The Economic Way of Thinking

How The Market Works

Israel Kirzner's pamphlet, How the Market Works, offers a nice and readable discussion of the Austrian theory of a competitive market process against the standard theory of perfect competition.  Highly recommended.

It's available here.

My Explanation Of The Bubble

I have a piece forthcoming in the Review of Austrian Economics, available at their "Online First" link.  I challenge Hyman Minsky's theory of crises, and try to show how Austrian business cycle theory captures the notion of financial instability and macroeconomic breakdown.

You need to have a personal or institutional subscription (NMU does) to access my paper.

A Hayek Challenge

My friend, co-author, and former professor, Bryan Caplan, tells his readers that he's lost all patience with Hayek and that Hayek's "original, true ideas could have been five good blog posts."  Bryan goes on to say that another great libertarian economist, Milton Friedman, didn't "talk nonsense" and was "full of original true ideas, had few outright errors or bizarre obsessions, and wrote respectable sentences."  While I'm sympathetic to Bryan on the point of clarity, I think he's quick to forget some of Friedman's huge errors and even more hasty in dismissing Hayek.   

So, here's a challenge for Bryan: prove your point!  Show us that Hayek can be summed up in five blog posts.  When you're done, we (readers of this blog, my co-bloggers if they're so inclined, and I) can clean up on what you missed. 

The ABCs Of ABCT Bleg

Next week I will begin two full weeks of Austrian business cycle theory (ABCT) in my Intermediate Macro class.  To date, we have gone through all of the major schools of macroeconomic thought, and we're saving the best (and most correct) for last.  As any good Int. Macro class should be, it's been a course of macroeconomic nihilism with construction (i.e., "Here's the model") immediately followed by destruction (i.e, "Here's why the model stinks...").

Since this is my first time teaching Int. Macro and ABC theory, what two or three articles (20-30 pages max), book chapters, etc. about ABC theory would you hand out to students?

Laws And Economics

It turns out Dave's a great dubber.  Many years ago, he wrote an essay titled "Praxeology" for the Elgar Companion to Austrian Economics.  In the essay he introduced readers to something he called "the Caldwell Question," which I'm pretty sure is a term he created.  (The Caldwell Question, according to Dave, asks people interested in methodology to consider the following: "How does one choose between rival systems of thought that also claim to be deduced from absolutely true axioms?"). 

In a recent blog discussion, Dave attempts to create another new term, which he calls "the Horwitz Rule."  According to the comment section, The Horwitz Rule would "allow the Fed to adjust the money supply whenever money demand changes so as to maintain monetary equilibrium."

What do you all think of Horwitz's Rule vis-a-vis Friedman's Rule?   

Build That Man a Rizzo Institute!

Over at The Austrian Economists, Mario Rizzo responds to a guest post by Dan Klein.  Dan asks why there are no Milton Friedmans in the discipline of economics today and tries to answer his own question.  In response, Mario provided the following comment:  

...we don't *need* another Milton Friedman. The intellectual pieces are all in place. We need bright individuals who can elaborate and strengthen particular insights. We can also use clear-writing synthesizers to put these findings into compact and interesting form. But the synthesizers will be viewed as mere journalists. We must all grow up and do our work. The saints are dead and they will stay so. We do not believe in the resurrection. This is why a Mises Institute (or a Hayek Institute or a Friedman Institute or even a Keynes Institute) is a bad idea. It is not what we need at this time in human history. But even if we "needed" an intellectual god we wouldn't get one.

What do you all think about Mario's claim?  Does our movement need a God?

A Kirznerian Moment

I've heard one of the best young Kirznerians, the fabulous Fred Sautet, describe the Kirznerian moment of discovery as the moment of epiphany or the light bulb turning on.  I seldom have these moments, and I don't think what I'm describing below is pure discovery.  But, the experience sure felt good and was a nearly costless, pure profit opportunity for me.  It involved a transaction with a book dealer, and here's a replay of our exchange:

Book Dealer (knocking on my office door): Hi.  Any books for sale?

Me (grumpy, it's been a long day afternoon voice): Nope.  Not right now. 

Dealer (walking away): OK.  Maybe next time.

Me: Yeah, maybe.

Door closes

Me (opening the door and hollering): Wait!  Let me take a look!

Me (five minutes later): I have these nine textbooks that have, for some reason, just been sitting on my shelf. 

Dealer: Let me take a look.

Dealer (five minutes later): I can give you $145 for four of them. 

Me: Perfect!

I am thrilled to have fattened up my normally cashless wallet, and I feel doubly satisfied that I'm helping students enjoy slightly cheaper textbook prices. 

The History Of The Austrian School Of Economics

We here at EWOT are Austrian Economists.  To learn more about our school, see this wonderful lecture by Israel Kirzner delivered at the Foundation For Economic Education a couple weeks ago.  Thanks to our friend Steve Horwitz for posting it over at The Austrian Economists blog.

The Gloves Have Finally Been Dropped

I hate ugly battles like this, but I'm glad to see that Pete has finally thrown down the gloves in response to nonsense.  The shots Pete has taken from Joe et al. have been cheap and ongoing for years.  While Joe is no fan of hermeneutics, a pretty simple application of the "hermeneutics of suspicion" goes a long way in explaining what's behind his efforts. 

For the record: I've never been called an Austro-punk, but I sure like punk music. 

"The Economy's Not a Pot Plant!"

While at a ballgame last night with a number of economists and freedom lovers, I heard a good rant that went something like the following:

"I'm so tired of the phrase 'green shoots.'  The economy's not a pot plant!  The economy's not a sick patient!  The economy's a..."

Anyone want to try finishing the rant for me?

Fuzzy Math?

Austrian macroeconomist, Roger Garrison, has a nice reply to Brad Delong today at the Mises blog.  In a post claiming that "the Austrian theory just does not work," Delong, among other things, accuses Garrison of having a "very basic problem with his math."  To which Garrison replies with the following:

My article did not contain any problematic math; it contained no math at all — because the Austrians recognize that the relationship between cause and effect is not a quantitative relationship. Both Mt. Vesuvius and the smoker's carelessness count as causes. So, too, do the cheap credit and consequent temporal discoordination that preceded the downturn.

The Austrian theory is not a theory of recessions per se; it is a theory of the unsustainable boom. As such, it has a much stronger link to the underlying microeconomics than does much of today's mainstream theorizing. The Austrians focus broadly on credit markets and ask what happens when the price of credit, i.e., the interest rate, is held below its market-clearing level. If interest rates were held too low by legislation (interest-rate caps), there would follow an immediate credit crunch. This "if-then" proposition is a direct analogue to the proposition that rent control causes a housing shortage and, more generally, that price ceilings cause quantities demanded to exceed quantities supplied.

Garrison's original Freeman article, which prompted Delong's post, and his reply to Delong are both worthwhile reads on how Austrian economists understand the crisis and why mainstream macroeconomists are "flummoxed." 

Is Cesar Millan an Austrian?

Caveat: This post is meant to be light-hearted and not taken too seriously!

 

One of my favorite Pete Boettke quotes came several years ago when he went into the belly of the beast to make a presentation at USAID and said, “The only path [to development] is an indigenous one” (Pete says the same thing in print here).  Pete was brilliant, and he clearly established that his approach wasn’t anti-planning; it was just anti-state led planning.  Pete’s point about indigenous institutions and “stickiness” has affected all of his students in their research.  And, as I said a few weeks ago, it has also caused me to think about parenting strategies with our mutt (and maybe one day children, too). 

Disaggregation

One of the best parts of teaching Macro Principles is the fun you can have driving home the point of “Lies, damned lies, and statistics.”  While I’m thankful to have a break from Macro this semester, I couldn’t resist looking more closely at the CPI after last week’s press release.   

The headline news story about CPI is that the US experienced 0.1 percent price inflation over the last 12 months (1.8 percent “core” inflation, which takes out food and energy).  Overall inflation, as measured by the CPI, is at its lowest level since 1954.  With any aggregate, though, there are many stories to tell when we disaggregate.  For what’s it worth, here are the most inflationary markets (as measured by the CPI on an annual unadjusted basis): 

                                       Percent change in index since Dec '07                                  

Motor oil, coolants, and fluids:                                  24.0%

Pet foods                                                                 15.5%

Household paper products                                       11.4%

Vehicle parts and equipment (excl tires)                     9.6%

Intrastate landline phone calls                                     9.5%

Interstate landline phone calls                                     9.1%

Parking fees and tolls                                                 8.6%

Intercity train fares                                                     8.3%

Intercity bus fares                                                      8.2%

Jewelry                                                                     7.5% 

Note 1: My list is based on the eyeballing method of Table 3 in this report, so I may have missed one or two. 

Note 2: I have excluded food and energy from the list.   

In previous posts (e.g., here), Dave has argued that Austrians should engage Minsky.  I don’t know enough about Minsky to comment.  But, I do think Austrians should also do more work like this Garrison and Callahan article, which does a nice job of explaining the tech bubble as an unintended result of easy money in the 1990s. 

As many others have been saying, the seeds of another boom are being planted at this moment.  When you get your hands dirty and study where those seeds are being laid, though, it just might be that the first signs of a boom can be found in the most unlikely of places: Fido’s Puppy Chow!

Rational Constructivism and Running

Someday I will get one, if not both, of these guys (links here and here) to write up a short little ditty with me on the problem of central planning inherent in a long distance run.   

If there were ever an activity where the clichés of “just let things go” or “go with your gut” were true, it’s in the long distance run.  As my Zen master dean and lunch buddy, Skip Mounts, constantly says, “Take your watch off and you’ll run a better race.”  I have yet to take my watch off in a race, but I suspect he’s probably right.     

The problem for the runner is that your mind and body are telling you to try to control the process from beginning to end.  One mile that’s too fast or slow can often breed panic.  And, panic in a race will blow you up.  If you run a couple of miles past people screaming, you can get a huge shot of adrenaline, which makes many runners move more quickly.  But, in long distance running, adrenaline will blow you up.   

In the long distance run, the most minor adjustments and the most random shocks have unintended, unexpected consequences that often produce more harm for the runner than good.  If the runner is not in the right state of mind and tries to fine tune his or her performance too much, they blow up.  As an old Top Gun line puts it, “You don’t have time to think up there.  If you think, you’re dead…” 

A similar planner’s problem presents itself when a runner becomes injured.  Rather than approach the injury with gradual and slow changes, most runners respond by changing too many things all at once.  When it’s a knee injury, many runners respond by getting new shoes, altering their stride, seeing a doctor, changing their diet, introducing new stretches, and backing off their running program.  And, they make these drastic changes all at once!  By changing so many variables at the same time to try correcting for one problem, they are, no doubt, introducing many more future problems.  One can’t help but wonder how things would’ve turned out had they just left well enough alone.   

People tell me the problem of parenting can also be described as a problem of central planning.  While I don’t have kids, I believe them.  And, on February 1^st, I’ll try to relate to our parents who read the EWOT blog by discussing the planner’s problem (or, at least, this author’s problem) in raising a yellow lab mutt (it’ll be her 3^rd birthday that day).  Stay tuned…