Showing posts with label Hayek. Show all posts
Showing posts with label Hayek. Show all posts
Saturday, January 7, 2012
Wednesday, October 19, 2011
Sunday, May 1, 2011
Saturday, March 5, 2011
Wednesday, January 5, 2011
What is economics good for?
EXCERPTS:
"So the fact that economists did not foresee the Great Recession with any precision and have failed to model accurately the recovery does not mean that economics or even macroeconomics is worthless. My claim is simply that we should recognize the limits of reason in analyzing complex systems with millions of decision-makers, numerous feedback loops, institutional features (synthetic CDOs, the repo market, the willingness of the Fed to bail out bondholders) that are difficult to model in tandem with the outcomes we care about. Finally, there are important variables that we cannot observe directly such as expectations, anxiety, confidence, overconfidence and so on.
So what is economics good for? It’s good for organizing your thinking. It helps you know where to look for causal elements even if we cannot measure their precise contribution or how to relative weights of factors that pull in opposite directions. Economics helps us understand the relationship between the money supply and a general rise in the price level, between inflationary expectations and nominal interest rates, between expectations of the future and the willingness to invest, between policies that reduce prudence and a rise in imprudent investing. These are all things we understand better than we did 100 years ago partly because we have thought about them a lot, partly because of correlations in the data that we might view as sufficiently close to natural experiments, partly from armchair reasoning and partly from theoretical models of varying degrees of complexity.
We can’t measure any of these relationships with great precision, but we understand something and sometimes a lot about the direction that things are likely to go if something changes but nothing else does. Those are useful but modest gains in understanding. But they do not reach the level of what the media expects economists to be able to explain such as predicting the net impact of NAFTA on the US economy and the well-being of Americans, or how many jobs were created by the stimulus package of 2009. Unfortunately, economists do answer these questions with numerical precision as if they were physical scientists. My argument is that such answers are scientism and intellectually bankrupt.
Perhaps most importantly, economics can often remind us of the full range of effects of a particular policy, what Bastiat called the seen and the unseen. This is very valuable. Is it science? I don’t care. It’s a very powerful way of organizing your thinking about what happens when something changes in a complex system. Economics inevitably makes you aware of unintended or what might better be described as non-obvious consequences of a particular change.
Finally, economics is good for generating humility and preventing hubris. Remember the Hayek quote: "The curious task of economics is to illustrate to men how little they really know about what they imagine they can design."
"So the fact that economists did not foresee the Great Recession with any precision and have failed to model accurately the recovery does not mean that economics or even macroeconomics is worthless. My claim is simply that we should recognize the limits of reason in analyzing complex systems with millions of decision-makers, numerous feedback loops, institutional features (synthetic CDOs, the repo market, the willingness of the Fed to bail out bondholders) that are difficult to model in tandem with the outcomes we care about. Finally, there are important variables that we cannot observe directly such as expectations, anxiety, confidence, overconfidence and so on.
So what is economics good for? It’s good for organizing your thinking. It helps you know where to look for causal elements even if we cannot measure their precise contribution or how to relative weights of factors that pull in opposite directions. Economics helps us understand the relationship between the money supply and a general rise in the price level, between inflationary expectations and nominal interest rates, between expectations of the future and the willingness to invest, between policies that reduce prudence and a rise in imprudent investing. These are all things we understand better than we did 100 years ago partly because we have thought about them a lot, partly because of correlations in the data that we might view as sufficiently close to natural experiments, partly from armchair reasoning and partly from theoretical models of varying degrees of complexity.
We can’t measure any of these relationships with great precision, but we understand something and sometimes a lot about the direction that things are likely to go if something changes but nothing else does. Those are useful but modest gains in understanding. But they do not reach the level of what the media expects economists to be able to explain such as predicting the net impact of NAFTA on the US economy and the well-being of Americans, or how many jobs were created by the stimulus package of 2009. Unfortunately, economists do answer these questions with numerical precision as if they were physical scientists. My argument is that such answers are scientism and intellectually bankrupt.
Perhaps most importantly, economics can often remind us of the full range of effects of a particular policy, what Bastiat called the seen and the unseen. This is very valuable. Is it science? I don’t care. It’s a very powerful way of organizing your thinking about what happens when something changes in a complex system. Economics inevitably makes you aware of unintended or what might better be described as non-obvious consequences of a particular change.
Finally, economics is good for generating humility and preventing hubris. Remember the Hayek quote: "The curious task of economics is to illustrate to men how little they really know about what they imagine they can design."
Thursday, July 22, 2010
Wednesday, June 23, 2010
Hayek Has a Hit - Real Time Economics - WSJ
EXCERPTS:
"Mr. Hayek’s book is no beach read. Rather, it’s dense polemic against socialism that argues that centralized planning by the government will inevitably lead to an oppressive state. Mr. Hayek wrote it while living in England in the early 1940s out of concern that a shift toward collectivism there would give rise to something akin to Nazism.
***
A member of the so-called Austrian school of economics, Mr. Hayek believed that the economy was simply too complex for the government to attempt to manage its ups and downs. He argued that economist John Maynard Keynes’s recommendation that government spend money to allay an economic downturn could actually make the downturn worse, as well as lead to an inflation problem later.
... Late last year George Mason University economist Russell Roberts helped put together a rap video that pitted Mr. Keynes against Mr. Hayek that so far has garnered over a million hits on YouTube.... Mr. Roberts, a libertarian who runs the economics blog Café Hayek with colleague Donald Boudreaux, says he’s encourage by the renewed interest in Mr. Hayek.
“There’s been very large growth in government and very large growth in the deficit – it’s alarming,” he says. “I don’t know if we’re on the road to serfdom but we may be on the road to Greece, which is scary enough.”
Among most academic economists, however, Mr. Hayek’s ideas about how economy responds to government intervention have held little sway. His major contribution to the field has been the idea that prices convey crucial information about supply and demand, and that government attempts to manage prices – like the price controls put in place by the Soviet Union and its satellites – lead to the overproduction of some items, while others end up in short supply.
The rush of orders [for Hayek's book] caught Hayek publisher The University of Chicago Press short of copies.... He anticipates that as many as 120,000 copies of the Road to Serfdom will be sold this year, up from about 27,000 last year, and 7000 to 8000 a year before the financial crisis struck in fall 2008.
"Mr. Hayek’s book is no beach read. Rather, it’s dense polemic against socialism that argues that centralized planning by the government will inevitably lead to an oppressive state. Mr. Hayek wrote it while living in England in the early 1940s out of concern that a shift toward collectivism there would give rise to something akin to Nazism.
***
A member of the so-called Austrian school of economics, Mr. Hayek believed that the economy was simply too complex for the government to attempt to manage its ups and downs. He argued that economist John Maynard Keynes’s recommendation that government spend money to allay an economic downturn could actually make the downturn worse, as well as lead to an inflation problem later.
... Late last year George Mason University economist Russell Roberts helped put together a rap video that pitted Mr. Keynes against Mr. Hayek that so far has garnered over a million hits on YouTube.... Mr. Roberts, a libertarian who runs the economics blog Café Hayek with colleague Donald Boudreaux, says he’s encourage by the renewed interest in Mr. Hayek.
“There’s been very large growth in government and very large growth in the deficit – it’s alarming,” he says. “I don’t know if we’re on the road to serfdom but we may be on the road to Greece, which is scary enough.”
Among most academic economists, however, Mr. Hayek’s ideas about how economy responds to government intervention have held little sway. His major contribution to the field has been the idea that prices convey crucial information about supply and demand, and that government attempts to manage prices – like the price controls put in place by the Soviet Union and its satellites – lead to the overproduction of some items, while others end up in short supply.
The rush of orders [for Hayek's book] caught Hayek publisher The University of Chicago Press short of copies.... He anticipates that as many as 120,000 copies of the Road to Serfdom will be sold this year, up from about 27,000 last year, and 7000 to 8000 a year before the financial crisis struck in fall 2008.
Paul Samuelson Misread Hayek - Boudreaux
EXCERPTS:
"[Paul] Samuelson profoundly misread Hayek’s book. Hayek said that “the planning against which all our criticism is directed is solely the planning against competition – the planning which is to be substituted for competition.” So because Scandinavian countries emphatically do not plan in this way, Samuelson was mistaken to say that their socialism is of the sort that Hayek believed paved the road to serfdom. Those countries have reasonably free trade, only light regulation of capital markets and business, and strong private property rights. In short, all Scandinavia retains what for Hayek was the most significant protection against serfdom: competitive economies.
And while Hayek would disapprove of the size of Scandinavian welfare states, he stated explicitly that “Nor is the preservation of competition incompatible with an extensive system of social services.”*
Paul Samuelson’s long history of misrepresenting Hayek’s arguments has done a great disservice not only to one of the 20th century’s wisest minds but also – and more importantly – to the countless people who would have read Hayek but for Mr. Samuelson’s mischaracterization of The Road to Serfdom.
"[Paul] Samuelson profoundly misread Hayek’s book. Hayek said that “the planning against which all our criticism is directed is solely the planning against competition – the planning which is to be substituted for competition.” So because Scandinavian countries emphatically do not plan in this way, Samuelson was mistaken to say that their socialism is of the sort that Hayek believed paved the road to serfdom. Those countries have reasonably free trade, only light regulation of capital markets and business, and strong private property rights. In short, all Scandinavia retains what for Hayek was the most significant protection against serfdom: competitive economies.
And while Hayek would disapprove of the size of Scandinavian welfare states, he stated explicitly that “Nor is the preservation of competition incompatible with an extensive system of social services.”*
Paul Samuelson’s long history of misrepresenting Hayek’s arguments has done a great disservice not only to one of the 20th century’s wisest minds but also – and more importantly – to the countless people who would have read Hayek but for Mr. Samuelson’s mischaracterization of The Road to Serfdom.
Wednesday, June 16, 2010
The Gulf Spill, the Financial Crisis and the Failure of Big Government - WSJ.com
EXCERPTS:
"The Gulf oil spill and the global financial crisis both demonstrate the failings of big government. Partisan politics obscures the linkage, with the consequence that each political party repeats the mistakes of the other as its turn to govern arrives.
First, consider the oil spill. BP and its contractors are surely responsible for the accident. They may also be responsible for a poor response. The nature and scope of legal culpability is yet to be determined. What is the government's role? Offshore drilling is a dangerous activity with potential undesirable consequences now actualized. For this reason, as we have learned, it is heavily regulated. The agency directly responsible for regulating the activity is the Minerals Management Service (MMS) of the Department of the Interior.
... the federal government has assumed the role of solving a collective action problem. Potentially all Americans benefit from the drilling, but those living in coastal areas suffer disproportionate harm from mishaps. The government theoretically negotiates on their behalf and establishes rules to protect them.
Obviously, regulation failed. By all accounts, MMS operated as a rubber stamp for BP. It is a striking example of regulatory capture: Agencies tasked with protecting the public interest come to identify with the regulated industry and protect its interests against that of the public. The result: Government fails to protect the public. That conclusion is precisely the same for the financial services industry.
***
Advocates of heavy regulation promise that risky behavior by banks can be controlled and limited by regulators. There are two major reasons such efforts fail. I have already discussed the first: regulatory capture.
The second source of regulatory failure is the knowledge problem identified by Nobel Laureate Friedrich Hayek. The knowledge required by regulators is dispersed throughout the industry and broader economy. For regulation to work, that dispersed knowledge must be centralized in the regulatory agency. To successfully accomplish this requires central planning of the industry, if not the economy. But the local knowledge of specific circumstances of time and place cannot be aggregated in one mind or agency. We know that is impossible, and that impossibility was the reason for the collapse of the Soviet Empire and the transformation of the Chinese economy.
Regulatory practice represents islands of central planning in otherwise decentralized market economies. If we add back in the problem of regulatory capture, then we get industries coddled and protected by government. When business and politics become intertwined we move from market economies to crony capitalism.
***
A big-government conservative administration failed in crisis, as has a big-government liberal administration. The regulatory state did not prevent excessive risk taking whether in financial services, nor perhaps in offshore oil drilling. Government response to crises once they occur is slow and inept. All this is not because either Republicans or Democrats are in power, but because big government doesn't work. It can't deliver on its promises. Big government overpromises and underdelivers. In reaching to do more, big government accomplishes less. That is not an ideological statement, but an empirical observation.
***
University of Chicago law professor Richard Epstein has observed that we need simple rules for a complex world. The complexity of rules is self-defeating, because that complexity requires more knowledge than can be acquired. Brazil has a simple rule for directors of failed banks: They are personally liable. That concentrates the mind of directors on reining in risk-taking by management more effectively than would creating a systemic-risk regulator.
The Obama administration and Congress propose more of the same failed approach to regulation. Instead they should heed Hayek, who observed that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
"The Gulf oil spill and the global financial crisis both demonstrate the failings of big government. Partisan politics obscures the linkage, with the consequence that each political party repeats the mistakes of the other as its turn to govern arrives.
First, consider the oil spill. BP and its contractors are surely responsible for the accident. They may also be responsible for a poor response. The nature and scope of legal culpability is yet to be determined. What is the government's role? Offshore drilling is a dangerous activity with potential undesirable consequences now actualized. For this reason, as we have learned, it is heavily regulated. The agency directly responsible for regulating the activity is the Minerals Management Service (MMS) of the Department of the Interior.
... the federal government has assumed the role of solving a collective action problem. Potentially all Americans benefit from the drilling, but those living in coastal areas suffer disproportionate harm from mishaps. The government theoretically negotiates on their behalf and establishes rules to protect them.
Obviously, regulation failed. By all accounts, MMS operated as a rubber stamp for BP. It is a striking example of regulatory capture: Agencies tasked with protecting the public interest come to identify with the regulated industry and protect its interests against that of the public. The result: Government fails to protect the public. That conclusion is precisely the same for the financial services industry.
***
Advocates of heavy regulation promise that risky behavior by banks can be controlled and limited by regulators. There are two major reasons such efforts fail. I have already discussed the first: regulatory capture.
The second source of regulatory failure is the knowledge problem identified by Nobel Laureate Friedrich Hayek. The knowledge required by regulators is dispersed throughout the industry and broader economy. For regulation to work, that dispersed knowledge must be centralized in the regulatory agency. To successfully accomplish this requires central planning of the industry, if not the economy. But the local knowledge of specific circumstances of time and place cannot be aggregated in one mind or agency. We know that is impossible, and that impossibility was the reason for the collapse of the Soviet Empire and the transformation of the Chinese economy.
Regulatory practice represents islands of central planning in otherwise decentralized market economies. If we add back in the problem of regulatory capture, then we get industries coddled and protected by government. When business and politics become intertwined we move from market economies to crony capitalism.
***
A big-government conservative administration failed in crisis, as has a big-government liberal administration. The regulatory state did not prevent excessive risk taking whether in financial services, nor perhaps in offshore oil drilling. Government response to crises once they occur is slow and inept. All this is not because either Republicans or Democrats are in power, but because big government doesn't work. It can't deliver on its promises. Big government overpromises and underdelivers. In reaching to do more, big government accomplishes less. That is not an ideological statement, but an empirical observation.
***
University of Chicago law professor Richard Epstein has observed that we need simple rules for a complex world. The complexity of rules is self-defeating, because that complexity requires more knowledge than can be acquired. Brazil has a simple rule for directors of failed banks: They are personally liable. That concentrates the mind of directors on reining in risk-taking by management more effectively than would creating a systemic-risk regulator.
The Obama administration and Congress propose more of the same failed approach to regulation. Instead they should heed Hayek, who observed that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
Friday, June 4, 2010
Monday, May 17, 2010
The Limits of Power, Hayek - Thomas Sowell
EXCERPTS:
"...when even slaves had to be paid to get certain kinds of work done, this shows the limits of what can be accomplished by power alone. Yet so much of what is said and done by those who rely on the power of government to direct ever more sweeping areas of our life seem to have no sense of the limits of what can be accomplished that way....
Even the totalitarian governments of the 20th century eventually learned the hard way the limits of what could be accomplished by power alone. China still has a totalitarian government today but, after the death of Mao, the Chinese government began to loosen its controls on some parts of the economy, in order to reap the economic benefits of freer markets....
"Ironically, the United States is moving in the direction of the kind of economy that China has been forced to move away from. China once had complete government control of medical care, but eventually gave it up as the disaster that it was.
The current leadership in Washington operates as if they can just set arbitrary goals, whether "affordable housing" or "universal health care" or anything else -- and not concern themselves with the repercussions -- since they have the power to simply force individuals, businesses, doctors or anyone else to knuckle under and follow their dictates.
Friedrich Hayek called this mindset "the road to serfdom." But, even under serfdom and slavery, experience forced those with power to recognize the limits of their power. What this administration -- and especially the President -- does not have is experience.
Barack Obama had no experience running even the most modest business, and personally paying the consequences of his mistakes, before becoming President of the United States. He can believe that his heady new power is the answer to all things.
"...when even slaves had to be paid to get certain kinds of work done, this shows the limits of what can be accomplished by power alone. Yet so much of what is said and done by those who rely on the power of government to direct ever more sweeping areas of our life seem to have no sense of the limits of what can be accomplished that way....
Even the totalitarian governments of the 20th century eventually learned the hard way the limits of what could be accomplished by power alone. China still has a totalitarian government today but, after the death of Mao, the Chinese government began to loosen its controls on some parts of the economy, in order to reap the economic benefits of freer markets....
"Ironically, the United States is moving in the direction of the kind of economy that China has been forced to move away from. China once had complete government control of medical care, but eventually gave it up as the disaster that it was.
The current leadership in Washington operates as if they can just set arbitrary goals, whether "affordable housing" or "universal health care" or anything else -- and not concern themselves with the repercussions -- since they have the power to simply force individuals, businesses, doctors or anyone else to knuckle under and follow their dictates.
Friedrich Hayek called this mindset "the road to serfdom." But, even under serfdom and slavery, experience forced those with power to recognize the limits of their power. What this administration -- and especially the President -- does not have is experience.
Barack Obama had no experience running even the most modest business, and personally paying the consequences of his mistakes, before becoming President of the United States. He can believe that his heady new power is the answer to all things.
Thursday, April 8, 2010
Progressives can't get past the Knowledge Problem - Glenn Harlan Reynolds
EXCERPTS:
"Market mechanisms, like pricing, do a better job than planners because they incorporate what everyone knows indirectly through signals like price, without central planning.
Thus, no matter how deceptively simple and appealing command economy programs are, they are sure to trip up their operators, because the operators can't possibly be smart enough to make them work.....
There's good news and bad news .... The bad news is obvious: We're governed not just by people who do screw up constantly, but by people who can't help but screw up constantly. So long as the government is this large and overweening, no amount of effort at securing smarter people or "better" rules will do any good: Incompetence is built into the system.
The good news is less obvious, but just as important: While we rightly fear a too-powerful government, this regulatory knowledge problem will ensure plenty of public stumbles and embarrassments, helping to remind people that those who seek to rule us really don't know what they're doing.
"Market mechanisms, like pricing, do a better job than planners because they incorporate what everyone knows indirectly through signals like price, without central planning.
Thus, no matter how deceptively simple and appealing command economy programs are, they are sure to trip up their operators, because the operators can't possibly be smart enough to make them work.....
There's good news and bad news .... The bad news is obvious: We're governed not just by people who do screw up constantly, but by people who can't help but screw up constantly. So long as the government is this large and overweening, no amount of effort at securing smarter people or "better" rules will do any good: Incompetence is built into the system.
The good news is less obvious, but just as important: While we rightly fear a too-powerful government, this regulatory knowledge problem will ensure plenty of public stumbles and embarrassments, helping to remind people that those who seek to rule us really don't know what they're doing.
Monday, March 8, 2010
Lyrics and Guide to "Fear the Boom and Bust" rap video
If you're wondering what the lyrics to the video actually mean, this gives a fairly-detailed explanation.
Friday, February 12, 2010
Video: "Fear the Boom and the Bust: A Hayek vs. Keynes Rap Anthem"
This video is an interesting introduction to issues we will begin getting into in chapter 5.
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