The Economic Way of Thinking

Best and Worst of the Decade

CNBC has a new report out that says Ukraine was the best performing stock market between 2000 and 2009; Brazil was the best over the past year:

Ukraine — in spite of the fractiousness of its political elite in recent years — that offered an unbeatable return of nearly 900 percent over the decade, data compiled by Reuters show.

The best performing stock market in 2009 was Brazil whose Bovespa Index surged a blistering 145 percent in dollar terms, fueled in part by the 29 percent rise in the value of its real currency versus the greenback.

According to the same story,

Shares in Bahrain and Slovakia were the worst- performing globally in both local-currency and dollar terms, with losses of some 20 percent.

While many factors influence stock market returns, I wondered about whether or not economic freedom changes may be the source of some of the variation. 

Since 1995, Ukraine's economic freedom ranking has gone from 3.4 to 5.6.  They have gone from being the least free country in the study to 121st of 141.  Bahrain's economic freedom score and relative ranking since 1995, meanwhile, has hardly moved.  Finally, Slovakia has become quite free since 1995, but they have had a miserable decade.

What do I make of this???  (Answer below the fold).

Remembering

The coverage of the 20th anniversary of the fall of the Berlin Wall on the blogosphere has been stellar.  Since I was barely 12 years old at the time and hadn't been exposed to the economic way of thinking, I remember the pictures on television more than anything else.

However, while in Prague with Pete in the early 2000s, we interviewed people involved in the transition.  Here's one of my favorite passages from an interview we conducted with a Czech citizen who was a teenager when communism collapsed in Czechoslovakia:

I went to Vienna with my mother.  I wanted to cry when I looked in the shop windows.  There were so many things in the windows that I could only dream of owning before that day.  By the end of our trip, my eyes were sore from looking at so many different goods, and my feet were sore because we could not afford public transportation around Vienna. 

Anatomy Of A Crisis

Most economists and policymakers looking for crises similar to the 2008 financial crisis have looked back to America's Great Depression for lessons on what was done then and what should be done now.  As long as the interpretations of the past are correct, studying events like the Great Depression to better understand the present makes good sense.  Our studies shouldn't be limited solely to the Depression, however, if other crises provide information to us as well.

For example, the Asian financial crisis of 1998 is one such crisis that seems to have largely been ignored by policymakers rushing to call 2008 the 21st century Great Depression.  In 1997-1998, banks in Latin and South America, the former Soviet Union, and East Asia were highly leveraged; the banks were also lacking transparency and were tangled up in complicated assets.  Like the US in the early 2000s through 2008, consumption and government spending in many of the countries affected by the "contagion" was deemed "too high" by experts and many warning signs were present in advance of the crisis.     

Instead of recommending easy money and fiscal stimulus, Western policymakers responded to the crisis by recommending transparent banking, controlled government spending, and higher interest rates.  In other words, the recommendations for Asia was for tighter restraints on monetary and fiscal policy--the exact opposite of what has been recommended this time around.  For people interested, here's a time-line of the 1997-99 events produced by Frontline.  Here is a list of the policy positions taken by major players involved in the crisis.

The easy way to dismiss comparisons of the Asian crisis to the present is to say (1) the scale of the crisis is much larger this time; and (2) the crisis originated in a big country (i.e., the US).  When you look more closely at the past, however, the similarities of the Asian financial crisis to the present are striking and cause one to wonder about the wild divergence in policy recommendations by experts then compared to now.   

Is Californication All They Need?

The Economist magazine has an article this week that downplays the effect California's high state taxes are having on emigration out of the state.  According to the article, 1.73 poor households are leaving California per new household arriving and 1.09 rich households are leaving per new arrival.  Since the poor are leaving more, the article argues that high taxes, which the poor don't pay have to worry about much, can't be the cause of emigration.  Instead, high housing prices in California are playing a far more important role in peoples' choices about where to live.

That high housing prices are driving people out of California is probably true.  Unfortunately, the article does not talk much about why housing prices are high in California, which, of course, has a bit to do with demand and a lot to do with tight zoning policies and barriers to new housing development.  Unlike Atlanta, GA or Houston, TX, where zoning authorities are quite content to go out or go up with new housing in response to demand, cities like San Francisco, San Jose, and Los Angeles are quite restrictive about new building. 

The restrictive policies make it impossible for the poor to afford housing.  The result, then, is for many to "vote with their feet" and run away from bad policy.  And, as this personal and economic freedom index makes clear, there are plenty of bad policies in California to run away from, and they aren't limited to taxes.  People's economic and personal freedoms are being constrained in California on many different margins that matter when it comes to making a decision about where to live. 

The bottom line is this: high housing prices shouldn't be treated as a mysterious, exogenous force.  Whenever an economist is confronted with an absurdly high price, such as those people pay for housing in California, government meddling is a good place to start in trying to explain these high prices.

Cuba Continues To Go Down The Toilet... Without All The Amenities

I've argued in my EC 101 class that government would not be able to supply enough toilet paper to meet consumer demands.  Now I've found my argument holds true in the case of Cuba.

Saturday Morning Trivia

Without cheating, does anyone know which country is the richest African country (in terms of GDP per capita in current international $)?  HINT: it’s not Botswana.

Answer below the fold…

Boettke's Best

My friend, EWOT co-author and co-blogger Pete Boettke rarely posts here, and for good reason.  His opportunity cost is simply too high.  But from time to time I promise to link his best posts from our other blog, The Austrian Economists, onto this blog. 

Take a look at this -- Pete's take on the political economy of our current crisis. 

"Neat Graph" 2

 

                                                      Source: World Development Indicators, 2008

The graph is being squeezed, but you can click on it to see a larger version.  No data for Zimbabwe after 2005. 

Of course, past performance is no guarantee of future results.

"Neat Graph" 1

I recently told readers that a couple of “neat graphs” related to my Botswana research would be coming soon.   

Here’s the first in the series:

 

   

                               Source: World Bank, World Development Indicators (2008)

Everybody Talkin' About Freedom: A Lawson Recap

As I said in a recent post, Bob Lawson was a big hit earlier this week in kicking off my “Readings in Political Economy” Guest Speaker Series.  Given that the purpose of the speaker series and course is to explore the role a free society plays in promoting peace, prosperity, and higher quality lives, Bob was the ideal person to have in for our first lecture (it was pure luck that he turned out to be the lead-off man) to discuss the Economic Freedom of the World report. 

Here are three memorable moments from the lecture:

(1)   When comparing arguments in the “hard” sciences to arguments in the social sciences, Bob used a neat analogy that went something like this, “When one chemist thinks that mixing Chemical A and Chemical B together will produce a rosy smell while the other thinks it will smell like rotten eggs, how do they resolve their disagreement?  They mix the chemicals together and see what happens!  Well, when arguing with a lot of my socialist friends about economics, I came to the conclusion that I needed evidence and data to persuade that them that I was right…and, here’s what I’ve found.” 

Later on, he managed to link his talk back to the rose and egg discussion in a brilliant way.

 

(2)   When asked what he’s learned, Bob said, “The big thing for me has been discovering that the differences between Sweden, Canada, and the U.S. are trivial compared to the differences between Myanmar and the U.S. or Zimbabwe and Botswana.”

 

(3)   When discussing the importance of economic freedom he concluded with a slide that showed a strong correlation between economic freedom and life expectancy.  He concluded by saying, “Economic freedom isn’t just about money.  It’s about living long enough to see your grandchildren and having them see you.”

From beginning to end, it was a perfectly woven talk and excellent discussion with students.  Thanks again for visiting us, Bob (and make sure to keep up with his excellent Division of Labour blog)! 

Diamonds and Development

Within the small cottage industry of Botswana researchers, which I am a member of, there are two main camps: the policy people and the diamond people.  The policy people attribute much of Botswana’s success to sound economic policy and good institutions; the diamond people say that much of Botswana’s success is nothing more than a temporary blip fueled by diamond revenue.   

I suppose I’m clearly in the first camp.  I have emphasized the role economic freedom, the rule of law, and good leadership have played in Botswana’s development (though, I have also emphasized factors like Botswana’s cosmopolitan culture and their lack of a national defense for their first 10 years after independence).   

No matter what kind of pro-policy argument or evidence one presents to the second camp, the “doom is right around the corner” argument from the diamond people persists.  Here’s the latest example of their argument.  The diamond people insist that once diamond revenues dry up, Botswana’s economy will flounder.  Its lack of diversification into other sectors will leave it vulnerable, and Botswana could become a ghost town.  Their usual mantra is that Botswana’s government should have been using the diamond revenues to help diversify the economy (which, by the way, they have been doing, but not enough for the diamond people.).   

Even if declining diamond revenue presents challenges to the government, ex ante diversification would have made little sense: if the profit opportunities had been there, entrepreneurs would have filled those niches; if there are no large profit opportunities, then government efforts to actively hand-pick future winners is futile.  What can they possibly know that market players don’t know?   

Though the current growth projections for Botswana don’t look good, I’m skeptical that things will be as bad as the “diamond” people predict.  They have been predicting doom for a long time now, and Botswana’s economy has proven resilient time and again. 

Finally, even if things do turn out poorly, their solutions, which include government led diversification and attracting more foreign aid, are not the right ones.  Instead, the government could do well to learn from its past and, once again, embrace policies like opening up their borders to foreigners (especially Zimbabweans) and cutting national defense spending.  As one of Botswana’s better cultural historians put it to me in an interview in 2004, “Why do we [Botswana] need an Air Force.  What country in this region would consider attacking us through the air?”   

HT: Marian Tupy 

Two Murrays and a Man Named Noam: Anarchists

See Murray Rothbard here, delivering a presentation at the Texas State Libertarian Conference in 1989.

See Murray Bookchin also at a Libertarian Party conference (yes the LP)  here. 

Also see this interview with Bookchin back in 1981. 

They stand on opposite sides of the anarchist fence, although I was a little surprised how far Bookchin championed individualism at the LP conference. 

Noam Chomsky has been quite influenced by Bakunin (as I recall) and also Bookchin. Here's the first of a five part Chomsky interview.  You can easily navigate from that to the remaining parts.

Quantities Supplied and Demanded

Just what do these words mean?  Entry-level students have quite a bit of trouble distinguishing those terms from Supply and Demand. So we keep repeating:  Qd is the amount demanded at the Po price; Qs is the amount supplied.

In our textbook -- and this is something we've added after Heyne departed -- we consider Qs and Qd differently.  Yes, what I've said above is true and worth a repeat.  But we go further by asking just what do Qs and Qd really stand for?

They represent plans. 

Consider Qs to represent the plans of sellers at any given price, and the Supply curve represents a general pattern of changing sellers' plans as the price changes.  Consider Qd to be the purchasing plans of buyers at any given price, and the Demand curve represents a general pattern of changing purchase plans at different prices.  (Indeed prices themselves represent plans, price changes stem from plan changes.)

Market "equilibrium" is okay to speak about at this level, but that focuses our attention on the end of plan changes, where they are all settled.  Better that we also call it market clearing.  Why better? When the market clears, the plans of sellers and buyers are fully coordinated, they dovetail, and that's why no further change occurs in the market, thats why the market is now in a state of equilibrium. 

And this market-clearing coordination is an unintended consequence of people pursuing plans.

Issues that compare producer and consumer surpluses are fine if one wants to discuss the welfare characteristics of market equilibrium.  We can try to compare marginal rates of substitution in equilibrium, but we often lose site of the more important coordination problem, which is what any economy is really about -- including, of course, a comprehensively planned economy.  I lament our general judgment of what is important and what isn't. 

By the time students move into upper-division courses, as well as grad courses, they've lost the idea that some institutions allow for greater plan coordination, and some don't.  (And that assumes students were clearly exposed to the idea.) Institutions influence choices, plans of actions, and they causally influence the tendencies and patterns of changing plans.  But we spend more time attempting to discuss the final equilibrium welfare characteristics of differing institutions against an empirically impossible benchmark.  The benchmark serves as a normative standard to judge the efficiency properties of alternative economic systems.

Maybe we spend so much of our efforts on welfare properties of the market because the profession takes for granted the market's strong tendencies toward full plan coordination.  Maybe, but I don't think so. Consider the Post Keynesians, for example.

This is the comparative systems economist in me (and Pete) speaking.  I wonder how many intro courses study the issue of plan coordination.  Take a good look for a discussion in your textbook.

Mao's China

A mixed bag of analysis and ideology on YouTube.

The Great Leap forward

Economic Planning in China part 1

Economic Planning in China part 2

The Cultural Revolution