David Rockefeller as an Economist

David Rockefeller

David Rockefeller in the late ’30s reading Oscar Morgenstern’s The Limits of Economics 

 

David Rockefeller, grandson of John D. Rockefeller, died recently at the age of 101. He was known for many things. But perhaps the least known of his accomplishments was his dissertation for which he was awarded a Ph.D. in economics from the University of Chicago in 1940. This dissertation was published by the University of Chicago Press as a book in 1941 entitled Unused Resources and Economic Waste. Although the book is hard to find, I was able to secure a copy and read it. I include here the Preface from the book (Rockefeller, Preface).

The book is very heavily influenced by Frank H. Knight. This means that there is much subtlety, self-critical reflection and, above all, caution in the claims made. It also shows the less beneficial influence of Abba P. Lerner insofar as Rockefeller buys the market-socialist idea that under a form of socialism the attributes of pure competition might be approximated. Nevertheless, this idea is of quite minor importance in the book. The topic of the dissertation (and hence the book) was suggested by F.A. Hayek when Rockefeller was at student at the London School of Economics for one year in the mid-1930s.

The book, as the title indicates, is about unused resources and whether or not they constitute waste from an economic perspective. The topic was a major concern during the Great Depression and thereafter. Unfortunately, Rockefeller does not deal with the business cycle issues that may have been foremost in the reader’s mind (both then and today). Nevertheless, there is a good deal of valuable analysis regarding the connection – or lack thereof – between unused resources and waste.
Rockefeller is at great pains to show how unused resources are the outcome of entrepreneurial expectations. Suppose a firm expects demand to rise and then fall over a period of time. It may be quite economical to build a plant that is sufficient to produce for that demand for a number of years and then let it sit idle in whole or in part for a few years after that. Risk can also cause resources to go unused if the planner finds that demand turns out to be too low or costs too high. Uncertainty in the Knightian sense (the absence of clear-cut objective probabilities) can induce a planner to build a plant of great flexibility but at the cost of not being at minimum technological cost for any output. All of this is designed to show that there is no sense in equating unused resources with waste from the point of view of the firm. Certainly this is true in the ex ante sense but also in the ex post if we do not hold entrepreneurs to the standard of perfect foresight.

So what is waste? This is the unrealized net value that could be attained but is not. In the above examples, entrepreneurs do the best they can, so practically speaking, there is no waste. But waste can be engendered by monopoly, legal restraints, political barriers and so forth. Therefore, waste may occur at different levels of analysis and of constraints. What is not waste from the perspective of the firm — say the monopolist producing less than “ideal” output and hence using a smaller physical plant which does not produce at the lowest possible cost for that output —  may yet be waste from the perspective of society. Waste “can only have meaning in connection with environmental conditions which are subject to change by means of conscious human action” (p.226). Waste is the foregoing of value due to a failure to act. Overcoming waste involves changing the current constraints.

But some people have suggested that we to take constraints that produce waste as simple givens.  Rockefeller cautions us, just as his teacher Knight did, not to adopt a deterministic view of the world.

[I]f all of the psychological forces influencing the actions of, say, the entrepreneur were taken into account, as well as the institutional and other environmental conditioning limiting his behavior, the entrepreneur would be powerless to choose any course of action other than the one actually pursued. …But in that case all discussions of purposive action would be meaningless (232)

Thus it is not true that background social and political conditions deterministically give rise to institutions or constraints that produce waste. Entrepreneurs may be able to find more efficient methods of production. Policymakers may be able to reduce or eliminate monopoly power and the consequent social waste. But often this is not accomplished. One fundamental reason is inattentiveness of the entrepreneur or the policymaker.

Waste as it has been defined in this chapter implies unrealized value or satisfaction due to the inattentiveness on the part of the leaders of the group in question [family, firm, political entity] to the interests whose furtherance along established lines was their recognized responsibility (233-34).

Unfortunately, there is not much discussion of this in the book.

The book is dominated by a concern for the role of expectations in creating the appearance, but not the reality, of resource waste. The technologically feasible use of resources is not always the economically feasible. Sometimes not using a resource creates value and sometimes using a resource is wasteful.
There is Austrian content in the book — mostly in the overlap area between Hayek and Knight. But Rockefeller was a Knightian. The book also shows well his competence as an economist. What if he had pursued an academic career? I think he would have made significant contributions. But would that have been a waste from his perspective?

 

 

Time for Reflection: “The Unity of the People”

This is from more than eight years ago. It was written in response to the Obama campaign and its call for unity. It applies again today to the World of Trump.

ThinkMarkets

by Mario Rizzo

After most presidential elections in recent years there is talk of uniting the country, somehow overcoming differences and working for the betterment of the nation. This is a dangerous idea if it is taken seriously.

View original post 556 more words

Lessons from the Uber-de Blasio Showdown

by Liya Palagashvili

Earlier this summer, de Blasio attempted to cap the number of Uber and other ride-sharing drivers in New York City. Although he ended up dropping the proposal, the event itself serves as a wonderful pedagogical illustration of public choice insights. Here’s an excerpt from my op-ed on this:

What can we learn from this Uber fight and public choice economics? We need to have a more practical understanding of politics rather than indulging in a romantic notion that all policies intend to help residents or consumers. We often get bad policies because of self-interested exchanges between politicians and special interest groups. We shouldn’t fall head over heels every time politicians tell us they support a particular policy in order to “help the people.” Sometimes that’s just a façade for what is going on behind closed doors. So when politicians tell us they want to limit ride-sharing to “protect riders,” residents should take this public justification with caution and not immediately assume that they’re doing it out of the goodness of their hearts.

Read the full op-ed here.

Chickens Coming Home to Roost: The Progressive Destruction of Employment Opportunities

By Mario Rizzo

There comes a point where the continual mandating of benefits and restrictions on hiring has big consequences. We can see the handwriting on the wall in Europe as well as in the US. In Europe the young are more and more being left out of the traditional forms of hiring .

A recent article in the Financial Times (August 5, 2015) has a very interesting analysis of the issue. “In a continent known for strong employee protections, more than half of the eurozone’s young workers are in temporary jobs, churning from one short-lived contract to the next.”  And this is in countries with high unemployment rates among the young.

Temporary jobs among the 15 to 24 year-olds (of those who are employed)

Spain: 69.1%

France: 57.0%

Italy: 56.0%

Germany: 53.4%

OECD: 24.1%

UK: 15.2%

Japan: 14.4%

“…[I]n Italy, France, and Spain…fewer than 30 per cent of temporary employees have moved on to permanent jobs three years later.”

These temporary workers are not good candidates for on-the-job training and other employer investments in human capital. In the United States we see an increase in “gig hiring” in those areas of entry restrictions (taxis) and in areas of technological expertise. Some of this in both the US and Europe is, no doubt, desirable to workers from the point of view of freedom to decide one’s hours and so forth.

However, it is one thing to make a decision in an undistorted labor market and another thing to make a decision for this type of employment because mandates have significantly increased the costs of traditional employment. Furthermore, among the groups who have done the most to create this state of affairs – labor unions and so-called progressives – the reaction is quite interesting.  They bemoan the decline of the middle class and the security of the good ole days. And they worry about more and more workers avoiding the “protections” and “benefits” of union and state.

The simplistic line that much of the public has accepted is that we can pile mandate upon mandate, condition upon condition without much effect on labor markets. We can mandate the good things people want. On the other hand, I am not so sure that labor unions really buy this line. After all, their interests lie with incumbent workers, not those who are struggling to get ahead. But ignorance abounds in all quarters.

APEE: Call for Papers

Jerry O’Driscoll

The Association of Private Enterprise Education will hold its annual meeting in Las Vegas, Nevada, April 3rd to 5th, 2016. This year’s conference theme is Capitalism: Free-Market or Crony? Papers are welcome on that topic, as well as other topics relevant to market economies. That list certainly includes Austrian economics, Public Choice, etc. Here is a link to the Call for Papers: https://www.apee.org/call-for-papers/

I am the Vice President of APEE this year and have responsibility to organize the conference. Visitors to ThinkMarkets are invited to submit papers for the conference. If you want to organize a session, contact me and I will advise how to proceed. My contact is at the Call for Papers.

Stringham appointed as the Davis Professor for Economic Organizations and Innovation at Trinity College

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by Edward Stringham

I have enjoyed working with excellent colleagues and Ph.D. students at Texas Tech University, but I am thrilled to be hired as an endowed chair at Trinity College in Hartford, Connecticut. Undergraduate students interested in private enterprise, drop everything you are doing and enroll now! Parents of toddlers destined for success, create a fifteen year plan for your kids to send them our way. The first Episcopal college in New England, Wall Street pipeline Trinity has the fourth highest percentage of alumni millionaires. Actually, the atmosphere on its collegiate gothic campus is ideal in so many ways.

The Davis Endowment was made possible by legendary Wall Streeter and Forbes 400 member, Shelby Cullom Davis. The endowment sponsors classes, lectures, research on private enterprise, and reaches hundreds of students and thousands in the public. With more than $16 million, the Davis Endowment is one of the largest of its kind in the world.

Since its founding nearly 35 years ago, the Davis Endowment has been directed by Gerald Gunderson, longtime editor of the Journal of Private Enterprise, and author of A New Economic History of America and The Wealth Creators: An Entrepreneurial History of America, among others. Armen Alchian stated that Gunderson’s work, “stands head and shoulders above anything else in explaining our history and especially how the capitalist system operated and still operates when allowed.” Along with Gerald Gunderson, I will be working with John Alcorn, Bill Butos, and other great professors.

I am particularly grateful for Gerald Gunderson, Shelby Cullom Davis, and Shelby’s daughter, Diana Davis Spencer, for helping ensure that this endowment is where it is today. Gerald spent many years watching over the endowment and Diana Spencer was influential in speaking out in article on the front page of the Wall Street Journal when an ex-administrator was attempting to divert most of the funds out it. Diana Spencer worked with the American Council of Trustees and Alumni and the Philanthropy Roundtable in the fight to have her father’s donor intent honored. She stated “If colleges like Trinity undermine donors’ confidence that they will respect their wishes, they place at risk the generous support they receive from our foundation and so many others—and the benefits that inure to millions of students from this largesse.” (The ex-administrator who was attempting to divert the funds resigned shortly after coming up with another controversial idea , and more recently the Commonwealth of Virginia names him in a lawsuit for misuse of funds and violation of donor intent for his announced closure of Sweet Briar College.) A Pope Center report “An unusual victory for donor intent at Trinity College” documents some of the details of this multi-year battle and win. Gunderson wins first prize for the most persistent endowment director of all time.

I thank the search committee at Trinity, my professors (especially Peter Boettke), colleagues (especially Benjamin Powell), and countless others for helping me get here. I am looking forward to returning to my Yankee roots and working to build the premier liberal arts center for the study of private enterprise.

Why students interested in free markets should get their Ph.D. at Texas Tech University

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by Ed Stringham

If you are interested in earning a Ph.D., or if you know someone who is, I strongly recommend studying at Texas Tech University where I have had the pleasure to teach this past year. At the center of the action is my good friend, Benjamin Powell, who directs the Free Market Institute at Texas Tech University. I always found Powell impressive, but over the past couple years he has shown great program building and leadership skills to launch the Free Market Institute programs. Last year they hired me and the most excellent Adam Martin, bringing the number of George Mason University Ph.D.s on campus to four. This month they hired Alexander Salter who earned his Ph.D. from George Mason University in 2014, and they may also be hiring an economist with a long affiliation with PERC and another scholar who is well known in Austrian economic circles. Stay tuned.

Here are some reasons why students interested in free markets should look into studying at Texas Tech. The university is large and growing with more than 35,000 students and a $1 billion endowment. Walk around campus and observe the architecture to the flowers as small indications of how well the university is run.

The administration is actually full of supportive people with can do attitudes that are uncommon on most campuses, and the university plans to continue to move up in the rankings. (Speaking of rankings, as a New Englander, I like how Wes Welker and Danny Amendola played football at Texas Tech, but alas the university’s football ranking was not as good this year as in other years.) The campus is also nicely situated next to a bunch of good housing, restaurants, and bars giving it a close to ideal college town feel with most of what one needs in walking distance. The people in Lubbock are also very nice and the university lacks unkempt hippies found elsewhere.

Although the university is large, Ph.D. students associated with the Free Market Institute have a strong sense of community and can get a lot of face time with professors and visiting scholars. I enjoyed teaching economics of entrepreneurship and the economics of regulation to some great Ph.D. students over the past year. Peter Boettke was the Ludwig von Mises Visiting Scholar with a couple two week visits and Joshua Hall was a Big Twelve Visiting Fellow as well. In the past year and a half we had Walter Williams and Andrew Napolitano help fill 800 person auditoriums and top scholars including Vernon Smith, Israel Kirzner and Robert Higgs present on campus. The Friday research workshop and other seminars also had many interesting speakers including Scott Beaulier, Bryan Caplan, Jeffrey Rogers Hummel, Matt Kibbe, Peter Klein, Robert Lawson, Peter Lewin, Edward Lopez, Bryan McCannon, Phillip Magness, Daniel Sutter, and Richard Wager. We also cohosted conferences with the Institute for Humane Studies and the Free Market Roadshow with speakers including Steve Bradley, Enrico Colombatto, John Charalambakis, and Barbara Kolm.

Powell even has a television show where he discusses the research of many of the scholars who visit campus. Of course the best episodes featured me! Drop everything you are doing and check it out.

Expect great things at Texas Tech University in the future. Congrats to Powell and others who are making all of this possible. If you are a student, find out more about the programs and fellowships here.

Organizing sessions for the Society for the Development of Austrian Economics

By Ed Stringham

I am pleased to have been selected as the next President of the Society for the Development of Austrian Economics. Many economists including Karen Vaughn, Mario Rizzo, Peter Lewin, Steve Horwitz, and Peter Boettke, have done great work and help make the society far bigger than I would have predicted.

Sessions over the years have included some great and lively debates between Walter Block and Gordon Tullock. Chris Coyne gave an excellent presidential talk last year on problems with the theory of public goods. I had the good fortune to win two Paper of the Year awards from the Society for the Development of Austrian Economics (read the articles now here and here!), so thanks to everyone who made this latest honor possible.

One of my duties is organizing the sessions at the Southern Economic Association meetings and this year’s paper submissions are due this week. Submit your paper proposal to me today! Details are here.

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Economics Music Video Contest: Markets Promote Peace

by Edward Stringham

As a professor, I am a  fan of rigorous economic research, but I am also a fan of helping students learn about how important economics is in an engaging way. John Papola did an excellent job with the Keynes Versus Hayek music videos (especially the second one with yours truly), and over the past couple years I have had students make economics music videos. Think it is impossible to have music videos about Supply and Demand or Economic Value is Subjective? Think again! The results of the 2012 Supply and Demand Music Video Contest and the 2013 Economic Value is Subjective Video Contest have  been fantastic and have had more than 100,000 views on Youtube. See the winning entries below.

I am pleased to announce the 2014 Economics Music Video Contest on Markets Promote Peace. Winners get $2,500 and their professor gets $500. According to the great 19th century liberal, Richard Coben, markets help change a relationship between strangers from one of indifference, or even contempt, to one of mutual benefit. People who may not have cared about each other, now see the other party as an ally. Militarism, on the other hand, causes conflict. To Cobden an important, more humane, and more effective substitute for militarism in the international realm is the expansion of markets.

Continue reading about the contest here: http://hackleychair.wordpress.com/2-economics-music-video-contest/

Winners of  the 2013 Value is Subjective Music Video Contest

 

Winners of the 2012 Supply and Demand Music Video Contest

 

Gary Stanley Becker (1930-2014): Through My Austrian Window

by Mario Rizzo

It is tempting to over-romanticize a person when he or she is gone. I will strive to be balanced in keeping with how I feel and think about Gary Becker.

I am saddened by his recent death (May 3rd). I have known him since at least 1974 – some forty years. He was not on my dissertation committee but he took a strong interest in and liking to my dissertation on the effect of crime on property values. I audited his version of the first-year sequence in price theory at the University of Chicago. It was, in my view, the best of the three versions I was exposed to. He was a little scary insofar as he lectured and then suddenly would call on a student with a question. Since I was an auditor only, my name did not appear on the class list so I escaped the surprise questioning.

He loved economics and loved to apply it to a wide range of problems. He was no enemy of mathematical economics but thought that theory should be as simple as possible and developed with applications in mind. He was a true follower of Alfred Marshall on this: theory as the engine for the discovery of concrete truth. He was also no “positivist” in methodology. (Some people are quite careless about how they use that term.) He did not think that every statement in economic theory has to be falsifiable or testable. In response to what I believe to be the methodological disaster of behavioral economics, he argued that rationality per se is never testable. What is testable is the complex of assumptions and basic structure of a theory when it is applied to concrete problems. (I add, for those schooled in the philosophy of science, that he invoked the “Duhem-Quine Thesis.” )

He accepted Lionel Robbins’s view that economics is a science of choice generally, and not only a science of market exchange (what used to be called catallactics). In accepting that view he accepted the same perspective on this matter as Ludwig von Mises and the British economist Philip Wicksteed – from both of whom Robbins derived his own view. So there is immediately an undeniable Austrian connection.

Within the past couple of years or so, I wrote to Gary about how I thought his view on “irrational” preferences was similar to those of Philip Wicksteed who, in 1910, argued that irrationalities and inconsistencies of preference tend to be eliminated under the pressure of costs, when in fact those preferences detract from the agent’s attainment of his own goals. He agreed with me, with – in typically Beckerian fashion – the proviso that Wicksteed didn’t have adequate empirical evidence, but Becker did in some of his papers. Okay.

Some Austrians may think that Becker was an enemy of Austrian economics because in 1962 he and Israel Kirzner had a debate in the pages of the Journal of Political Economy. In the fullness of time, I believe that neither of them had a clear view of their own developing perspective in 1962. Nevertheless, Kirzner was emphasizing that some assumption about rationality (later “alertness”) was necessary if a market is to move from disequilibrium to equilibrium. Becker was arguing that you don’t need a rationality assumption to get a negatively sloped demand curve – scarcity is enough. Becker, I believe, was getting at a point later made by Vernon Smith that “rational” behavior can be provoked or engendered by the (institutional) constraints of the system under study. The interesting question is when is alertness the key and when are institutional constraints the key. What is the relative role of each?

I think to a certain extent contemporary economics has moved beyond (but probably not nearly enough) the equilibrium versus process divide. Most good theories borrow from each paradigm. Nevertheless, it is hard to argue that Becker’s relatively equilibrium-oriented approach has not provided useful insights about the real world.

Gary Becker will be missed not only for the breadth and depth of his ideas, but also because of his kindness and generosity to others.

Ave atque vale.

Congress Should Grow a Pair

by Roger Koppl

I was thinking of the NSA scandal while jogging through Rome’s Park of the Aqueducts  this morning. I guess it was that setting that made me think of our new computer-geek overlords as a virtual Praetorian Guard.  Augustus created the original Praetorian Guard about 27 BCE to protect the emperor. It quickly came to exercise independent power, once even auctioning off the empire to the highest bidder.  This outrage led the Roman general Septimius Severus to march on Rome and displace Emperor Julianus who had won the Praetorian bidding war. Severus disbanded the old Preatorian Guard only to set up a new Praetorian Guard, which quickly achieved a similar authority, power, and autonomy. The “intelligence community” of the US government seems to be playing a similar role today.

We now have secret interpretations of public laws  that some members of Congress have obliquely warned of. Continue reading

F.A. Hayek: His 114th Birthday

by Mario RizzoHayek as Street Art

Today is Hayek’s birthday. Much has been and will continue to written about him. When I look around at much of what passes for economics today, especially in the prestige circles, I cringe.  But reading his work always comforts me that something better is possible. And, in fact, there are many economists all over the world who take their inspiration from Hayek and his work. This is their day too!

Hayek, of course, was more than economist. He also had profound things to say about the mind, the rule of law, and ethics. Recently, I saw a stark example of the difference in ethical thinking between Hayek and more conventional moralists. This was in the case of the tragic fire in a Bangladeshi factory making clothes for western companies. The new Pope Francis condemned it as an example of corporations only caring about their bottom-line.

Now there are legitimate issues, from the point of view of the individuals working in this and other such factories. Can they rely on the attestations of a certain degree of safety in their working environment? Before people can voluntary assume the risks associated with certain kinds of work they must have at least a pretty good idea of what those risks are.

And yet there is a more fundamental issue.  Workplace safety is a matter of degrees. It is a working condition that is part of the cost of labor. There is an inevitable tradeoff between wages and level of employment, on the one hand, and workplace safety on the other hand. In rich countries workers can afford to sacrifice something for greater workplace safety. This is all part of increasing wealth.

Now major corporations are re-thinking their use of factory labor in Bangladesh.  They don’t want the images of large numbers of dead ruining their reputations. Ostensibly, they will argue that since they cannot trust Bangladeshi authorities to keep the factories safe they will not deal with them. Voila, the moral stance. Continue reading

The Euro: a Step Toward the Gold Standard?

by Andreas Hoffmann (University of Leipzig)

In a recent piece Jesus Huerta de Soto (2012) argues that the euro is a proxy for the gold standard. He draws several analogies between the euro and the classical gold standard (1880-1912). Like when “going on gold” European governments gave up monetary sovereignty by introducing the euro. Like the classical gold standard the common currency forces reforms upon countries that are in crisis because governments cannot manipulate the exchange rate and inflate away debt. Therefore, to limit state power and to encourage e.g. labor market reforms he views the euro as second best to the gold standard from a free market perspective. Therefore, we should defend it. He finds that it is a step toward the re-establishment of the classical gold standard.

There has been much criticism of the piece that mainly addresses the inflationary bias of the ECB. I actually agree with much of it. In particular, imperfect currency areas have the potential to restrict monetary nationalism. This can be welcomed just as customs unions that allow for free trade (at least in restricted areas). But I have some trouble with De Soto’s conclusions and the view that adhering to the euro (as did adhering to gold) gives an extra impetus for market reform – in spite of the mentioned e.g. labor market reforms in Spain. Continue reading

Income Inequality Matters

by Roger Koppl

Income inequality matters. Let me say that again so you know I meant it: Income inequality matters. This statement may be surprising coming from a self-described “Austrian” economist and a “liberal” in the good old-fashioned pro-market sense. It shouldn’t be. It should be one of our issues. The surprise should be that we pro-market types have not spoken up more on this central issue, thereby letting it become associated almost exclusively with more or less “progressive” opinion.

This indifference to income distribution is all the more mysterious because pro-market thinkers generally support a theory of politics that tells us to watch out for ways the state can be used to create unjust privileges for some at the expense of others. We should expect the distribution of income to be skewed toward the politically powerful and away from the poor and politically weak. In a representative democracy “special interests” engage in “rent seeking” to get special favors. Those special favors enrich some at the expense of others. That’s what they are meant to do! Continue reading

Economics of the Undead

This is a project I’ve been working on, and I hope that some of ThinkMarkets’ readers (and bloggers) will consider contributing.

Call for Abstracts

Economics of the Undead:  Blood, Brains & Benjamins

Glen Whitman & James P. Dow, Editors

The editors seek abstracts for essays exploring the relationship between economics and the undead, especially zombies and vampires.  The chosen essays will appear in a collection to be published by Rowman & Littlefield.

Ideal contributions will use economic reasoning to address issues related to the undead, use the undead as a means of exploring economic thought, or both.  Abstracts and final essays should be written in an accessible and engaging style for a popular audience.  Contributions should also make relevant reference to the undead in pop culture, such as the Twilight saga, Buffy the Vampire Slayer, the novels of Anne Rice, World War Z, the films of George Romero, True Blood, and The Walking Dead.

Possible topics include:  supply and demand in the market for blood; the operation of zombie labor markets; the political economy of responding to undead threats; macroeconomic recovery after a zombie apocalypse; what zombie and vampire behavior tell us about rational-choice modeling; etc.

Submission Guidelines:

1.      Send abstract of paper (100-500 words) in Word or compatible format.

2.      Include resumé/CV for each author.

3.      Submit by email to both glen.whitman@gmail.com and jpdow@verizon.net.

4.      Submission deadline is 7 April 2013.

5.      For accepted abstracts, first drafts of essays will be due 15 July 2013.

Feel free to forward this to anyone with economics training or experience who might be interested in contributing.  Although we are only asking for abstracts at this time, if you have already written an unpublished article that fits the subject matter, you may submit the article in its entirely.

Interests are More Powerful than Ideas?

THE BIG STORY OF SPENDING
THE BIG STORY OF SPENDING

by Mario Rizzo

There is an interesting interview with Ed Feulner, the outgoing president of the Heritage Foundation, in the weekend (Dec. 8-9) Wall Street Journal. The interview got me thinking about the progress made in the pro-economic-liberty cause, not only over the years of Heritage, but since, say, 1960. Continue reading

A “Kleinian” Version of Austrian Business Cycle Theory

by Gene Callahan

The next phase in my (now our, as I’ve taken on a colleague) project of thinking through Dan Klein’s Knowledge and Coordination is to see how his ideas might be used to help describe business cycle theories and demonstrate commonalities they share. Note: the point of the present exercise is simply to try to describe an existing business cycle theory in Kleinian terms, not to improve upon it or argue for its accuracy.

We will begin with the Austrian Theory of the Business Cycle: Continue reading

The Great Ideas of the Social Sciences

by Gene Callahan

Let’s take social science broadly, in the sense of German wissenschaft, so that The Republic and Politics and The Social Contract are social science. (I would contend that they are, in fact, often much more scientific than the latest regression study of how detergent use correlates with the suicide rate.)

So what, then, are the most important ideas ever put forward in social science? I’m not asking what are the best ideas, so the truth of them is only obliquely relevant: a very important idea may be largely false. (I think it still must contain some germ of truth, or it would have no plausibility.) Think of it this way: if you were teaching a course called “The Great Ideas of the Social Sciences,” what would you want to make sure you included?

Here’s my preliminary list. What have I left off? What have I mistakenly included? Continue reading

The Passions and the Interests in Forensic Science

by Roger Koppl

A front-page article  in yesterday’s Washington Post underlines the importance of establishing a substantive defense right to expertise in the US.

The article says, “Justice Department officials have known for years that flawed forensic work might have led to the convictions of potentially innocent people, but prosecutors failed to notify defendants or their attorneys even in many cases they knew were troubled.” The DoJ begin investigating in the 1990s “after reports that sloppy work by examiners at the FBI lab was producing unreliable forensic evidence in court trials.” As the Post article chronicles, the investigation was very narrowly drawn in spite of evidence that problems were likely more widespread. Continue reading

Social Cycles: An Example

by Gene Callahan

Earlier, I posted some preliminary thoughts on the idea of a general theory of social cycles. Today, I’d like to expand upon one of my examples a bit.

If you recall, I mentioned merging onto a highway as an illustration of adjustments and displacements — which I will henceforth call “disruptions,” by the way, since I think that is a better term.

Let us now imagine a busy highway with entrances and exits every mile. The entrances are not well-designed: there is no lane for smoothly merging into traffic while getting up to speed, but a stop sign at the end of the entrance ramp. (This, in fact, is pretty much a description of the Merritt Parkway in Connecticut as of 30 years ago.) What this means is that every time traffic nears an entrance, there occurs a cluster of disruptions, as people enter traffic at a slow speed.

These disruptions will produce a cascade of further disruptions, as the adjustments made by drivers breaking for merging automobiles thwarts the plans of other drivers who wish to continue at a steady speed. Thus we get a logjam around the entrance ramp. This is the “bust” phase of our cycle. (We need a better, more general term here. Any ideas?) Continue reading

O’Driscoll and Rizzo Got There First

by Gene Callahan

I had believed that Tony Carilli and Greg Dempster (“Expectations in Austrian Business Cycle Theory: An Application of the Prisoner’s Dilemma,” The Review of Austrian Economics, 2001) made a major advance in Austrian Business Cycle Theory by hitting upon the correct solution to the challenge presented by, for instance, Gordon Tullock, who once wrote:

“The second nit has to do with Rothbard’s apparent belief that business people never learn. One would think that business people might be misled in the first couple of runs of the [Austrian] cycle and not anticipate that the low interest rate will later be raised. That they would continue unable to figure this out, however, seems unlikely.” (“Why the Austrians Are Wrong about Depressions”)

By posing the situation as a prisoner’s dilemma, where businessmen are rational to exploit the short-term profit opportunities offered by the boom phase (since if they don’t their competitors will) Carilli and Dempster adequately answered Tullock’s complaint. (I especially liked their solution because I independently had hit upon the same idea, which I was working out while writing my book, Economics for Real People. Well, I wasn’t the first to print, but at least I was the first to reference their paper!)

But yesterday, while editing someone else’s work, I discovered that Gerald O’Driscoll and Mario beat us to the basic insight by several decades, although they did not give it a game-theoretical formulation:

“[T]here are profits to be made from exploiting temporary situations. . . . Though entrepreneurs understand [the macro-aspects of a cycle] they cannot predict the exact features of the next cyclical expansion and contraction. . . . They lack the ability to make micro-predictions, even though they can predict the general sequence of events that will occur. These entrepreneurs have no reason to foreswear the temporary profits to be garnered in an inflationary episode. . . . From an individual perspective, then, an entrepreneur fully informed of the Austrian theory of economic cycles will face essentially the same uncertain world he always faced. Not theoretical or abstract knowledge, but knowledge of the circumstances of time and place is the source of profits.” O’Driscoll and Rizzo, The Economics of Time and Ignorance

Note: I still think what Carilli and Dempster did, in giving this a game-theoretic formulation, is great work. I just see it is not quite as original as I had thought.

Supply and Demand in Music

by Edward Peter Stringham*

Many economists are criticized for being unable to communicate their ideas in am intelligible and non-boring way. How many people, for example, jump to listen about a debate about the Austrian theory of the business cycle? It turns out quite a lot. John Papola and Russ Roberts demonstrated to the world that lots people will actually listen to an economics discussion if presented in an interesting way.  Their videos recently surpassed 4.5. million views. They did an amazing job especially with their good casting decisions for the reporter at the end of the second video.

This year I decided to run a video contest for students to create music videos that help illustrate the laws of supply and demand. Continue reading

Stark quits ECB

by Andreas Hoffmann

This is good news for inflationists.

I am shocked that Jürgen Stark quit his job at the European Central Bank. Usually it is a good thing when central bankers quit their job – or at least it does not make a difference. But Jürgen Stark is known as an inflation hawk. Jürgen Stark – like the Mark writes Die Welt.

In my opinion, the main difference between the ECB and the Fed is that the ECB has people like Stark. Unfortunately, there are only a few.

He is opposed to cheap money policies. A while ago, he openly warned of rolling bubbles caused by too low interest rates in the media. Thus, he suggested a timely turn-around in interest rate policy. Recently he voted against further bond purchases of the ECB. More on this recent event can be found here.

Coming shortly after Axel Weber resigned due to his disagreement with Trichet’s policies, Europe’s anti-inflation block is now shattered. Something terrible must be going on at the ECB. I wonder where the ECB is heading?

“National Competitiveness”

by Mario Rizzo

A new book has been published, Institutional Economics and National Competitiveness,  edited by long-time colloquium member — Professor Young Back Choi of St. John’s University. Here is the publisher’s description. Please ask your library to order it.

This book offers a strong contribution to the growing field of institutional economics, going beyond the question of why institutions matter and examines the ways in which different types of institutions are conducive to the enhancement of competitiveness and economic development. Adopting a variety of approaches, ranging from New Institutional Economics, Public Choice, Constitutional Political Economy and Austrian Economics, to more traditional economic approaches, contributors examine the important issues of interest to development economics.

This book asks whether democracy is a pre-condition for economic development, what the proper role of government is in the age of globalization and whether successful government led policies were the cause of South Korea’s economic development. As well as these key questions, the book covers the issues of whether the government should rely on the market process to encourage economic development or must they interfere, and by what criteria one can judge a proposal for policies for economic prosperity. The book tries to make a contribution by introducing a variety of perspective, some argue in favour of industrial policies while others argue for a lesser role for the government and a greater entrepreneurial freedom. Some question the wisdom of promoting democracy as a necessary condition for economic development while others argue that political liberalization is the basis of lasting competitive edge of an economy

Check out the details here at the Routledge site. This book is in their series, “Frontiers of Political Economy.”

Peace and Free Enterprise

by Jerry O’Driscoll  

Initially, the headlines about the Iowa straw poll said Bachmann won. That was literally true, but hardly interesting. Libertarian Ron Paul basically tied her. The two candidates blew out the rest of the field with 57% of the vote. Under pressure from rapid blog postings, the established media have caught up with the facts.

All candidates spoke of the need for smaller government. Reasonable voters might have suspected, however, that not all candidates were as seriously committed to that as Bachmann and Paul. Both have unassailable Tea party credentials. The Tea Party in part grew out of Ron Paul’s 2008 presidential campaign. Bachmann jumped on the bandwagon early, before it was popular.

Paul finished fifth in Iowa in 2007. He surged this year on two other issues: end the wars and end the Fed. His call to bring home the troops and end the wars resonated with Iowa Republican voters. We’ll see how it plays out in other contests.

(Ending the Fed was actually his most popular issue in 2008. I thinking ending the wars mattered more this time.)

The linkage between peace and free markets was central to classical liberalism in 19th century Britain, right up through the Gladstone Liberal victory in 1906. Nineteenth-century economist James Mill summed it up when he said that war was the worst calamity that can befall a country. Randolph Bourne summed it up in 20th century when he described war as the health of the state. That is a favorite Ron Paul quote.

What won in Iowa is liberty.