The Time Factor

Pete Leeson wrote recently, on the Somali pirate situation, that "the market has spoken," he said:

The market has spoken: Even in today’s pirate-infested waters off Somalia, the low probability of being captured by pirates, together with the fact that pirates release their hostages unscathed, means it’s cheaper--and safer--to go without armed guards.

There were a lot of pretty good responses to this argument in the comments. However, one really fundamental one is this: the market takes time to gather knowledge, respond to incentives and price fluctuations. When we forget this, as Austrians, we look like the neoclassical economist who disbelieves that there is really a dollar in front of his eyes, on the ground, because someone would have already picked it up. As Austrians we should know better.

The planners were right about this. What they got wrong was that a quick government fix would be better. They assumed that government would know, and could then use its swift ability to fix any flaws seen. This is not correct, despite the loud proclamations that we have to "do something" because any quick action is better than nothing--even if the gas truck arrives first, any old liquid is not better than nothing on a house fire. If government's actions both exacerbate the problem, and make it harder to figure out the right solution, it is not better than nothing either.

Government doesn't know, but sometimes the market doesn't know either: before it learns. So, the idea that the "market has spoken" is not necessarily correct. And in some cases, like this one, the "right solution" is based on unknowns, probabilities, and changing circumstances. What this means is that whatever the market "chooses" may or may not work out best. The choice that produces 60% success is a better choice than the one that produces 50% success, if they cost the same, but there is still a 40% chance it will fail.

Then, if it works out poorly, it will be assumed that this was the wrong choice--but it may have actually been the choice with the higher probability of success. It may have been safer, cheaper or wiser, but there is no way to know, at least without a hundred randomized trials. We don't have that--any other similar situation still has a thousand variables, just for the one data point.

If the market chooses, we won't know if it was the right choice. Market purists are wrong to say that the choice was right simply because the market chose it. The choice may be wrong, humans are fallible, information is scarce, and evolving the best choice takes time. Sometimes there simply isn't enough time. There are mistakes and trials along the way. Sometimes it would have been better to choose differently--its a learning process. On the other hand, even if it looks wrong, it may have been right, even as planners point to the failure: statistics are statistics.

If government chooses, we also won't know if they chose correctly. Market purists will say that the choice that emerged in the market was right, because the market chose it. Planners and lovers of the government fix will assume that what government chose was right, because "the people," or the voters, chose it. But, we don't know. We can't know--that is just the fate of being human, and living in a world of time and uncertainty. Life would be pretty boring if this weren't the case, but it makes economics a lot less precise than is usually assumed.

The Five Types of Economist

Yes, its been done many times before. I just had an early morning urge.

1. The Mathematical Economist

"[The mathematical economist] has 30 pages of mathematics, and at the end there emerge the assumptions he put in at the beginning."
- Voprosy Economiki 1948.

The Mathematical Economist should have been a mathematician, but he knew that he would end up teaching community college if he went that route. He also knew how to write down his assumptions (name his variables) at the top of his paper, and repeat them at the end, having done some simple calculus in between. Therefore he knew he could get a top teaching position at a good research university as an economist. The Mathematical Economist has no friends, a wife, two or three children and a bland, pasta-filled life. But he is happy, and has absolutely no idea how the economy works, which makes him smirk whenever he admits it to himself, which is rarely.

2. The Clever Tear-Down Artist

The Clever Tear-Down Artist is the loudest, if not also the most common, kind of economist. The best ones teach at Harvard and win Nobel Prizes. The Clever Tear-Down Artist spends his days writing "one-liner papers" (which are about 10-20 pages) that illustrate cleverly that (if you make certain absurd assumptions) water runs uphill, the Sun actually revolves around the Earth, and Bill Clinton was a faithful husband.

Well established facts are cleverly whisked aside to make room for much more important econospeak and charts and models. Every paper is exciting and pathbreaking, and does it all in just 12 pages! They are great for cocktail parties because they can be explained so easily and they wow the girls. This is important because the Clever Tear-Down Artist is always on a conference loop or book tour, so he finds himself at a lot of cocktail parties.

3. The Whiz-Bang Kid

The Whiz-Bang Kid is a fun breed. He isn't really an economist as much as a clever flame thrower. Unlike the Clever Tear-Down Artist, he means no harm (unless he wants to start a revolution). He isn't interested in poking holes in theory, he is interested in re-writing language. For the Whiz-Bang Kid, 10 pages should be enough to explain the origin of life, and still have space for an homage to his favorite poet. Any one of his papers would win him the Nobel Prize, except that none of them have any content. Although he is brilliant the first time you hear him, and he is clearly smart, after a while it becomes clear that he isn't really saying anything. Probably first in his class, The Whiz-Bang Kid is always chipper and has a beautiful wife. A little quirky, he works hard and everyone likes him. He goes on book tours and possibly becomes a talking head* if he strays too far into policy.

4. The Small Contributor

This breed is excruciatingly boring, which means that they could possibly die off, which would be a great relief. The Small Contributor writes 25-50 page papers offering an extremely well proven argument defending the (already accepted) theory that firms in southeast rural Thailand had seen lower demand for dyed cloth in the 1994-1998 period than in the 1998-2002 period... or at least accepted theory believes that is what this kind of economist writes about, as nobody has actually managed to stay awake through to the end of the title, let alone read a whole paper. It is well established fact that papers written by these economists are tagged "BioHazard" when they reach the peer review office, and quietly passed through without another glance. These economists are either unmarried, or have an equally dull wife, if such a thing is possible for a woman.

5. The Good Economist

...usually either is, or should be, in another department

*I have not included the Policy Wonk, but they are pretty self-explanatory. They wonk.

How to be a Great American President

I have worked out the formula for creating lasting legacy, and an image of true greatness. Someone told me a while back that the American people remember FDR fondly because he carried them through the Great Depression—even if he did make it longer with his bad policies, he was there for the people, and suffered with them (even if he skimmed the cream off the top*).

So, here is the formula:

1. Run for president right after a stock market crash, preferably with a bank correction, and preferably one that the current president is fudging up.
2. Enter office and immediately pass a bunch of laws that will slow the correction and lengthen the recession, and bash business a lot, and take them to court; ideally turn the recession into a depression.
3. Once the recession has set in, begin to transfer powers previously held by other branches to the executive. Don’t forget to reach for the gold, you’ll never get it if you don’t try.
4. Use these new powers to create a bunch of new wings of government directly controlled by you, and use them to transfer money from one group in society to another—preferably, take from the whole people and give to small groups that will reward you with lots of good publicity and votes.
5. Most important: make soothing, well-written speeches. Lots of them.

If done right, all the powers over the economy will be nicely controlled from Washington. As written up at the Franklin D. Roosevelt American Heritage Center:

Under the New Deal, the federal government greatly extended its power over the economy. By the end of the Roosevelt years, few questioned the right of the government to pay the farmer millions in subsidies not to grow crops, to enter plants to conduct union elections, to regulate business enterprises from utility companies to airlines, or even to compete directly with business by generating and distributing hydroelectric power. All of these powers had been ratified by the Supreme Court, which had even held that a man growing grain solely for his own use was affecting interstate commerce and hence subject to federal penalties.

Of course, there are other things that you can do to be remembered well, including fighting a long war. But I think those 5 can already bring about a legacy. If we do not learn, history truly does have a way of repeating itself—in this case, likely because someone did learn from history, and wanted to be the next Great American President. Let's not let him.

* John Flynn recalls the scandals that occurred and were well documented by newspapers at the time, of the Roosevelts’ abuses of their position. For example, Elliot Roosevelt had his father convince the A & P Tea Company to loan Elliot $200,000, backed by shares in a Texas radio station. The company went along in order to avoid the New Deal inquiries that Roosevelt could enflame. In 1942, the President gave $4,000 to A & P and demanded the “worthless” stock back. It was worth $1 million, but A & P gave it back to the New Deal architect, and deducted the $196,000 loss off their tax returns.

Austrian Media Appearances

After watching this excellent Brooklyn libertarian cable interview with Cameron Weber, I started putting together a list of some appearances by Austrian-leaning economists. Here are some I have found and really enjoyed:

http://freedomwatchonfox.com/ is one of the bigger-name (but also watered down, and sound-bite filled) choice, it regularly has Peter Schiff and Ron Paul.

Here is an interview with Steve Horwitz.

Bob Higgs, who was brilliant, in a long C-SPAN in depth talk.

Excellent Alex Tabarrok talk at TED.

Finally, here is a Hayek video from his later life.