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Peter J Boettke wrote:
>
> On Policy, there is less scope for agreement between Steve and myself. I
> would have thought that our humility would have placed serious limits on the
> state's ability to act proactively. Anyway, at a meta policy level I would
> stress:
>
> (1) that we cannot assume government as a corrective to any so-called market
> problems, but must first examine how government itself will make the
> decisions to supposedly correct the so-called problem;
History has shown that government intervenes only in market failures. The New
Deal was a classic example. Recent market failures surrounding LTCM, Enron,
telecom IRU (Indefeasible Right of Use), etc., have created doubts about
deregulation of financial markets.
> (2) that incentives do indeed matter and that policy is never a choice about
> particular distributions of income, but always a choice over rules of the
> game which engender a pattern of exchange and production. State actions are
> never neutral with regard to the future economic decisions of actors.
Special interest lobby on policy is indeed very much focused on income
distribution not between rich and poor, but between rich and rich. There is a
direct relationship between income and power and vice versa.
> (3) How do we know markets are cyclical? I deny this proposition and look
> instead for the trigger mechanism that generates the cycle.
Market have not been cyclical for over a decade. This is because the economy is
no longer functioning on relationships between supply and demand. Structured
finance (derivatives) essentially allowed an unprecedented explosion of credit,
by unbundling risks for assignment to a wide range of risk takers who sought
corresponding returns. While hedging initially provided protection against
volatility to individual market participants, it soon became profit centers for
financial institutions. This led to the institutionalization of volatility as
regular market opportunities. Financial institutions actually sought volatility
in the system to
provide continuous profit. Creative accounting, whose peculier logic evolved
from structured finance, also made the traditional debt equity ratio immaterial.
Ways were gradually devised for the large market participants to structure debt
as hedges, through swaps that avoid taxes and balance sheet liabilities. Swaps
enable
borrowers to legally book loan proceeds as income and loan liabilities as future
capital expenditure.
Circular counterparty risks suddenly became neutralized risk, and swap cash flow
became net revenue.
The global finance game became a sure win for those who held dollars. But after
the Asian Crises of 1997, essentially the whole world adopted dollarization, if
not directly, at least through hedges.
At this point, the US economy suddenly lost its dollar hegemony advantage
because US entities are no
longer the only one with access to dollars. To keep a strong dollar monetary
policy, the Fed needed to
tighten dollar money supply. But it did not slow the economy because structured
finance permitted debt
to expand without a corresponding expansion of equity. This gave the US economy
a low cost import
boom, while the US trade deficit merely forced foreign exporters to finance the
US debt bubble through a capital account surplus. Japan did it for a whole
decade, pushing its own economy into permanent recession while it dollar
reserves mounts. China (including Hong Kong and Taiwan) took up the void of the
Japanese slack by 1995 and the three Chinese economies together now hold more
dollar reserves than Japan (over $400 billion). The growth of the 1990s was a
sructural shift of the US economy from industrial capitalism to finance
capitalism, with the US as the forerunner and leader through financial
globalization which simultaneously shifted labor intensive manufacturing off US
soil while lowering the cost of manufactured products. Financial products and
intellectual property constituted most of the growth. With the Big Bang,
London, Franfort, Paris, Tokyo, Hong Kong and Singapore became financial
outposts of New York.
This game is in danger of ending, as the US consumer market become saturated and
resigned to low
single digit growth, regardless of business cycles. The wealth effect from a
tripling of the DOW did not
double consumption in the US. It doubled investment globally. The competition
for credit will be in
favor of double digit growth markets in the NICs, but the US continued to
dominate global finance
through its sophistication and innovation. The problem is that all unregulated
market eventually self
destruct, not by its failure, but by its very success. And regulation cannot
cure the problem because
regulation only makes sense after market failure disaster, never before. Just
three telecom heavy weights, Global Crossing, Qwest and Worldcom, have seen
their combined market capitalization drop by over $2 trillion, that's 22% of the
GDP. Trillions of laons had been colateralized by the vanished market
capitalization, triggering defaults and bankruptcies. Finance capitalism is a
system in which capital is only a notional value upon which to build a gigantic
mountain of debt. Frequently, market need to be regulated to remain free.
> Perhaps it is
> speculation, but why are people led to make a systemic error in their
> speculation? I want to explain the "cluster of errors" that occurs during a
> recession or depression. Business failure is not the same as a business
> cycle --- businesses fail all the time and that is one of the beauties of
> the market economy ---- you get penalized if you no longer satisfy consumer
> demands (this might raise some eyebrows among John and his friends ---
> witness the 'beauty' in the Enron case; a large firm with big political
> connections is nevertheless forced out of business). Even the most recent
> dot.com was not a business cycle --- it was a market readjustment. Those
> resources didn't translate into "lost" resources, the capital (physical and
> human) was reallocated quickly to more higher valued uses.
In the testimony of Chairman Alan Greenspan Federal Reserve Board's semiannual
monetary policy report to the Congress, before the Committee on Financial
Services, U.S. House of Representatives on February 27, 2002:
"From one perspective, the ever-increasing proportion of our GDP that represents
conceptual as distinct
from physical value added may actually have lessened cyclical volatility. In
particular, the fact that concepts cannot be held as inventories means a greater
share of GDP is not subject to a type of dynamics that amplifies cyclical
swings. But an economy in which concepts form an important share of valuation
has its own vulnerabilities.
As the recent events surrounding Enron have highlighted, a firm is inherently
fragile if its value added
emanates more from conceptual as distinct from physical assets."
> (4) I don't believe there are macroeconomic variables unconnected to
> microeconomic activity, so while we may have macroeconomic problems, I
> believe there are only microeconomic solutions. Thus, policy should be
> geared at creating conditions for individual actors to face high powered
> incentives to utilitze the information at their disposal as best they see
> fit to coordinate their plans with those of others to realize the mutual
> gains from exchange.
>
> (5) Economic Freedom is positively correlated with Economic Growth, and
> Economic Growth is positively correlated with a host of measures that many
> consider to be primary goals of a human society --- life expectancy, health,
> education, political voice, etc. We can discuss this, but an examination of
> the data is in order for us to discuss this and not impressions that we have
> from long ago when our political opinions we being formed. In short, I
> think the evidence is a lot clearly than some of us want to let on that
> private property, freedom of contract, monetary constraint, and fiscal
> responsibility and free and and open trade are the key ingredients to more
> peaceful and prosperous lives, and thus provide the basis for human
> "flourishing" in the Aristotlean sense.
>
Freedom is not a divisible commodity. Either everyone is equally free or no one
is free. The notion that economic freedom is positively correlated with
economic growth is a US ideological fixation that has very little universal
relevance. The Anglo-American system of politics and economics, like any system,
rests on certain principles and beliefs. Americans often act as if these were
the only possible principles and no one, except in error, could choose any
others. Political economics becomes an essentially religious question, subject
to the standard drawback of any religion -- the failure to understand why people
outside the faith might act as they do.
Polanyi challenges Adam Smith who suggested that the division of labour depended
upon the existence of the market, or upon man's "propensity to barter, truck and
exchange one thing for another", because the market economy had not appeared to
much extent in Smith's time. Even where it had appeared it was a subordinate
feature of economic life.
Trade and Market in the Early Empires// (Polanyi et al, 1957): 'What is to be
done, though, when it appears that some economies have operated on altogether
different principles, showing a widespread use of money, and
far-flung trading activities, yet no evidence of markets or gain made on buying
or selling? It is then that we must re-examine our notions of the economy.'
(Polanyi et al 1957 xvii).
As Friedrick List pointed out, the notions of Adam Smith were meely what suited
the British national economy at that time, rather than universal truth. TheUS
has not always promoted free trade. Alexander Hamilton was a economist
nationalist to whom the nation owes much.
Henry C.K. Liu
Chairman
Liu Investment Group
157 East 62nd Street
New York, N.Y. 10021
>
> All this said, Economics is definitely in the need for some debunking and
> Steve has no doubt put down what he considers a strong argument for
> debunking in his book --- I still hope to get a copy someday and would in
> fact like to get somebody to review it for the RAE. I remain skeptical of
> the mathematical flaw argument --- I just don't believe errors are made in
> the simple models ONCE the relevant assumptions have been made. I am much
> less skeptical about the criticism of relevance to the real world of these
> models (including I should add the derivative model of imperfect markets!!!)
>
> I do want to end this note with a point which I believe all heterodox
> economists MUST recognize --- neoclassical economics are honest and
> hard-working souls just like us. They are often brilliant men/women trying
> to figure out the world around them. They are not stupid or evil just
> because they don't agree with us about economics methods, methodology and
> policy. The burden of proof must always rest on the shoulders of the
> challengers to the orthodoxy and we heterodox economists (of all stripes)
> are often our own worse enemies by the way we behave and spend our time
> talking only to each other. Life is way too short, and economics is way too
> interesting to be making this sort of mistake.
>
> Peter J. Boettke, Deputy Director
> James M. Buchanan Center for Political Economy
> Department of Economics, MSN 3G4
> George Mason University
> Fairfax, VA 22030
> PHONE: 703-993-1149
> FAX: 703-993-1133
> EMAIL: pboettke@xxxxxxx
> HOMEPAGE: http://www.gmu.edu/departments/economics/pboettke
> ----- Original Message -----
> From: "Steve Keen" <s.keen@xxxxxxxxxx>
> To: <HAYEK-L@xxxxxxxxxxxxxxxxxxxxx>
> Sent: Sunday, March 17, 2002 12:49 AM
> Subject: Re: [HAYEK-L:] KEEN SEMINAR Plea from the innumerate
>
> > Peter put forward an interesting challenge:
> >
> > >I guess one what to advance this would be for Steve to list the five most
> > >important changes to education he could hope for from his book, and then
> the
> > >5 most important policy proposals he would advocate
> >
> > I'll try to meet it. On the 5 points for education:
> >
> > 1. Make economics education more modest and honest, even within the
> mainstream.
> >
> > One of the first things is that economists should realise how little they
> > truly know in an unconditional way. Many of the beliefs that economists
> > have are little more than that--beliefs--whereas our equivalents in the
> > physical sciences have a much stronger foundation of knowledge.
> >
> > "A demand curve slopes downward in price"? If we live in a representative
> > agent world in which the distribution of income doesn't affect demand; but
> > if we don't, to quote Varian's unjustifiably oracular statement
> > "Unfortunately ... The aggregate demand function will in general possess
> no
> > interesting properties... The neoclassical theory of the consumer places
> no
> > restrictions on aggregate behaviour in general." (Varian 1992)
> >
> > "Increasing wages above equilibrium will lead to unemployment?" If the
> > aggregate labour supply curve is upward sloping, and if there aren't
> > aggregate distributional and output effects from modifying this pivotal
> > market, and if static equilibrium analysis is appropriate in this
> instance,
> > and if...
> >
> > "Indifference curves can't intersect"? Not if the experimental research
> > into consumer behaviour is anything to go on--where attempts to apply
> > revealed preference theory have failed abjectly.
> >
> > I could go on. There are so many areas in which the confidence with which
> > economists believe various propositions, and the confidence with which
> they
> > teach them to their students, are simply not supported by their own
> > theoretical work--let alone by any decent experimental testing.
> >
> > Given the nature of current education, students emerge convinced that
> > economic theory is a sound edifice when it is not, and that what is
> > required is extension of fundamental concepts to new areas, when what may
> > really be required is a deeper examination of those fundamentals
> > themselves, and perhaps a new foundation altogether.
> >
> > 2. Teach other schools of thought and the history of economic thought, as
> > well as neoclassicism
> >
> > This is obvious, but the failure to do again enshrines the belief that
> > there is only one way to think economically--or it drives those who don't
> > accept this into the periphery. Given how little mainstream economics
> > really knows, it is in no position to rule as inadmissible contrasting
> > modes of thought.
> >
> > 3. Learn from true sciences and other social sciences
> >
> > There has been enormous development in the physical sciences in the last
> > 130 years, with dynamic methods especially dominant, and of course the
> > recent development of chaos and complexity theory. Understanding this
> > literature requires an education in at least ordinary differential
> > equations and computing, yet economic instruction in mathematics continues
> > to be dominated by static equilibrium methods that long ago ceased to be
> > where the action is in genuine sciences.
> >
> > At the other end of the spectrum, social sciences have improved greatly in
> > the ability to find out how people actually behave. Survey methods,
> > computer software to analyse these, etc., are far more sophisticated than
> a
> > century ago. Yet economists fail to ask people how they behave because
> they
> > often think they know the "real" answers without asking them, and
> > experimental economics itself appears more directed to confirming accepted
> > theories than setting up genuine tests of them.
> >
> > 4. Recognise the political components of economics
> >
> > Many potential students of economics are turned off by the virtually
> > complete dismissal of political questions given the mainstream belief that
> > economics is a positive science--which nonetheless always seems to lead to
> > superficially conservative policy recommendations. Acknowledge that
> > economic policy is an area of political debate over the nature of human
> > society, where ethical issues have legitimacy.
> >
> > 5. Somewhat paradoxically to 4., try to inspire students to emulate
> > meteorologists
> >
> > As well as being a political discipline, economics is also the study of a
> > complex system whose behaviour cannot be predicted from the nature of its
> > constituent parts. Relationships matter as much as entities, and complex
> > feedbacks can undermine direct effects.
> >
> > Though meteorologists don't have to cope with fundamental uncertainty of
> > the future in the same sense that economists do--the mass of the Earth's
> > atmosphere can be taken as a constant, for instance--there are
> similarities
> > between what meteorologists have to do and economists should do. No-one
> > likes a hurricane, but meteorologists need to be able to predict them if
> at
> > all possible. I think economics has been badly afflicted by a predeliction
> > for proving that a capitalist system is the best of all possible worlds
> > (just like Marxists were afflicted by a predeliction for precisely the
> > opposite), and this welfare bias in the development of economics has
> > distorted its development.
> >
> > We get credence from the public, not because they want welfare theorems
> > proven about the society in which they live, but because they (largely
> > erroneously, in my view) credit us with some expertise on the economy and
> > hope that our advice might prevent the occurrence of the economic
> > equivalent of hurricanes--or at least make it possible to warn of their
> > impending arrival.
> >
> > To some extent, we need to live up to that expectation, and we could do
> > worse than emulate how meteorologists have approached that task over the
> > years. Students need to be inspired to try to take this task on, rather
> > than inspired into the small-scale stuff that dominates graduate endeavour
> > these days.
> >
> > On the policy front, I don't really believe that my book gives me a great
> > deal of legitimacy to comment, since so much of it was a deliberate
> > exercise in debunking, rather than an attempt to provide alternatives.
> >
> > However, there are some policy implications that I think flow fairly
> > naturally from this debunking, so I'll mention my top three here:
> >
> > 1. Accept that finance markets are unstable, potentially destructively so,
> > and consider the need for regulations and institutions to restrain their
> > instability
> > 2. Accept that unemployment isn't simply caused by high wages, and that
> > unions (and employer groups) have a legitimate presence in the economic
> system
> > 3. Accept that a market economy is cyclical, and that it is therefore
> > unfair for the individual to shoulder the burden of this cyclicality
> > (through unemployment-induced poverty, etc.) without assistance from
> > society in general
> >
> > Cheers,
> > Steve
> >
> > Home Page: http://www.debunking-economics.com
> > http://bus.uws.edu.au/steve-keen/
> > http://www.stevekeen.net
> > Dr. Steve Keen
> > Associate Professor of Economics & Finance
> > School of Economics and Finance
> > Campbelltown Campus, Building 11 Room 30,
> > UNIVERSITY WESTERN SYDNEY
> > LOCKED BAG 1797
> > PENRITH SOUTH DC NSW 1797
> > Australia
> > s.keen@xxxxxxxxxx 61 2 4620-3016 Fax 61 2 4626-6683
> > Home 02 9580-4663 Mobile 0409 716 088
> >
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