Sunday, March 31, 2013

Thoreau Notes the Two Great Faults College Lecturers Can Committ

Here: "More significantly, I appreciated the person on page 147 who complained that the lectures were basically the same as what was in the textbook.  The only complaint more common than that, in my experience, is 'The lectures are different from the textbook.'"

Why Does This Nonsense Persist?

Consider this:

"In the Middle Ages, wine was commonly drunk (at least in wine-growing areas), but it was a weak concoction and popular mainly because - unlike water - it was safe.

Did any of you ever forget a glass of wine on the counter for a couple of days? (Hey, if you haven't, then your benders just haven't gone on long enough, OK?) It gets pretty moldy, doesn't it? A weak dilution of wine in water is totally insufficient to make infected water safe for drinking. Yet people write such nonsense over and over again.

Sigh

"They do not remember what Plato said in Book Three of The Republic, that a society filled with students of law and medicine is already a sick society. Many students continue to think that more law and more medicine will cure what can only be cured by a reform of their own souls."-- Here.

Why doesn't the iPhone link appointments and contacts?

This would seem to be the most natural thing in the world: when I enter an appointment with "Bob (socialist-Sraffa-loving) Murphy," why isn't there doesn't iOS (or the calendar app) offer me the opportunity to link to the aforementioned person in my contacts? Is there some way to trigger this that I have simply been missing, or is Apple missing a very obvious app synergy here?


Risk Averse Bidders in Auctions

I am very puzzled: in a lecture course on game theory, I heard the lecturer state that "risk averse" bidders will not behave as standard theory says they should: they will bid too high since they are averse to the risk of not winning the auction.

But wait: why is that called risk averse, rather than being averse to the risk of paying too much for an item? This seems arbitrary. Any explanations?

Friday, March 29, 2013

Mountains Are *Not* Caused by Valleys!

Scott Sumner writes: "Bubbles are caused by asset prices crashes, just as mountains are caused by valleys." Sumner's contention is thatwe only see "bubbles" when NGDP crashes, and leads to a steep price decline in the asset class that we then declare to have been in a bubble.

Well, first of all, mountains aren't caused by valleys! The land surface of the Earth would not be a 29,000 plateau if not for those pesky valleys: tectonic plates collide, and lift up mountains. So the metaphor is bad, but what about the economic analysis? Sumner says:

"The 1920s and the Great Moderation both saw relatively stable NGDP growth. So why the big bubbles? Because NGDP growth crashed in 1929-30 and 2008-09. In 2008-09 NGDP growth slowed by 9% relative to trend, nothing like that happened in the 1970s. It was the crash that (partly) created the bubble. Without the crashes, we wouldn’t even be talking about the great stock bubble of 1929, or the great housing bubble of 2006."

This is a weird way of looking at this evidence. Yes, NGDP growth was stable during 1920s and the Great Moderation: so what were stock prices (20s) and home price (00s) doing soaring so much faster than NGDP? Hmm, perhaps they were in a bubble-bubble, not just a subsequent-crash-bubble? Or what about the NASDAQ? In 2000 the NASDAQ peaked at over 5100. (Inflation adjust, this would be about 6800 today.) It has doubled over the previous year. Well before 9/11, the index had sunk back well below 2000. And yet there was no drop in NGDP at all over that time. Even today, the index in price-adjusted terms is less than half of what it was at its peak.

That the NASDAQ only appears retrospectively to have been in a bubble in retrospect, due to NGDP declines, is not a very plausible story!

Thursday, March 28, 2013

Who pooped it?

When I got to my house in Pennsylvania I discovered literally hundreds of these little turds covering my driveway and front lawn. Does anyone have any idea what varmint did this?




UPDATE: My son, who walked the yard with me, heard me posting this, and said, "Not hundreds, Dad: more like a hundred."

Brooklyn Law

You know those fancy law offices you see on screen in LA Law? They've got nothing on us:



It's the garbage bulging out from under the "reception" desk that I think is the nicest feature.

If Julius Caesar's friend had been named Fay

He could've invented a famous Cajun dish.

Why?

Wednesday, March 27, 2013

Hayek, too, abandoned the lengthening of the structure of production as a meaningful concept

I must admit I have not yet tackled the Pure Theory of Capital. So I was surprised to see that Hayek had followed my lead 70 years before me, and dropped the idea of an average period of production from his capital theory:

"By Pure Theory of Capital, however, Hayek has jettisoned the average period entirely, denying both the validity of such a construction and its usefulness." -- Goodspeed, Rethinking the Keynesian Revolution, p. 122

Why Does Every Search of My Blog from My iPhone Fail?

Without fail, if I search La Bocca using the browser in my phone and the sites own search function, I always get "No results found." But from any PC, the search function seems to work fine!

How could this be? The only thing I can think of is that the browser on my phone somehow mangles the search string I type before passing it on to the site. Has anyone else tried this? What results do you get?

How Hayek solved Sraffa's own-rate problem

It turns out it is the same way that Keynes solved it:
But Hayek had indeed, like Keynes, absorbed the lessons of the Sraffa exchange, and accordingly acknowledges that whereas the rate of increase of the physical amount of anyone input invested at an earlier date and the physical amount of the same input obtained at a later date may, and indeed will, differ for any two commodities, "the value equivalence in terms of the 'numéraire' at the two dates must bear the same ratio to one another for all commodities...

This elucidation, we should note, is precisely the same as Keynes's own-rate setup in chapter 17." -- Tyler Beck Goodspeed, Rethinking the Keynesian Revolution, p. 120-1
The fact that Keynes, Hayek and Lachmann all see Sraffa's own-rate challenge as having been answered, and by the same answer that I see as meeting that challenge, gives me a fair amount of confidence I am on sound footing here!

The World of Science Is an Abstraction

"To many, no doubt, this process is simply the gradual discovery that the real world is different from what we expected, and the old opposition to Galileo or to ‘body-snatchers’ is simply obscurantism. But that is not the whole story. It is not the greatest of modern scientists who feel most sure that the object, stripped of its qualitative properties and reduced to mere quantity, is wholly real. Little scien­tists, and little unscientific followers of science, may think so. The great minds know very well that the object, so treated, is an artificial abstraction, that something of its reality has been lost." -- C.S. Lewis, The Abolition of Man

Modernism Is So Old-Fashioned!

Per Kenneth Arrow: "I am old-fashioned enough to retain David Hume's view that one can never derive 'ought' propositions from 'is' propositions."

What a weird thing to say! Hume's disjunction would have been considered nutty by most of the people living in most times and places before Hume. It is quite a bit more "old-fashioned" to recognize that one can derive oughts from ises than it is to believe the opposite.

What is individually rational can be collectively suicidal

It can be perfectly sensible for any particular couple to have only one child. But when all the couples in an entire culture does so, that culture is going extinct. If the practice continues, in twenty generations a city of a million people will only have one person left in it.

Tuesday, March 26, 2013

Roger Scruton on Same-Sex Marriage

Here.

I really don't know whether same-sex marriage is a good idea or not. What I do know is that I am often stunned by the utter childishness of the many people who think we can change this fundamental social institution and then... absolutely nothing else will be affected.

UPDATE: Another example. Sullivan says all opponents of SSM have is Bible-thumping "or a tortuous reinvention of natural law."

Sullivan is supposedly a Catholic. Why doesn't pointing to scriptural passages condemning sodomy carry any weight with him? Silence. Why is what is going on a "reinvention" of natural law rather than a use of it? Silence.Why is it "tortuous"? Silence.

This is argument by name-calling: only really mean people could possibly oppose me!

The Classical Labor Market and the Fallacy of Composition

In an economy with full employment, if I am asking too high a nominal wage for my labor, I can reduce that request and find work. That truth is behind the classical labor-market model.

That the above is true does not mean that all workers can reduce their real wage requests and find work. First of all, workers cannot directly negotiate real wages. They can only lower their nominal wage requests. And if all workers do so, this will surely lower nominal aggregate demand. Which, in turn, can lower real output, so that the new nominal wage level is still "too high," and unemployment persists.

The Solicitor General

That post must have been very different during the Kennedy administration, right?

Methodological subjectivism

What an economist should say is that "in our model we treat value as entirely subjective," not that value is entirely subjective. Methodological subjectivism is a postulate, not an empirical or a priori truth.

The Cost of Automatic Grading

We have automatic grading machines at my school. But they have a cost, I think. After hand grading 50 tests in the last couple of days, I realize that doing so gives me an intimate sense of what the students are not getting. I don't think I would garner the same knowledge even from a detailed statistical breakdown offered by a grading machine.

Monday, March 25, 2013

I understand Keynes completely now

At least his comment about how he could only understand material in written German that he to some extent already understood well. My Italian is about at that point now. When I read an Italian newspaper, I can understand a story about Obama's trip to Israel pretty well, since I know the topic already. But the articles on Italian politics I really don't get at all. I think this is just the sort of thing of which Keynes was speaking.

Endogeneity and Me, Are Pretty Good Company

In an interesting discussion of exogenous versus endogenous this money, Nick Rowe writes:

"If we are being *very* strict about terminology, things are never 'exogenous' or 'endogenous' in themselves, but only within the context of a given model. E.g. weather is exogenous in economics models, but endogenous in meteorological models."

I think Nick is being overly instrumentalist here. To me it seems perfectly accurate to say that a bird's heartbeat is endogenous to the bird, and not merely to our model of the bird, and that the arrow I shoot at the bird in order to have it for dinner is exogenous to the bird, and not merely to our model of the bird. (But that the arrow is endogenous to my plan for getting dinner.)


Of course, "the bird" is itself an abstraction from all else around it, but I assume Nick is not shooting for absolute idealism here.


(Hat tip Murphy.)

Sunday, March 24, 2013

Yo yo I'm high-tech now

So, I'm trying to dictate blog posts now using a Bluetooth headset and the voice recognition capabilities of the iPhone. So far so good, although, of course, everything needs to be checked over carefully after it's been dictated — Siri still makes a lot of errors.

Oddly enough, but I first cut when I first dictated the above sentence, what came out on my phone was "Windows still makes a lot of errors." When I tried to dictate it again, Siri stopped recording and said, "No Dave, you don't want to say that."

Buying an A and the signaling theory of higher education

I just watched a show containing a grade buying scandal. Let us say that you could get away with buying A's in your courses without any risk of getting caught. Per the signaling theory of higher education, isn't this a great way to send a signal to employers they really do care about your success? For someone who is a moral utilitarian and buys the signaling theory, is there any reason to recommend against this?

Just Where Could I Discover a Fact Like That?

For some reason my son was on the Wikipedia page for Jeff "Skunk" Baxter, formerly of Steely Dan and the Doobie Brothers, where can discover that Jeff is now a defense consultant and chair of a Congressional advisory board.

But in the talk section, someone posted a comment, questioning whether Baxter was really an original member of Steely Dan, because the poster didn't think he had played on their first album. Hmm, now where would one have to go to discover if that memory was accurate? If only there were a huge, encyclopedic web site, chock full of just such facts, where someone could go to look that up!

Saturday, March 23, 2013

An obvious case of a negative externality

Every morning, when I go to work, I see a fellow tossing advertising circulars at the brownstones in the neighborhood. In our lobby we often find 30 or 40 of them stacked up in the foyer. Almost every one of those gets thrown away. I have no doubt that the people advertising in the circular Would not do so unless they found it profitable for them to do so. However, this profit calculation takes no account of the time it takes for the residents to throw out all this rubbish, or the environmental cost in terms of carbon footprint for these things to be created.

Wouldn't banning this practice be an obvious gain for everyone?

Friday, March 22, 2013

How Labor Markets Really Work

Bob Murphy asks Daniel Kuehn:

"Do you think there are at least 1000 workers in the United States who produce more than $20/hour for their employers, yet they are only earning minimum wage?"

My guess would be: "Certainly."

Too many economists have no idea how companies hire people. I have done it at several places. Here's what happens:

Someone higher up in the company decides some task needs to be done. They give you the task. You say, "Well, OK, but I'll need a couple more programmers."

"How much will they cost?"

"Good Java programmers get around $100,000 per year."

"Hmm... can you get by with one full-timer and one part-timer?"

"Yeah, I guess so..."

"OK, do it."

Most likely, no one in the company has any real idea how much this project is worth. No one has any real idea what the value of the output of these 1 and 1/2 programmers is. All that matters is whether the higher up is pleased with the outcome of the project. And so long as her superiors are pleased, and the company as a whole makes money, things can go on this way forever.

So, my guess is that there certainly are well over 1000 workers in the United States who produce more than $20/hour for their employers, yet they are only earning minimum wage. As well as whole boatloads who earn the minimum wage but produce far less for their employers. Bob attempts to dismiss the possibility of such failures of wages to equal marginal products by saying that, if they existed, we could create "a business plan for how we can hire these 1000 (at least) people at $10/hour, and still make $10,000 in pure profit per hour."

There are at least two problems with the above attempt at a reductio:

1) Since the employers don't know (for the most part) who these people are we certainly can't either!

2) It is quite possible someone could make employer A $21 per hour, but make far, far less if employed by B. The factors of production are not homogenous and are not perfect substitutes for each other.

(Ah, [some] Austrians! This point is in the forefront of their minds when they wish to critique some interventionist scheme, but when it comes to defending the near-perfect efficiency of the market, it goes walkabout.)

The same thing applies to other factors of production as well: Where I have worked, when someone "needed" a new computer, no one in the chain of approval asked "What will its marginal product be?" And no one would have known how to answer if they had. No, we justified it because, "Carl has been here two years, and yet he has the slowest computer in the group, and he's really griping about it." And the request would get approved in good times and turned down in bad times, which is absurd in a marginalist theory of how prices are set.

Final note: I am not "anti-marginalist," any more than I am against physics models that feature frictionless surfaces. I am just noting that it is an idealization, and the real world only resembles the model in a very rough fashion.

UPDATE: Daniel Kuehn notes that the "frictions" in economics are simply other margins. Very good point: as an employer, I could try to get more and more accurate measures of my workers' marginal product. But there is a margin at which they cost of doing so exceeds the benefit. I have been a companies that ignored that truth: the whole company became bogged down in an attempt to measure productivity, and weren't doing no production!

The Most Shocking Thing about the Bakke Case

It wasn't, for me, anyone's view on affirmative action: It was that, in 1978, Bakke's B+ average was considered "outstanding"! And people with C+ averages were getting into medical school.

Thursday, March 21, 2013

Nixon's Choice of Burger...

was usually mushroom-Swiss.

I kid, of course: I mean Nixon's choice of this Burger. But wasn't perhaps Nixon himself kidding around with the rest of us a bit? He was replacing someone named Earl Warren, and he replaced him with someone named Warren Earl?!

It's Always Nice to Get Support from Thomas Nagel

As noted by Ed Feser, Thomas Nagel pins the tail on the exact same donkey I have in some recent posts:
The modern mind-body problem arose out of the scientific revolution of the seventeenth century, as a direct result of the concept of objective physical reality that drove that revolution. Galileo and Descartes made the crucial conceptual division by proposing that physical science should provide a mathematically precise quantitative description of an external reality extended in space and time, a description limited to spatiotemporal primary qualities such as shape, size, and motion, and to laws governing the relations among them. Subjective appearances, on the other hand -- how this physical world appears to human perception -- were assigned to the mind, and the secondary qualities like color, sound, and smell were to be analyzed relationally, in terms of the power of physical things, acting on the senses, to produce those appearances in the minds of observers. It was essential to leave out or subtract subjective appearances and the human mind -- as well as human intentions and purposes -- from the physical world in order to permit this powerful but austere spatiotemporal conception of objective physical reality to develop. (pp. 35-36)
Just so: The "objective world" and the "subjective world" are abstractions from the totality of experience. It is those abstractions that create the illusion of a terrible mind/body problem in need of being solved. Descartes and Galileo (and their epigones) could have made the same abstractions and not generated this problem if they had kept in mind that "the subjective" and "the objective" are merely abstract, and while useful distinctions for modern science, are in no way ultimate.

Tuesday, March 19, 2013

Markets in everything

The market is a wonderful, wonderful thing. So is a Swiss Army knife. However a Swiss Army knife is not a very wonderful thing to use for changing your baby. The idea of "markets in everything" is a form of idolatry, holding forth a single ideal as if it applied to all of human experience.

An Irony Supreme

Because of the Miranda case, when Miranda finally got out of prison (he was convicted in the retrial the Supreme Court ordered), and was murdered, his killers were read their Miranda rights.

A modern shopping list

First I pile the empties on a counter near the door. Then I photograph them:
When I get to the store, I pull out my phone and look at the photograph. Then, as I walk around the store I forget almost everything I saw in the photograph and go home without most of the things I put on the counter.

John Marshall's Magical Feat

I'm not necessarily against it, but the logic of it is essentially the following:

1) John Marshall: The Supreme Court is the ultimate arbiter of the U.S. Constitution.

2) Critic: Who says?

3) JM: The Constitution itself.

4) Critic: Hey, Article III, the one setting up the Court, certainly does not say that in so many words. On what authority are we to read the Constitution that way?

5) JM: Please pay closer attention to step 1.

It is very similar to the way the Pope became infallible.

You got a fight for your right...

to park close!

I pulled into the faculty and staff lot this morning and there was a truck hauling a dumpster sitting in the middle of the driveway between the rows of spaces. I just pulled into a space about ten back from this setup: what if he was going to back up? Easiest just to stay clear: it takes about five seconds to walk ten parking spaces, right?

Well, the woman who pulled in behind me would have none of this. She pulled up as close as she could possibly get to the dumpster, then carefully squeezed past it to the closest spot it was physically possible to reach. She was getting out of her car when... the truck hauling the dumpster moved! She climbed back into her car, started it back up, and reversed the car into a new spot that previously had been blocked... and was about three spots closer to the nearest buildings. At this point, I was looking back, already arriving at the cafeteria. She was literally parked about ten or fifteen seconds walking time closer to the buildings, and it had taken her an extra two or three minutes to achieve that feat.

What is going on? Do people think St. Peter allows entry to heaven based upon who got the closest parking spots during life?

A Tip on Makeup Quizzes

It is always a pain-in-the-neck to generate a new quiz for that one student whose car broke down, grandma died, etc. and missed the quiz on the date it was given. But you can make it easier by realizing that you don't need to change everything on a multiple choice makeup quiz. You only need to change enough so that the student who is trying to get by solely based on knowledge of the first quiz is unsure of when you have and haven't, say, reversed the meaning of a question, or when a change in the facts of an example change the correct answer. So, turn a few questions into their opposite by, e.g. changing "demand increased" into "demand decreased," introduce a couple of brand new questions, and change the facts of a few examples, e.g., turn "bananas and oranges" into "wheat and rice."

If the student doesn't know the material, this will make it essentially a brand new quiz. The better prepared student will recognize the shifts as minor, but so what? You want that student to do well.

Monday, March 18, 2013

That's Not What *I* Mean by Anarchy!

"When I say anarchy, I don't mean a situation in which there is no ruler and a bunch of groups fight to become the ruler. What I mean is there is no ruler and everyone peacefully gets along!"

Yes, this vision is lovely. I understand that what we typically actually see when there is no ruler is different from what you want: (almost) no one is asking for civil war. But if, in fact, that's what we will get, it doesn't really matter if anyone asked for it or not.

Sunday, March 17, 2013

Keynes was an "Austrian" economist

Today's neoclassical mainstream tends to look at the economy as a series of shifts from one equilibrium state to another. Of course, all of the best neoclassicals recognize this as an idealized abstraction, but they largely think of it as an abstraction that largely captures what really occurs in an economy.

Keynes, in common with Austrian economists, saw that while the market process generates a tendency towards equilibrium, it is never, or almost never, in an actual equilibrium state. Market participants do not have before them a neat little supply-and-demand diagram telling them just what the new equilibrium price will be when supply or demand changes. Instead, they must engage in a discovery process searching for the new "correct" price. Keynes's "vision" was based upon his realization that, in such uncertain conditions, buyers and sellers would be likely to make quantity adjustments as well as price adjustments to the new situation. (In contrast to the neoclassical equilibrium-always model, where they instantly arrive at the new, equilibrium price, and then read their quantity to be supplied or demanded from the model.) Furthermore, those quantity adjustments potentially could produce a positive-feedback loop, where one supplier's quantity-adjustment downward prompts other suppliers to similarly reduce their quantity supplied, which would induce the initial supplier who reduces his quantity supplied to reduce it yet again... which could prompt yet further quantity reductions from other suppliers.

There is nothing "unpraxeological" in the process that Keynes posits. No one in his model is acting contrary to their own self-interest, as they see it. No, what has happened is that market actors' expectations have fed off of each other, so that one business's anticipation of lower sales next month causes it to cancel orders from a supplier, who therefore anticipates lower sales himself, and thus cancels orders from his supplier, and so on.

The neoclassical model of markets with perfect competition is a very useful tool of thought, a reality which neither Keynes, nor Mises, nor Hayek, nor Kirzner, etc. ever denied. In the case of a market in which very many buyers and very many sellers of very large numbers of a commodity of which each unit is essentially identical to every other unit--for instance, shares of Apple stock traded on an exchange--that model will likely be a very good approximation of what really occurs in that market. But when those conditions do not hold, for instance, in the market for real estate, where no two buildings are ever really identical, where the neighborhoods in which they are located are never really identical either, and in which transaction volume is very low compared to that of a publicly traded stock, the perfect competition model will be a much less faithful portrayal of what actually happens. Sellers will frequently make offers significantly higher or lower than "the equilibrium price," and buyers will, similarly, frequently accept offers that are "too low" or reject offers they "ought" to have accepted. Keynes's originality consisted chiefly in noting that such "false trading" could feed upon itself and drive a market further from equilibrium. Neither Mises's nor Hayek's nor Kirzner's understanding of the market process rules out such a possibility!

I suggest that Austrians cease trying to write off Keynes as some sort of economic nitwit, and instead acknowledge that his understanding of the market process is very similar to theirs. Having done so, the real contested ground can then be seen more clearly: How are important are quantity adjustments compared to price adjustments in markets in disequilibrium? If quantity adjustments are a significant factor in disequilibrium conditions, how likely is it that they will result in the positive* feedback effects that Keynes postulated? If such positive feedback is an important part of contemporary economies, is Keynes correct in believing that government and/or central bank action can dampen them?


* "Positive" here means that the effects self-amplify, not that they are to be applauded!

Saturday, March 16, 2013

A strange anarchist argument against Hobbes

Civil War England of Hobbes time, the anarchist says, was not actually an example of anarchy. You see, he continues, the factions fighting were each trying to establish themselves as the state.

Well yes, that is what occurs under anarchy. How in the world is that supposed to be a refutation of Hobbes?

Does Austrian Business Cycle Theory Depend Upon a Lengthening of the Structure of Production?

No, it does not:

"But now the drop in interest rates falsifies the businessman's calculation. Although the amount of capital goods available did not increase, the calculation employs figures which would be utilizable only if such an increase had taken place. The result of such calculations is therefore misleading. They make some projects appear profitable and realizable which a correct calculation, based on an interest rate not manipulated by credit expansion, would have shown as unrealizable. Entrepreneurs embark upon the execution of such projects. Business activities are stimulated. A boom begins.

"The entrepreneurs embark either upon lateral expansion of production (viz., the expansion of production without lengthening the period of production in the individual industry) or upon longitudinal expansion (viz., the lengthening of the period of production). In either case, the additional plants require the investment of additional factors of production." -- Mises, Human Action, p. 550-553

The evidence above is decisive: "in either case," whether the structure of production does or doesn't lengthen, the same process sets in.

How Scott Sumner Will Triumph, and That Triumph Will Be His Defeat

He will triumph because, in the past, stabilizing NGDP would have been a cure for many macroeconomic woes.

This will be his ultimate defeat, because once NGDP is the target of policymakers, it will no longer function as it did in the past.

An analogy: a high fever has been a good sign that someone is very sick from an infection and might die soon. If the fever subsides, that has been a good sign the person is getting better.

But, if people begin to target the patient's temperature, then very sick patients will be put in ice water, etc. The temperature will cease to function as an accurate gauge of health precisely because it is now being targeted directly.

A Good *thought* Relevant to the Natural Rate of Interest Debate

"The market rates of interest on loans arc not pure interest rates. Among the components contributing to their determination there are also elements which are not interest." -- Mises, Human Action, p. 536

Note: I did not say "some good sentences" -- the sentences are not particularly eloquent. It is the thought behind them that is important.

Friday, March 15, 2013

The Worst Thing That Can Happen to the Church?

"BERGOGLIO: It is what De Lubac calls «spiritual worldliness». It is the greatest danger for the Church, for us, who are in the Church. “It is worse”, says De Lubac, “more disastrous than the infamous leprosy that disfigured the dearly beloved Bride at the time of the libertine popes”. Spiritual worldliness is putting oneself at the center. It is what Jesus saw going on among the Pharisees: “… You who glorify yourselves. Who give glory to yourselves, the ones to the others.”

This is exactly what my primary Buddhist teacher, Chogyam Trungpa, warned about all the time.

Many paths up the sides, but one mountain.

(Hat tip Dreher.)

Paleofantasy

Europeans ate grains 30,000 years ago. More here.

Garrison and the lowering of interest rates

(Part three of an examination of Garrison's business-cycle  theory as an over-investment theory: part two is here.)

It is true that lowering of the interest rate will raise the net present value of a long-term investment by more than it will reduce the net present value of a short-term investment. However, this does not mean that a lowering of the interest-rate will make it more likely that I will undertake a new long-term investment the new short-term investment. The fact is, what I will look at is the yield on my Investment versus my cost of borrowing to finance the investment. If the investment returns 5%, the interest rate was 6%, and it is been lowered to 4%, the investment now looks profitable to me, whether the investment is a one-year investment or 30 year investment. Thus, what we will see is more investment projects being undertaken, whatever the length of the project. (And of course, less saving.)

But doesn't the greater increase in the net present value of a long-term investment make them more attractive than short-term investments at the new lower interest rate? No, it does not. Why? Because I potentially can continually re-invest my one-year investment for 30 years and achieve the same stream of cash flows as I would on the 30-year investment, and the NPV of that stream, since it just is the same stream, will be the same as for the 30-year investment.

Of course, if I choose the one-year investment, I risk not being able to reinvest at 5%. On the other hand, if I choose the 30-year investment, I risk the interest rate going up and the investment becoming unprofitable. Theoretically, therefore, it is indeterminate whether I will choose shorter or longer term investment.

Thus what we can expect to see at the new, lower interest rate is a number of investments being undertaken, of whatever maturity length, that would not have been undertaken at the former, higher interest rate. Now, this is exactly what Keynes liked about low interest rates: it would prompt greater investment spending. But he was considering situations in which the money interest rate was above the natural interest rate, and therefore ought to be lowered. (And, thus, too little investment combined with too much saving.)

Hayek, of course, was looking at the opposite situation, where the money interest rate is lower than the natural interest rate. Garrison is certainly within this Hayekian tradition. My point here, however, is that I think his formulation of pushing "beyond the PPF" is superior to Hayek's, and that what actually occurs during the boom is that too many new investment projects are launched, of whatever length.

Thursday, March 14, 2013

Workers and employers cannot reach real wage bargains

If the lowering of nominal wages creates deflation, the real wage may remain high despite the lower nominal wage. In any case, it not determined exclusively by wage bargaining between employer and employee.

This point, of course, is from Keynes.

Wednesday, March 13, 2013

Keynes versus the Classicals

'In Keynes' theory, then, the homeostatic mechanisms postulated by the classics are neither "out of order" nor just missing.' -- Leijonhufvud, On Keynesian economics economics of Keynes, p. 161

Theory hiding in the aggregates, part two

'Aggregation implies abstraction — certain particularistic features of the elements of the aggregates are suppressed, while "representative" characteristic subsume exclusive significance. The aggregation procedure is, therefore, as important in determining the properties of an economic model as the assumptions made about relationships between the aggregates. Yet, economists eventually pay far more attention to specifying and defending the qualitative relationships among the aggregates of their models than to giving the reasons for the particular choice of aggregates. The aggregates used tend to become professional conventions which are seldom examined.' -- Leijonhuvud, On Keynesian economics and the economics of Keynes, p. 111


Filming in front of my building

I think what they're interested in is catching a shot of me at 6 AM, to go along with the news clip saying, "Gene Callahan actually wakes up and goes to work at 6 AM!"





Tuesday, March 12, 2013

Reactionary!

I've written here before that the word "reactionary" acts as a warning sign to me that the person using it probably shouldn't be taken seriously on the point in question. I saw an example of that today listening to a history of the Supreme Court by Prof. Peter Irons of USCD. Commenting on the Supreme Court case of Adkins versus Children's Hospital 1923 Irons says that the decision of the court to strike down a minimum-wage law was "so reactionary that even Chief Justice Taft dissented."

Now in the context of Marxist historical doctrine, the word "reactionary" makes some sense. But taken out of that context it is really little more than an equivalent of "yuck!" One calls whatever policies or positions that stand in the way of a leftward-moving agenda "reactionary." What is ironic in this case is that, of course, the legal regulation of market prices far, far predates the laissez-faire doctrine that the court was using in making their decision. While Prof. Irons holds that the court was "going back" to the late-19th century in making their decision, the kind of law he's supporting in this case is actually "going back" to the Middle Ages. Therefore it was far more reactionary, if one wishes to use that kind of silly terminology, than was the court's decision.

The above constitutes no argument against minimum-wage laws, of course, once one abandons the fatuous notion that history is always moving forward in some "progressive" fashion.




But If You Can't Ever Actually Find Any Truth...


This poster implies that anyone who claims to have stumbled upon any truths is to be avoided. But, if finding the truth is illegitimate, what is the point of seeking after it?!

Monday, March 11, 2013

Why Keynes's Work Was a "General Theory"

"The revolutionary impact of Keynesian Economics on contemporary thought stemmed in the main, we have argued, from Keynes' reversal of the conventional ranking of price and quantity velocities. In the Keynesian model price velocities are not infinite; it is sometimes said that the implications of the model result from the assumption that money wages are 'rigid.' This usage can be misleading. Income-constrained processes result not only when price-level velocity is zero, but whenever it is short of infinite." -- Axel Leijonhufvud, Keynesian Economics and the Economics of Keynes, p. 67

In other words, the classical theory of markets, as we still present it to students today, posits that when faced with a disequilibrium price, the market will make infinitely fast price adjustments, so that no quantity adjustments will ever occur. That, certainly, is a very special theory: in reality, price adjustments can never be infinitely rapid, so there will always be some quantity adjustments as well: Keynes has, indeed, put forward a more general theory, in which the case of infinitely fast price adjustments is correctly understood a special case. As Leijonhuvud notes, many modern "Keynesians" have ignored this fundamental aspect of Keynes' work, attempting to fob off "price rigidities" on labor unions, minimum wage laws, long-term contracts, and so on, so that they can still employ micro-models that include infinitely fast price adjustments whenever such barriers are not present. They have thrown out the baby and kept only the bathwater.

A note to Austrians: No disciple of Mises' analysis of the market process should differ from Keynes in this regard: instead, they ought to acknowledge that, whatever the differences in policy implications, Keynes and Mises were very similar in their critiques of the "equilibrium always," achieved solely by means of price adjustments, school of economics.

How Say's Law May Encounter Difficulties

"The fact that there exists a potential barter bargain of goods for labor services that would be mutually agreeable to producers as a group and labor as a group is irrelevant to the motion of the system. The individual steel producer cannot pay a newly hired worker by handing over to him his physical product (nor will the worker try to feed his family on a ton-and-a-half of cold-rolled sheet a week)." -- Axel Leijonhufvud, Keynesian Economics and the Economics of Keynes, p. 90

Or, on the Other Hand...



Perhaps a mind is actually like a house, and if you leave it open all the time, all sortsa varmints gonna wander in. Who wants a mind full of opossums and squirrels and pigeons and what not?

Op. Cit. = Pain in the Butt

People don't use the op. cit. form in referencing others' work much anymore: thank God! I'm reading Leijonhufvud, and I find "Arrow op. cit. pg. 54." I've scanned back about 30 pages so far and not found the op. being cit.ed... but of course, perhaps I missed it, so when I get back to page 1 I will have to start over.

Why in the world did this style ever prevail?

The Life of the Law

"The Life of the law has not been logic. It has been experience.” -- Oliver Wendell Holmes, Jr.

Sunday, March 10, 2013

Is Garrisonian Over-Investment Theory Still "Austrian"?

I suggested here that Roger Garrison's business cycle theory should be disentangled from its Hayekian-triangle encrustations and show itself as a theory of how low interest rates can produce temporary movements beyond the PPF (where the PPF is understood to represent sustainable combinations of investment and consumption production). What that would do would be to free the theory up from its (I think) unnecessary ties to the shaky notion of a "lengthening structure of production." Long before the Cambridge capital controversy highlighted the reswitching problem, no less an esteemed Austrian than Mises had declared, "The 'average period of production' is an empty concept" (Human Action, p. 522).

So if we eliminate that feature and rely instead on Garrison's idea of movements beyond the PPF, is there something distinctively "Austrian" left in the theory? I think so: it is the notion of a capital structure. We must take that into account in order to answer the question of why, having moved temporarily beyond the PPF during a time of artificially low interest rates, we do not simply fall back to the PPF, or even a new higher PPF, when they are raised. The latter is what we might expect in a model with only a homogenous pool of capital, K: the period of "unsustainable" investment would still leave us with more capital than we had before the start of the boom, and we'd find ourselves on a higher PPF when the boom ended.

But if we take the capital structure seriously, we can see that the movement "beyond the PPF" was in some ways an illusion. Certain very visible things were produced in great quantities, while other, less visible ones were neglected. For instance, consider a software company that, during the boom, releases new programs at a rapid rate, in response to high customer demand. Its sales soar, and it appears this productivity represents a great boost to the economy's capital stock. But if the company has achieved this production by neglecting to build maintainable software, by cancelling employee vacations, and ignoring the need for employee training, then at some point this situation will be revealed: new versions can't be finished because of the tangled mess of code in the rushed versions, if key programmers are burning out and quitting, and if the lack of training means staff ignorance of developing standards, then clearly that burst of productivity was not all it seemed to be: the company is likely to suffer through a "slump" as it tries to correct the problems it created during the boom.

But why would interest rates that are too low tend to produce such situations? Well, you will have to wait for our next post to find out the answer to that question.

Saturday, March 09, 2013

Almost Done with *That* Project

My wife said, "Let's put on a movie."

"OK."

"But first I have to finish the laundry."

"All right then. I'll keep reading the Internet. I think I'm almost done."

"With what you're reading tonight?"

"No. With the Internet. I've read just about all of it. I think I have just a couple of more pages left. Let me go see."

Annoying Cowen Tics

I've already complained about Cowen using commas as sentence separators, which he does all the time, if you're beginning a brand new sentence, you should use a period, he seems to do this for no apparent purpose at all.

But "sentences of interest" or "very good sentences" is really starting to grate on me as well. First of all, it's not like it is usually really well-constructed sentences he is noting; it is the ideas that are of interest. But secondly, the last two times he did this it was just a single sentence, and yet in the post title "sentences" is still plural.

Theory Hides in Aggregates

"it sometimes proves difficult to trace... theoretical conflicts to assumptions which have been explicitly stated. This is partly because we habitually concentrate on making those assumptions explicit which specify the relationships between the variables actually appearing in the model. The immediately antecedent stage in model-construction, i.e., the selection of aggregates, is often the stage where implicit theorizing enters in.

"The behavioral assumptions underlying a particular mode of aggregation are, however, just as important as the behavioral relationships assumed to hold between the variables defined." -- Leijonhufvud, On Keynesian Economics and the Economics of Keynes, p. 38-39

Friday, March 08, 2013

Obama's Best Friend?

Mises Sought to Unite Value Theory and Monetary Theory

As did...

"Keynes envisioned and grand synthesis of the theory of value and the theory of money, as we have seen" (Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes, p. 31).

A Notable Economist Who Recognized the Importance of Cantillon Effects

His name started with "John Maynard," and ended with "Keynes":

"The basic contention [in the Treatise] is that a monetary injection (for example) will not impinge with the same force on all markets and all prices." -- Axel Leijonhuvud, On Keynesian Economics and the Economics of Keynes, p. 23

Thursday, March 07, 2013

Garrison's Business Cycle as an Overproduction Theory

In my continually rethinking of cycle issues, I have come to the conclusion that Roger Garrison's cycle theory ought to liberate itself from its Hayekian triangles and stand on its own as a theory of a temporary movement beyond the production possibilities frontier.

Garrison defines his PPF as a sustainable combination of output. How can we move beyond that? A story as simple as this will do: Let's say we own a factory that produces some investment good. Our normal schedule is to run the machines in the factory 20 hours per day, allowing four huors for them to cool down and to be repaired. But the good we produce becomes in great demand for some consumption good it is used to produce. We could invest in more machines, but instead we decide to "make hay while the sun shines": we run our machines 24 hours a day, with no maintenance or cool down periods.

For some time, the production of both investment and consumption goods may rise. That is the "boom." But this cannot last: after two months, all of our machines begin breaking down. That, of course, is the "bust."

How do the interest rate and the capital structure relate to this simple story? That is the subject of our next post.

By Left We Mean...

That other left, the one to your right:

Green Beans?

Yes, the short,round kind.

Wednesday, March 06, 2013

OK, *Now* Explain This

A while back I wrote that I was curious about restaurants and so forth that have single seat toilets but still segregate them by sex. Commentator Scott responded that this was part of the natural order of things, and people would feel very uncomfortable sharing a public toilet with those of the other sex... despite the fact we all do this in our homes, and on trains, and airplanes.

Well, today, I was in such a restaurant and the men's room was occupied. A waiter nearby told me, "Just use the women's room!"

So, they have signs up saying "Men's" and "Women's," even while encouraging patrons to use whichever they want.

Explain that, will you!


Hooray for Rand Paul

Here.

Soon a certain friend of ours will doubtlessly argue that it is humanitarian for the government to use drones to kill Americans as they drive home from work or play softball, and so Paul should just stop being a pest.

UPDATE: He beat me to it.

If Obama begins arresting people for criticizing these policies, I'm quite sure Kuehn will tell us he can "read the constitution for himself" and that it certainly doesn't prevent a president from shutting up nuisances.

Does Lachmann Make a Case for Technical Analysis Here?

Technical analysis hasn't much of a reputation in academic circles, having been compared to astrology, but Lachmann seems to make a case for why it might be effective, although the following passage never mentions technical analysis explicitly:
Let us suppose that on a market a 'set of self-consistent expectations' has had time to crystallize and to create a conception of a 'normal price range'. Suppose that any price between £95 and £110 would be regarded as more or less 'normal', while a wider range of prices, say from £80 to £125, would be regarded as possible. We thus have two ranges, an 'inner range' from 95 to 110 reflecting the prevailing conception of 'normality', and an 'outer range' associated with what is regarded as possible price change. Many economists have started their study of expectations with the notion of a 'range', usually in the form of a probability distribution, but only to discard it at the next moment in favour of a point, a 'certainty-equivalent', 'to substitute for the most probable prices actually expected with uncertainty equivalent prices expected with certainty'. By contrast, we shall endeavour to show that the location and motion of actual prices within our ranges are of crucial importance for the formation of expectations, and that by compressing the range to a point we should lose the very frame of reference within which actual price changes can alone be meaningfully interpreted and shown to be relevant to the formation of expectations.

II.39
What is the significance of our two ranges for the formation and revision of expectations?
II.40
As long as actual prices move well within the inner range, between, say, 96 and 109, such price movements will probably be regarded as insignificant and due to random causes. In fact, where the 'normality' conception is strongly entrenched, it will be very difficult for the price to pass the limits. For as soon as the price approaches the upper or lower limit of the inner range, people will think that the movement 'cannot go much farther' and, anticipating a movement in reverse, will sell (near the upper limit) or buy (near the lower limit). In such a situation 'inelastic expectations' will tend to 'stabilize' prices within the inner range.

II.41
But suppose that in spite of sales pressure near the upper, and buying pressure near the lower limit, price either rises above 110 or falls below 95. Such an event will sooner or later give rise to second thoughts. As long as actual prices move within the outer range, between 110 and 125, or 80 and 95, it is true, nothing has happened which was not regarded as possible. But the more thoughtful market operators will take heed. The mere fact that in spite of the heavy 'speculative' pressure encountered near the limits of the inner range, and engendered by inelastic expectations and the sense of the 'normality' of the inner range, price could pass these limits at all is a pointer to the strength of the forces which must have carried it past such formidable obstacles. Such a movement can hardly be due to random causes.

II.42
But the force that carried the price past the limits, while strong, need not be a permanent force. It may spend itself sooner or later. The market will therefore judge the significance of price movements within the outer range by the supplementary criterion of the time factor. If prices relapse soon and return to the inner range this will of course confirm the prevailing notion of normality. But if they stay within the outer range, gradually opinion will swing round. First some, and then others, will come to revise their notion of 'normal price'. Such revision will express itself in a new willingness to buy at a price, say 118, at which formerly one would have sold, or to sell at a price, say 88, at which formerly one would have bought. This means that a price movement, once it has been strong enough to overcome resistant pressure at the limits of the inner range, and reached the outer range, will probably sooner or later be carried further by the very speculative forces which formerly resisted it. This is readily seen if we reflect that the sales and purchases near the limits must have been at the expense of normal stocks, so that a price of 115 would probably now find the market with low stocks, and a price of 90 with an accumulation of excess stocks which are now a mere relic of the unsuccessful speculation of the 'normalists'. A fast movement within the outer range may therefore be just as much due to re-stocking (positive or negative) as to the operation of more permanent forces. This is why in such a situation the market keeps a close eye on stock variations. In fact, in dynamic conditions price movements have always to be interpreted with an eye on the 'statistical position' of the market which thus becomes a second supplementary criterion for diagnosis

II.43
Once the price passes the limits of the outer range, rises above 125 or falls below 80, an entirely new situation faces us. The market, shocked out of its sense of normality, will have to revise its diagnosis of the permanent forces governing a 'normal situation'. It must now become clear to everybody that the hypothesis about the constellation of fundamental forces which formed the basis of our range structure has been tested and has failed. But while the failure of an experiment may invalidate a hypothesis, it does not by itself suggest a new one. It follows by no means that the really operative forces will be recognized at once. That must depend on the insight, vigilance, and intelligence of the market. Experience shows, for instance, that an inflation is hardly ever recognized as such in its initial stages, at least in a society which has no prior experience of it. Almost invariably, at one point or another in this early phase, people will think that prices are already 'too high', will defer purchases and postpone investment plans. In this way, they will, by their very failure to understand the modus operandi of the fundamental force, mitigate its impact for a time by reducing 'effective demand'. And if, as is not impossible, the inflation stops early enough, they may be right after all! But it is more likely that they will be wrong. And in so far as their action entails the undermaintenance of capital, the ultimate results for society may well be disastrous.

Monday, March 04, 2013

Steak on the Eye?

I was watching Don Matteo the other night. The protagonist receives a blow to one eye that leaves it raw and swollen. His housekeeper brings a steak out of the fridge... and he slaps it on the wound! Oy vey.

First of all, steak is good to eat... but not after its been on a raw sore. Even worse, though, is that the reason we cook steak is... bacteria. Uh-huh, nothing better for a raw sore than to have a festering boatload of bacteria pressed up against it. After the steak, Don, maybe try a baby's soiled diaper... or something like that.

The punctuational theme for this post is... ellipses.

Sunday, March 03, 2013

We're Number 91! We're Number 91!

Or so Amazon was telling me today, at least in the category "Metaphysics"! (Metaphysics looks like a complete holdgepodge to me.)

Archers Worked for the Scythians, So...

Perhaps they would have worked against the Wermacht as well?

Noahopinion details an interesting debate between Robert Waldmann and David Glasner. What I find most fascinating is that neither of them seems to consider the true state of affairs: there is no single, simple truth about whether or not monetary policy works at the zero lower bound. It may have worked in Ruritania in 1968 and utterly fail in Strackenz in 1988. Why? Well, for one thing, expectations are a key factor in all economic processes. People learn, and on the basis of their learning form new and different expectations than they had before. Faced with those new expectations, a policy that worked perfectly well in one time and place may fail utterly in another.

The social sciences really are different than the physical sciences.

Saturday, March 02, 2013

The Perversity of Airline Pricing

My wife bought my son a ticket from New York to London to Lisbon for $850. She then tried to get a ticket for herself for just the London to Lisbon leg, since her employer would fly her to London. If the whole 4400 mile trip cost $850, how much do you think that last 984 miles will run you?

$1100.

Well, at least on American Airlines, which is where she got my son's ticket. But she noticed the last leg was operated by British Airways. So she tried again with them.

$300.

The exact same seat on the exact same flight, purchased on the exact same day, was almost 300% more expensive purchased from one airline than from another.

Yes, Virginia, There Is a Unique Natural Rate of Interest

"Fisher, himself, in Appreciation and Interest (1896) had introduced something like an own-rate analysis in discussing how the same real rate could be expressed equivalently as different nominal rates, depending on the choice of numeraire or unit of account; Keynes’s analysis in chapter 17 of the General Theory is merely a generalization of Fisher’s analysis, leading to a similar conclusion, that a unique real rate can be expressed equivalently in terms of many different nominal rates, each one depending on a different choice of numeraire or unit of account. So although it is possible to identify a unique real natural rate of interest, there is no unique nominal natural rate of interest, because, as Fisher certainly understood, the choice of a numeraire rising in value over time would imply a lower nominal interst rate than the choice of a numeraire stable or falling in value over time." (Emphasis mine.) -- Glasner and Zimmerman, "The Sraffa-Hayek Debate on the Natural Rate of Interest"

Now, what I did in this post was demonstrate how that unique real rate could be "pried out" of the various nominal rates.

When Bob saw the paper quoted above, he made a fuss over Glasner and Zimmerman's statement in the abstract -- was this all he read? -- that "Thus, the natural rate of interest, on Keynes's analysis in the General Theory, is well-defined, at least up to a scalar multiple reflecting the choice of numeraire."

So here is where we stand, by my lights, by analogy:

Hayek: If the central bank sets Gene's weight above Bob's weight, we will get a boom and bust.

Bob: What do you mean, "Bob's weight"? Bob's weight in grams, or pounds, or stones, or solar masses, or proton masses? Those are all different numbers!

Lachmann, Callahan, Glasner, Zimmerman: Just pick one scale. Then Gene's weight in that scale shouldn't be set above Bob's weight in that scale. Furthermore, all we need is the right multiplier and we can move the discussion into any other scale you want.

Friday, March 01, 2013

Wicksell-Keynes-Hayek

"Hayek and Keynes could be said to have merely been theorizing on opposite sides of the same Wicksellian coin." -- Goodspeed, Rethinking the Keynesian Revolution, p. 119

I had been groping towards this conclusion myself: Keynes is concerned with what happens when the money rate of interest is above the natural rate, and Hayek with what happens when it is below the natural rate.

This Should Drive Sales...

Through the roof, from a copy per month to as many as two copies per month!

Current review queue

Pearce: British Journal for the History of Philosophy Deneen: The American Conservative Chao-Reiss: Computing Reviews