Archive for August, 2011

My God! Lord, my God! Please Make the Devil Keep his Word!

August 18, 2011 3 comments

So I’m a libertarian–a real libertarian, not a leftlibertarian (it’s like a really bad horror movie, you know it’s sick and wrong but for some reason you can’t help watching it again and again).  I think the government should be a lot smaller and generally leave us alone.  Also, I’m an economist (more or less) and I especially think it should stay out of markets and economics.  Lots of people agree with me.  Lots of people don’t.  The ones who do seem to be growing in number which is good.  But there is something problematic going on intellectually in the movement and it could very well be our undoing if we don’t sort it out quickly.

Over the past century there has developed a major divide in macroeconomic thought.  The two sides can be represented by the Keynesians and the Austrians with several other schools falling somewhere in between (monetarists, RBC, etc).  To put things simply, the Keynesians are the big-government types and the Austrians represent our side.  For the most part the Keynesians have been winning the battle.  Naturally, the two sides don’t care much for each other and if you go on the Austrian blogs you will find a general dismissal of Keynesian ideas as confused and intellectually bankrupt.  I have no interest in defending Keynesianism, I have been an ardent critic of it.  But these people aren’t as confused as Austrians seem to think.  In fact the root problem with Keynesianism is that it is morally bankrupt.  It’s true that there are important theoretical flaws in their models but these are not so simple as the broken window fallacy. The flaws are there to cover up the moral foundation which would terrify most people if it were revealed.  But the general conclusions are largely correct.  This should concern us much more than if they were just completely misguided but if we are going to do anything meaningful about it we have to acknowledge how and why their theories “work.”

I will try in coming weeks/months/years to make the case that orthodox Keynesian economics is largely correct and that this is why we should be concerned.  But this is too large a task to undertake in this post.  So my appeal to you the reader is not to believe me but just to admit that it’s possible.   So let me try to explain why there is so much distance between the two sides.

Austrians are like scientists and Keynesians are like engineers.  Just as a scientist tries to describe the laws of nature, Austrian (and most of classical) economics is concerned with describing how a natural, free market economy functions.  Just as an engineer tries to construct devices to overcome the laws of nature, Keynesians concern themselves with designing a system to overcome the laws of economics.  Of course neither of them can change the natural law, but they can often overcome what seem to be the obvious implications of those laws.  The law of gravity says there is a force pulling things down (more or less).  The obvious implication of this is “what goes up must come down.”  Nonetheless, an engineer can design a craft that flies.

Hundreds of years ago, people claimed that government spending creates jobs and grows the economy.  Austrians and classical economists correctly identified that government spending misallocates resources and doesn’t help the economy.  But the other side didn’t just say “oh I guess you’re right, we give up.”  And what’s more, they didn’t just keep making the same flawed argument (though this seems to be the view of most people on my side).  They actually constructed an economy in which the broken window fallacy is seemingly not a fallacy.  Of course, there is a fundamental law of nature underlying the concept and they can’t change that.  Yes, it’s true that destruction (in this sense) is inefficient and governments misallocate resources.  Yes we would be better off if the government didn’t do this stuff and we had a free market.  But we don’t have a free market, we have a contraption constructed by progressives to make these fallacies hold.

So is it so hard to believe that Krugman might be right, that more government spending–even wasteful spending–might actually improve the economy?  This doesn’t invalidate any tenants of Austrian or classical economics any more than observing an airplane flying negates the law of gravity.  But just like an airplane, an artificial device constructed to combat the laws of nature can do so only temporarily.  The economy is an airplane and we are citing the law of gravity to deny that we are flying.  But this doesn’t do anything to save us.  The plane is going somewhere.  That is what they don’t tell us.  They tell us “just don’t worry it’s flying, as long as it keeps flying we’ll be fine, we know what we’re doing.”  The insight that we need to glean from our knowledge of the laws of nature is not that planes don’t fly but that eventually they come down somehow.  If we notice this we can start asking when, where, and how it will come down (the answer is not good).  But in order to answer these questions we have to understand how planes fly in the first place.

So please, just ask yourself if you are willing to go down this road.  If you are, please stay tuned to my blog.  Like I said, I don’t expect you to be convinced by this that Krugman is right.  I’m not arguing that we should do what he is prescribing and I’m certainly not trying to convince you to become a Keynesian.  But if we don’t understand why he wants to do it we can’t work toward a real viable alternative.  Intellectuals on our side of the debate are well aware that what we have is not really free market capitalism.  They are well aware that the Federal Reserve manipulates the economy and creates bubbles.  In other words they are aware that they have constructed a system capable of making the economy function in ways which are different from a natural free market economy.  But then when a Keynesian comes along and says “look, the machine works like this,” all I hear from my side is “the machine doesn’t exist!”  But never forget my dear brothers, “when you hear the progress of enlightenment vaunted, that the devil’s best trick is to persuade you that he doesn’t exist!”

The Rodney Dangerfield of the GOP

August 17, 2011 4 comments

This came to me courtesy of Thomas Hepner who just started a blog.

Categories: Politics Tags:

Couldn’t Resist

August 9, 2011 Leave a comment
Categories: Uncategorized

Playing Games with the Economy

August 9, 2011 2 comments

Here is a quote I used in an especially prescient post in March of last year:

“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenue — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

Now Democrats are blaming the Tea Party for the recent downgrade of U.S. debt by S and P.  This, of course, is a complete sham.  They are saying that the downgrade and subsequent stock market declines are due to Tea Party brinksmanship with the debt limit.  There are two huge problems with this reasoning.  The most obvious is that the Tea Party types were using said brinksmanship to try to affect the changes that ratings agencies had warned us must happen in order for us maintain our AAA rating while the Democrats were employing the same level of brinksmanship (brinksmanship is always mutual) to maintain the status quo of massive spending, massive entitlements, and massive debt.  Then after the brinksmanship has come to an end and resulted in some typical Washington do-nothing “compromise,” we get downgraded.  And this, Democrats would have us believe, is because of the very people who tried and failed to do the things the rating agencies were telling us we had to do.  It should be pretty obvious that this makes no sense.  We got downgraded not because the right tried to cut deficits in a meaningful way but because they failed to do so. After all, if they ratings agencies were just worried about a debt ceiling increase, shouldn’t they have downgraded us before that was settled?

The second point is more important.  The fall in markets is not due mainly to the debt downgrade.  This may be part of it, but treasuries actually went up.  If the only thing happening were U.S. bonds being seen as more risky, money would have flowed out of treasuries and into other investments, possibly the stock market or possibly cash, gold, etc.  What we are seeing is in fact the deflationary contraction resulting from a monetary bubble.  Why are treasury yields actually decreasing on a U.S. credit rating downgrade?  Why is oil falling dramatically on a U.S. credit rating downgrade?  Why is the stock market falling while yields are oil are also falling?  This doesn’t make any sense if you attribute it to a debt rating downgrade.  But this is exactly what you would expect to happen when the borrowing dries up in a debt-fueled bubble.

Commodity Bust

August 4, 2011 Leave a comment

Some things that happened today:

The DJIA fell a lot.

Oil prices fell

Silver prices fell a lot (gold prices fell a little but put options rose more significantly)

“Japan and Switzerland took action to hold down the rise of their currencies.” -WSJ  (Video)

Jobs numbers continue to be weak

The race to inflate the most is on.  Get ready for QE3….


August 4, 2011 8 comments

This post is about the boring kind of model.  For the good kind click here.  Most of the groundwork has already been laid in recent posts so I will cut to the chase.  The conception of god laid out on this blog is a way of organizing knowledge of reality.  The important essence of this approach is to organize reality into levels and to appreciate the different boundaries to knowledge at each level.  The physical world is one level.  God (I will stop adding “as defined” or anything like that from now on) is on a higher level.  From that level our reality looks different than from ours.  Furthermore this means that there is a wall past which we cannot see because of our limited perspective.  This wall is dynamic, it moves as we learn more, but it cannot be eliminated.  We can understand how gravity works but we can’t understand why gravity works.  We can understand that we like cheetos but we can’t understand why.

The easiest way to understand this concept of god is to understand the concept of a model.  This is because models represent the level below our own.  I make models for a (meager) living.  When one does this in economics the process is more or less the following:

1. Speak some actor or actors into “existence.”

2. Define some parameters describing the situation with which they are faced.

3. Define some rules prescribing how they will act.

4. Figure out what happens.

The whole point of doing this is that once you complete the first 3 steps the 4th step is determinate.  This allows us to say what happens with certainty.  There is no deficiency in our knowledge because we had to specify everything when constructing the model.  All the laws governing the model must be constructed out of nothing.  Of course when making an economic model much of this has already been done and can be taken for granted–for instance mathematics.  Mathematics is just a large and complex model.

If in other sciences we should arrive at certainty without doubt and truth without error, it behooves us to place the foundations of knowledge in mathematics. – Roger Bacon.

The important thing to understand about mathematics and other models in economics and physics and any other discipline is that they have no physical existence.  That is to say they don’t exist on our level.  They are a level below because they were created by mankind our of nothing.  Because of this we have complete knowledge of them.

To understand the different dimensions I have mentioned previously, notice that when we create a model we can put in things such as probabilistic outcomes.  But when we do this we know what all the possible outcomes are and what the probabilities are.  It is not that one of them actually “happens.”  This notion of “happening” only exists if you are trapped within the model and only experience one dimension.  The modeller sees all dimensions simultaneously.  The same phenomenon is true of concepts like time.  When making an economic or physics model it is often helpful to include a variable for time.  But as the modeller you do not experience time linearly, you see all time at once as any other variable.  You can change an initial condition and see what happens at every time.  The model is like a snapshot.  This doesn’t mean time doesn’t exist it just means that it looks different to the modeller than to the modeled.

I could go on about this but I think I will just leave it at that for now and see if I get any comments and deal with them if/when they come up, except to say, for my objectivist friends, that when organizing things this way many other characteristics commonly attributed to god (or God) kind of make sense.  For instance:

So God created man in his own image, in the image of God he created him…


P.S. If objectivists relaxed their initial disgust for religion, they might find much of the meaning in the early part of Genesis very agreeable.  Maybe I’ll write a post about that…

Categories: Philosophy Tags: ,