

By Chidem Kurdas and Thomas McQuade

In our previous post, Thomas argued that voter feedback is weak in constraining the exercise of legislative power. Chidem countered that the other fundamental constraint, the constitution, is therefore all-important. Commentators were divided, with cogent arguments pro and con. We continue this discussion.

Chidem:  Constitutionalism is the idea of subjecting political power to rules that stand above that power. The concept took a long time to develop and became effective only in some societies. Its roots go back to the Magna Carta of 1215 in which King John of England accepted limits to his authority and an earlier Charter of Liberties. Today’s struggles about the US Constitution are but another chapter in this long history.

Public choice pioneer and Nobel-prize winner James Buchanan powerfully made the constitutionalist case. Geoffrey Brennan and Buchanan offer this definition in The Reason of Rules (1985): “the essence of the constitutionalist approach is that political action (including the making of laws) be conducted according to certain rules (or meta-rules).”

In the alternative view, majority voting is the ultimate source of morally legitimate political power and there should be no constraints on it.  Buchanan and Roger Congleton (Politics by Principle, Not Interest, 1998) argue that in the absence of meta-rules politics devolves into majority-seeking deals where some benefit at the expense of others.  

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.