Thursday, June 12, 2014

No Reason to Think? Delong vs the Austrians, Evidence vs Ideology

There is an Economic Policy Journal post from last year titled "Horror from Horwitz" which argues that Steve Horwitz has "a jumbled message" because he argues that central banks can be effectively used; policies - including monetary expansion - can help if crafted carefully. Is Horwitz going against Austrian theory, or is EPJ just charicaturing Austrians? I will address this more below, first I must respond to something from Brad Delong.


Delong has a recent piece on the Beveridge Curve in which he asserts that:

There is no reason to think that June 2009 was a magic moment after which “skill–needs mismatch” took a sudden upward leap.

No reason? Actually, Austrians, and those inspired by their theory like Arnold Kling, have argued that in general the greater diversity and specificity of labour and complexity of the economy in in recent decades made recover slower and made government programs less effective.

Delong offers no evidence to support his view, he only says that it seems likely to him, but there is reason to believe that there has been a jump - just look at the evidence. The more complex the economy the more trip-ups policies are likely to face, the harder it is to be enlightened and run an economic plan smoothly. Very small economies with simple homogeneous systems can just about get away with it - think Sweden. Creator of the "Great Stagnation" theory, Tyler Cowen, also sees evidence for a long recalculation in today's complex US economy:
In general, which hypotheses predict lots more short-term unemployment among the less educated, but among the long-term unemployed, a disproportionately high degree of older, more educated people?  This stylized fact seems to point toward search and recalculation ideas, with some zero marginal products tossed in. - See more at: http://marginalrevolution.com/marginalrevolution/2010/07/zero-marginal-product-workers.html#sthash.PvPnJ1Nz.dpuf
In general, which hypotheses predict lots more short-term unemployment among the less educated, but among the long-term unemployed, a disproportionately high degree of older, more educated people?  This stylized fact seems to point toward search and recalculation ideas, with some zero marginal products tossed in. 

Although Delong argues that businesses will have been " reconfiguring jobs to make more use of low-wage “unskilled” labor,"  Cowen cites statistics that show that the unskilled are facing 30% unemployment rates, while the skilled face only 3% unemployment. From Kling's very readable and sensible (at least hiss main foundational argument, or "mantra"):

the last 75 years has made labor much more heterogeneous and put greater "distance" between the different kinds of work people do.  More specifically, a far lower percentage of labor is physical in the ways that the WPA and CCC demanded.  And perhaps most importantly:  an economy that is orders of magnitude more complex than that of the 1930s will be one in which it's much harder to figure out what sorts of government make-work programs will match the human capital structure of the unemployed labor.

and, more specifically, he argues that the Great Recession has been experiencing a "jobless recovery" because of this:

Labor markets and unemployment are having trouble recovering perhaps because the very specificity of labor makes the recalculation process more protracted, and the variety of ways in which policy makers are complicating the process with stimulus spending and extended unemployment benefits is not helping.
Contra Delong, Austrians like Steve Horwitz argue the specificity of labour in the highly complex economy makes readjustment more difficult and recovery slow, and this means that there is reason to believe that there was a time in about 2009 (just after the crash) "after which “skill–needs mismatch” took a sudden upward leap." Unless Delong is saying that the moment should have been earlier, one must assume that he has not have read the Austrian arguments that explain why. As one example, Horwitz explains:

As the boom pulls highly specific factors of production into the artificially stimulated areas, it will also increase the incentives for developing very specific sorts of human capital (one need think only of the high-end financial markets here).  Come the bust, this human capital may well have next best uses that are a far cry from the value it had been producing. 
Rather than a more complex, wealthier economy having greater dampening effects on the volatility of cycles, it may well be the case that an economy with a greater division of labor and specialization, and therefore more heterogeneous human and physical capital will actually suffer larger booms and longer and deeper busts from the same bout of inflation than would simpler economies.  There's a reason that red line is so deep for so long.
This also means that the recalculation process will both take more time to sort out and that it will be that much harder for governments to try goose aggregate demand with make work programs.  What exactly government is supposed to do to "directly employ" unemployed folks with these highly specific skills?  I really am waiting for someone to argue government should pay them to build websites and databases and then just delete what they've done.

This was a lesson learned from the Soviet experiment (of course Austrians predicted it beforehand): a more complex economy means a harder time trying to employ workers using public employment schemes; centralized money and centralized employment, production, and distribution are also difficult and dangerous to undertake at the same time (as Trotsky put it: it is like the man who tries to stand and lift both his feet off the ground at the same time).

This brings us back to the EPJ article. Perhaps ironically--if you are of the mind, as one branch of Austrian economics is, that central banks cause misallocations regardless of how they may try (as all central planners do) to be careful and not cause them--the Federal Reserve bank of St. Louis was among those who published on the issue of labour mismatch during the Great Recession. Does Horwitz have a "jumbled message" because he supports central banking? The article says that Horwitz's support for central banks is "is as far from Austrian theory as you can get.  Austrian school economists see central bank monetary expansion as distorting the economy."
Although one Austrian strand takes this point of view--that all central banking must cause misallcoations-- it is not the strand (which some might call less ideological and more "nuanced," and "moderate") of Steve Horwitz, who is a proponent of an Austrian theory of Monetary Equilibrium (ME) using central banking. And, no, this is not a contradiction in terms.


I used to call market socialism a contradiction in terms, and then I was sure that libertarian socialism was a complete contradiction, impossible. Just as a purist view can see socialism as impossible--because it sees complete central planning and the socialist goals as defining socialism, much like one might say true communism is impossible--one might see libertarian socialism as impossible. But it is the black and white of this approach that makes useful discussion between opposing political and economic viewpoints so difficult - impossible, if you will.

To see these - and an Austrian that is OK with central banking - as contradictions is to see them as too pure or perfect, which is to see a complex interconnected society filled with complex humans as something that can be treated as a perfectly uniform system fully represented by a single model. 

Finally, although I think Austrians have the right idea regarding misallocation and labour specificity, I do have some qualms with Kling's arguments. Klng argues that " Jobs like website development and social-media marketing are very far removed from the final stage of production." It is not just capital involved in "roundabout production," and therefore misallocated, as part of the ABCT, it is labour too:
This explains how we can have a “jobless recovery,” meaning a large percentage increase in output without a comparable percentage increase in employment. For firms in today's economy, labor represents an investment. Firms hire workers in order to develop capabilities that will eventually produce output more efficiently.
For firms in today's economy, labor represents an investment. Firms hire workers in order to develop capabilities that will eventually produce output more efficiently. The return on an investment in workers may take as long or longer to realize as the return on investment in a machine. The return on investing in workers may be at least as uncertain as the return on investing in equipment.
 But is it fair to say that website design and social media marketing are long-term investments that would not be cut back easily, and would lead to misallocation of resources? It is not my intention to take on all of ABCT here, but I will note that although Kling suggests that "Real employment in today's economy represents a long-term investment, not short-term make-work," the American economy is far more flexible with the hiring and firing of labour than the UK or European labour markets (thanks to more flexible regulations and labour law), such that forms do lay-off workers quickly when they see profits fall.
 
In complex free market economies, it is important to experiment and hire for short periods by contract before finally hiring full-time, permanent employees, and this is frequently done. More to the point, many website designers and social network marketing workers work for companies dedicated to those things - so when profits fall, they are indeed laid off right away (I remember the dot.com crash!) especially because those companies primarily invested in labour, with few other assets.

Some companies, especially large ones like pharmaceutical companies and large publishing companies, have on-sitef social media marketing (if they have a marketing department rather than outsourcing/contracting this function), will they lay off these staff when hit by drop in sales/ profit? I guess it depends and will be a choice made by the CEO. He or she will have to determine the cause for the drop--if it is the recession and not something the company has done wrong or needs to change to keep up with competition, what should they do? Perhaps the best long-term strategy, given a short-term recession, is to keep these staff, but then if marketing can shrink in the short-term during recession, might it not be cheaper to make layoffs and re-hire, even with training costs?



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Wednesday, June 11, 2014

My Course on Soviet Economic History

Tyler Cowen has posted about my course at Marginal Revolution University. It is officially launching, but you can start it any time, and it never really ends!

Students (anyone can take the course free of charge, you don't need to be in university-proper or of university-age) can take the course whenever they want, at their own pace. There is a final exam and taking it allows the student to earn a "certificate" from MRU.

The course is video-based, and there are suggested readings and study questions posted with many of the videos. Students can answer the questions on the site and I will respond and provide feedback, and others taking the course may engage in the discussion as well.

The videos, readings, and the "classroom participation" and discussion are the primary features of the course, but the exam also helps the student to learn and absorb the material, and allows him/her to earn a certificate from MRU.

Also, I will be available to help anyone taking the course who wants to develop ideas inspired by the course into a paper. I enjoy editing and commenting on papers -- hence the 3 essay collections I have published or forthcoming with Palgrave-Macmillan -- and I want to see more work in this area:

  • qualitative or literary comparative economics and economic history of the Soviet Union; 
  • cultural and utopian studies of economic systems; 
  • evolutionary and spontaneous order systems theory; 
  • and other work emerging from this research and analysis.

So, stop on by!

And let me know what you think of the course, what you want to see more of -- I may create a second part, covering more of the classical period and the collapse and transition, and covering other ways that economic models have been or should be affected by what we've learned from the Soviet "experiment."


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Thursday, June 5, 2014

Usurping & Reclaiming the Bad Logic of Religion

Funny little thing:
Forgetting the word "gap," I googled "empty spaces" in its place, searching for that argument "God of the Gaps" -- which describes when one sees God anywhere there is a gap in the science. So, I searched "God of the empty spaces" and it turns out that some minister has titled an album (here, here) of religious songs by this name -- taking back the term, maybe catching skeptics before they have a chance to read about the argument, playing them soothing religious music instead!

Thursday, March 27, 2014

The Energy Price Competition Rabbit-Hole

This morning there's a debate on competition in the energy market in the UK - the coalition government has set up a committee, which will provide results in 2016 and Labour says that were it in power they would introduce a price freeze today. Meanwhile one energy company has introduced its own price freeze, paying for it by laying off a large number of employees.

Analysts explain that although there are only a "Big 6" energy companies, there are only a "Big 5" supermarkets, but there is price competition among them--only if the other energy companies follow suit and introduce a price freeze too will it show competition among energy providers, which no-one expects--the difference? It is easier to change which supermarket you shop from, prices are easier to understand, and especially there are fewer taxes affecting their prices. If they find a problem, the competition committee would recommend, among other changes, moving those taxes into the general budget.

Wait ... aren't those taxes there to reduce energy usage to help prevent global warming? And if a price freeze was introduced, as Labour recommends, won't we see a lot more layoffs? Inevitably, this kind of chain of unintended consequences tends to lead to nationalisation, but consider the state-run energy companies, or semi-private ones like Gazprom in Russia, they do not tend to be corruption-free, separate from military-industrial policy, and in any way transparent... How should the UK avoid this rabbit-hole?

Thursday, March 20, 2014

Coming Soon: my course on Marginal Revolution University

Starting within about a week, my course will be up on MRUniversity.com -- you can start the course as soon as its up there, but it is a flexible system so if you can't start right away, that should be fine. You can check out the video lecture titles here (scroll to the bottom), and I will post again when it's all up there!

Tuesday, March 11, 2014

Palgrave's FREE ACCESS month of March

Access all of Palgrave's journal articles (but sadly none of their books or chapters of books) all March long! This includes--sorry, bit more self-promotion--my articles for Comparative Economic Studies, which can be found here.

Wednesday, March 5, 2014

My new book is out - and was featured in Palgrave newsletter!

The March newsletter "Your Economics Update from Palgrave Macmillan" lists my book as the Featured Title! So cool - definitely a first for me :) and an honour.


Featured Title

Spontaneous Order and the Utopian Collective

Spontaneous Order and the Utopian Collective

In Spontaneous Order and the Utopian Collective, Nell takes her cue from the personal writings and documents of Lenin, Trotsky, and Bukharin to consider them anew from an Austrian theoretical perspective, analyze the divergence between theory and practice using a spontaneous order framework, and identify three interconnected prerequisites necessary for a utopian collectivist society... read more

Thursday, November 21, 2013

How to tell if your representatives is just a bigot

There are many states in the American South that do not want to grant any benefits of any kind to same-sex couples, and have constitutional amendments prohibiting same-sex marriage, which they hoped would let them deny benefits to such couples. However, the U.S. federal government prohibits discrimination of this sort with its equal protection clause of the 14th amendment.

So, Oklahoma Drops National Guard Benefits For All Couples To Avoid Serving Same-Sex Couples -- and they are not alone, as the article explains: many of these states have dropped benefits or changed other laws in order to get around the federal ban on discrimination enumerated in that constitutional amendment.

Wow... what pure, plain, bigotry - plain as the nose on your face ~  but, at least it can act as a nice acid test: if any libertarian supports this you know they are twisting their philosophy into gnarled and crooked knots, or pretzels, because they are actually secretly social-con (read: bigoted). How can I be so sure? Well...

Except for anarchists, national defense, which includes each state's national guard, is generally considered one of the few appropriate functions of government  (along with police and courts, and administrative, legislative, executive...), so this makes these national guard some of the few legitimate employees hired by government according to libertarian thought.* Unless all employees of government, federal, state and local, should lose their health benefits--without replacing the benefit with a cash equivalent--the libertarian should be against such a policy. It is clearly a policy passed for "religious" (read: bigoted) reasons, not for economic efficiency or for justice, and it treats people with favoratism, or rather the reverse, with prejudice.

These national guard are (former/current) employees of government -- not welfare recipients--although, of course, if they cannot receive health care coverage from their employer they may end up on welfare... Anyway, it is clear that the benefit bill was not too high for the taxpayer/voter of the state until such time as they were going to have to give those benefits equally to homosexual couples as to heterosexual ones, so unless there are a very significant proportion of the state's national guard or overall population that is gay, it is not a budget issue. Clearly the cancellation of the health care policy was done in order to prevent gay couples from being given these benefits, purely out of bigotry.


* In fact, constitutionalist libertarians and peacenik libertarians should find the national guard preferable to the large national standing army, since it is a reserve army and power is decentralized to the states. Again, on the question of federalism and states' rights: NO, a single state cannot overrule the basic human rights respected and ensured at the federal level, by the constitution. That's why it's only what is left out that is "reserved to the states respectively, or to the people"...

Thursday, September 26, 2013

One Last Call - Individualism and Society

There is still space in the second volume, on individualism and society. I would like to see at least one or two more contributions, and in particular I would like to see additional essays tackling the difficult and important question of subjectivism/methodological individualism and the problems with "rational economic man." The two-fold issue (and essay may choose one of these two to address, as both are already massive) as I see it:

1. Can we really treat all economic action as stemming from the individual - atomistic, isolated, decision-maker making choices separately from his/her surroundings--and if we can't then how can we defend Austrian and neoclassical subjectivism, seeing as it does root all economic behaviour in this individual action?

2. Austrian, neoclassical, and public-choice economics relies on assumptions very much like "rational economic man," with his self-interested motives and calculating mind--otherwise there would be no assumptions of rent-seeking, responding to institutions with the usual incentive-driven behaviour, etc. We have long known that "rational economic man" is an absurd simplification, the truth of which, to the extent there is any, is embedded in market-derived culture and institutions. Yet we know we also cannot drop the assumptions entirely and assume an infinitely malleable human nature--this sort of assumption was what allowed so many to falsely believe socialist institutions might yield a utopian society and "new man." How can we reconcile these dual understandings of the complexity of human nature?

On the second point, it might be interesting to discuss viewpoints such as: 

Rational Economic Man, by Martin Hollis and Edward Nell
Don Lavoie on Hollis and Nell
"Knowledge and Rationality in the Austrian School: an Analytical Survey," Richard N. Langlois

and/or Beyond Economic Man, by H. Leibenstein && Beyond Economic Man, by M. A. Ferber and ‎J. A. Nelson

Let me know ASAP if you have any interest ~ liberty at economicliberty . net ~ the final deadline for the entire volume is March 1st, I would need an abstract and outline by November and a draft by January 1, and final draft by February 1st.

Wednesday, September 4, 2013

Diseases of Times Past

Both malaria and AIDS look like they will soon be categorized as such, thanks to a mixed - public and private - strategy of funding, internationally. The new AIDS vaccine and the new malaria vaccine both showing promise. I love it -- welcome to the star trek age!