Emerging Realism

Thanks to Powerline for a nice overview of realism a it applies to international relations. However, I fear that this notion of political science has a common flaw: the assignment of inappropriate attributes to collective groups. I don’t believe that nations have interests or even that nations can have interests. Instead, those individuals in power have interests. Now it might be true that anyone in power in a given nation might share the some of the same interests. It is certainly tempting to view those shared interests as national interests. But that kind of thinking can lead to flawed analysis. These flaws can be avoided by remembering that only individuals can have goals. When groups of people have a common goal, the goal is usually a fragile compromise among individuals. A more accurate portrayal of systems comes from always viewing composite goals, interests, and actions as the result of individual components from which an order has emerged.

Buy Global

Simple economic concepts elude many people. I confess, some concepts have zipped over my head until I saw the right example expressed in the right way. To that end, I direct you to a very clever explanation of why globalization is good and the “buy local” movement is not so good.

The Power Of Bad Ideas

Why are bad ideas and bad policies so persistent? If you’ve ever wondered about this, you will be interested in Bryan Caplan’s Idea Trap. He makes a compelling argument for why there is popular support for bad ideas. While I agree with his logic, I think it is only a partial explanation. People may support bad ideas, but someone has to promote bad ideas – then people can rally behind them. And why would people promote bad ideas? My guess is there is some personal short term relative advantage. That, combined with the human power of self delusion, is enough to abandon reason.

Your Tax Dollars At Work

This is hilarious and sad at the same time. In a fit of bipartisanship, Congress has seen fit to take your tax dollars and spend it on subsidizing the production of rum and racetracks. I guess there are worse kinds of stimulus – I guess we’re lucky that they didn’t fund whorehouses and opium dens. It’s hard not to think of Congress as a band of pirates – and incompetent pirates at that. Shiver me timbers.

Great Depression II

Some people worry that we are headed for another Great Depression. The parallels between then and now are striking: insane blunders by first a Republican and then a Democratic administration pushed the country into a nightmare. I’ve just finished reading the best short analysis of the Depression and it’s, well, depressing.

The moral of the story comes at the end:

Nothing would be more foolish than to single out the men who led us in those baleful years and condemn them for all the evil that befell us. The ultimate roots of the Great Depression were growing in the hearts and minds of the American people. It is true, they abhorred the painful symptoms of the great dilemma. But the large majority favored and voted for the very policies that made the disaster inevitable: inflation and credit expansion, protective tariffs, labor laws that raised wages and farm laws that raised prices, ever higher taxes on the rich and distribution of their wealth. The seeds for the Great Depression were sown by scholars and teachers during the 1920s and earlier when social and economic ideologies that were hostile toward our traditional order of private property and individual enterprise conquered our colleges and universities. The professors of earlier years were as guilty as the political leaders of the 1930s.

Social and economic decline is facilitated by moral decay. Surely, the Great Depression would be inconceivable without the growth of covetousness and envy of great personal wealth and income, the mounting desire for public assistance and favors.

Sound familiar?

Boom and Bust

The essentials for prosperity are everywhere and always the same: economic calculation and entrepreneurial planning augmented by a sound monetary institutional framework, a predictable legal framework that supports property rights and contract enforcement, and highly competitive resource markets.

If we are to better understand why the same policy that generates wealth to begin with is the best policy to follow in a crisis, one should begin with an understanding of the boom-bust process and more sound normative interpretation of the boom and bust.

The standard normative judgment about the phases of the cycle is that a period of booming economic activity is typically considered “good” while the downturn/recession/bust is “bad.” But it is the boom times that play host to the plague of malinvestments, overconsumption, and misdirected production. The bust brings readjustment and reestablishes the potential for sustainable growth. The standard normative judgment is backwards: it is the boom that is “bad,” and thus should be prevented or halted before it proceeds too far. It is the bust that, from a long-run perspective, is “good.” Past errors and misallocations of resources are discovered and, if markets are allowed to work, corrected.

via Return of the Dead Hand – John P. Cochran – Mises Institute .

What an insightful article! Note that two of the factors needed for prosperity (sound monetary framework and the legal framework) have recently come under some strain.

I Am Not An Aggregate

Jeff Harding nails the problem with mainstream economics:

Econometricians believe that if you look at history (data) you can come up with truths about what happened historically and, based on that history, what will happen in the future.The only problem is that philosophy doesn’t work very well. How many econometricians, or any contemporary economist for that matter, saw the crash? You know the answer to that one.

Why doesn’t their philosophy work very well?

Because the “economy” is not some amorphous aggregate that can be measured with any precision. It is instead a word to describe the decisions made by millions of individuals every day. I am not an aggregate; I am an individual. You just can’t fathom the reasons for all these decisions as if human beings were molecules of matter subject to the rules of physics. There is just too much data, even with supercomputers with yottabits of storage (10²⁴). So, when econometricians select certain historical data, they have no clue as to whether or not they’ve got the right data. They are guessing.

If you can understand that, then you are way ahead of most economist who believe in things like the classic Keynesian formula that never works.

The Austrian School economists figured this out. They pioneered breakthroughs in epistemology (the science of how you know what you know) of the social sciences. Men like Ludwig von Mises and Friedrich von Hayek developed these ideas from the ground breaking work of their Austrian economist predecessors such as Menger, Böhm-Bawerk, and others. They were intellectual giants. The Einsteins of economic theory, if you will. Yes, their ideas are that important.

Read the whole thing.

Thinking Pitfalls

I was reading an excellent post by John Mauldin which has some great insights into the future of the economy (scroll down if you link there). I found the prediction that we can expect persistently high unemployment as a result of “rescuing” the economy most insightful.

Nevertheless, this post can lead you astray if you don’t keep things in perspective. Two notions concern me:

While macroeconomics can offer insight into aggregate behavior, we do not live aggregate lives. While macroeconomic conditions are interesting, most people care more about their personal microeconomy. Consumers were carrying far too much debt, but that doesn’t mean that all consumers, or even most consumers, were too heavily indebted. Aggregate numbers can be driven by the margins and the aggregate effects can have little or no effect on most individuals. So, while unemployment may lock in at 10%, it’s likely that this will be concentrated in certain job categories and industries. A prudent person can avoid the damage. For example, I’d think twice before considering a career in manufacturing.

Mauldin makes much of our economy settling into a “new normal”. I understand the thinking, but remember that every “normal” of the past proved unsustainable. There really is no “normal”. A better way of thinking about the economy is that it lurches from change to change as Schumpeter described: “creative destruction”. Thinking of a “new normal” might lull one into complacency.

Comments

Some of the best short commentary on the Web is embedded in comments. Some bloggers attract better comments than others. Here are some I enjoyed from a recent Arnold Kling post:

Regarding government white papers and the like:

what one could have predicted about any report written by political leaders:

1. No real blame would fall on the politicians
2. It was just a matter of who (outside of the relevant regulators or agencies) would be blamed.
3. The conclusions would center on “more power to the government”
4. The agencies that failed the worst would end up with the greatest increases in power and money.

Regarding the financial crisis:

If risk were so easy to calculate and control [that] a regulator could do it, we wouldn’t be in this pickle in the first place.

Our unique form of government:

The federal government is by design (in order to prevent tyranny) very inefficient and every decision and directive is is resisted by near half the government.

Regarding government behavior:

We have reached the point in [__________________] policy where government is like the ten-year-old boy who starts fires so that he can be lauded as a hero for helping to put them out.

Business Basics

Arnold Kling offers a very short, amusing, and insightful view of what happened to the economy and the government’s response. How true, how funny.

There are larger issues here. All businesses spend money now in order to make money in the future. Sometimes they miscalculate. Sometimes they miscalculate due to sheer foolishness, but more often the assumptions behind their calculation change: new technologies arise, public tastes change, competitors do something clever, or governments change the rules. All of these things happen all of the time, making business (and the jobs produced by business) a risky proposition. Perfectly valid business plans can be undone by events.

We don’t want to impede technological improvement or new business ideas that benefit us. We can’t do much about public taste. We can, however, realize that every change in governance harms some business and some jobs. The change may be well intentioned, even beneficial for almost everyone. Nevertheless, some are always harmed. This is why “business conservatives” prefer government to proceed slowly and cautiously. This is why there is so much concern about the message coming from Team Obama: sweeping changes are being proposed. The impact of change is being hotly debated, but one thing is certain: any change damages someone and a bad change can damage lots of people.

We are all suffering through a government induced train wreck. Maybe we should proceed with caution and at least delay the next one.