Home > Macro/Monetary Theory > A New Direction

A New Direction

When I started this blog, it was basically just for me to practice writing down things I was thinking about.  I had a lot to say about liberty and property rights and stuff like that.  But lately, these things have been under such constant assault and it should be so obvious to anybody who thinks about them, that I have had little motivation to come on here and rant about the same things everyone else is ranting about.

Meanwhile, libertarian ideas have been on the rise.  This is good.  Unfortunately, this movement is mired in some serious economic confusion.  In short, the reliance on Austrian economics is leading to a sort of conservative/libertarian orthodoxy which is not only misguided but increasingly isolated and disconnected from all other academic thought on economics that has taken place over the last century.  We seem to think that everything worth knowing about economics Austrians have known for fifty years and all other schools are just attempting to obscure that reality to support some alternate ideology.  This attitude stands in the way of any intellectual progress as well as any hope of communicating with non-Austrians.

However, libertarians seem to be drawn to Austrian economics because there is essentially no other school of thought out there that embraces decentralized, free-market economic policies.  That is understandable.  But I find myself on an intellectual island.  Here are some of the things I believe.

1.  Free markets are good.

This is both a moral and practical belief.  Morally, I believe that a system where property rights are protected and people are otherwise free to do what they want with their lives and their property is the most just system and most harmonious with natural human rights.  In addition to this, I believe that free markets and property rights generate more prosperity than any other system.  This does not mean that they are perfect but once you start allowing the government to arbitrarily meddle with markets in the name of efficiency, or “equality” or whatever, you start down a road that always ends up doing more harm than good.

2.  Central banks are bad.

This is also both a moral and practical belief.  Morally, I don’t think you have a free economy (see belief #1) when there is a centralized authority manipulating the money supply and financial markets.  Most people, frankly, don’t care about this as long as the system works fairly well.  Practically, I don’t think this system will work well in the long run.   This is because I believe it requires the Federal Government and central bank to be constantly taking over more and more of the economy and this will eventually crush the free-market system which is the source of all of our prosperity.  But this is difficult to explain and can’t be shown by pointing to historical data because it is largely a prediction about things that haven’t happened yet.

3.  “Mainstream” economics is not that bad.

There are a lot of issues tied up in this one.  For one thing, many Austrian criticisms of mainstream economics derive from a misunderstanding of mainstream economics.  Utility is one glaring example.  When it comes to macro, mainstream economics does a much better job of describing how the economy actually behaves. (I particularly think Market Monetarism does the best job of this.)  Of course, macroeconomics is a really complicated thing and they are certainly not perfect.  The main shortcoming of “mainstream” economics is that it is nearly entirely focused on describing the current system and almost never deals with questions like “is this system a good idea?”  Austrian economics, on the other hand, is still using arguments that were used a hundred years ago to argue that the system we have now was not a good idea to argue, not that we should have a different system, but that we should have tighter monetary or fiscal policy within the current system.  That makes no sense and this causes Austrians to be mostly dismissed by people who understand mainstream economics.

[Note: There are, no doubt, some Austrian economists out there who would consider my characterization of them inaccurate, and maybe it is.  However, it is an accurate description of the popular arguments which I encounter frequently on the internet/TV/etc. and are often associated with that school.  For what it’s worth, I do think Austrian economics has made some meaningful contributions, I just don’t think it is nearly as perfect as many other libertarians seem to.]

These are essentially the three pillars of my macroeconomic beliefs though there are a lot of more specific details related to them.  So what school do I belong to?  Seemingly, the only school that believes in the second one is the Austrians but they are completely turned around on number three.  In short, there seems to me to be an intellectual hole in the blogosphere.  There has to be room for people to question the efficacy of central banking without throwing out all of mainstream economics.

It is my intention to refocus this blog to meet that need.  I have been deriving a macroeconomic model which I think can ultimately explain, in “mainstream” terms, the threat that central banking poses.  It is not quite complete and I certainly don’t claim to have everything figured out but I think we have to start making intellectual progress on these issues which means we have to start discussing them in an open-minded way.

This puts me in a strange position where I will be arguing mainly with the people who agree the most with my values (conservatives and libertarians).  In some ways I would rather be arguing with progressives.  However, right now, I think we need to get our own house in order before we will be able to make further progress so I see no way around it.  To this end, I intend to basically dive in and spend the next couple weeks identifying the biggest economic misconceptions conservatives have.  I hope this will be taken in the spirit intended.

[First misconception: hyperinflation/money isn’t backed by anything]

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  1. J Thomas
    March 4, 2014 at 3:50 am

    This is interesting! You are an original and creative thinker.

    I want to suggest a few ideas that are mostly compatible with yours.

    “1. Free markets are good.”

    Yes. But there are a large number of ways that free markets can vary in detail. And some free markets are better than others. We should carefully study which free markets are better in which circumstances, and look for ways to get better free markets in place of worse ones.

    “2. Central banks are bad.”

    Yes, but traditional banks are kind of bad by themselves, and central banks are an inadequate solution to another bad problem.

    The banking industry as a whole does things which regulate the economy. It is not good to have companies that regulate the economy for their own short-term profit. It is not good to have companies that regulate the economy to improve their own competitive position among their competing banks. Etc.

    We need a way to provide the useful services that banks currently perform while ameliorating their worst excesses. Ideally that would happen without government regulation. I tend to think it should be done by some sort of private institutions that would not deserve to be called banks, but I don’t know in detail how it could work. Certainly if we didn’t have banks we wouldn’t have central banks either.

    “3. “Mainstream” economics is not that bad.”

    As you say, mainstream economics provides some insight into how the economy currently works. It’s interesting to consider how to design an economy that would work better. How to test whether that economy would work better. How to get from here to there, with room to make changes or even reverse course in response to unexpected results.

    It’s possible to argue that we will get the best results if we prevent government from interfering (except perhaps to stop private coercion) and then let things take their course without any thought involved. I have some doubts about that approach. I think it’s better to try to think things out. Ideally we might find ways to encourage useful institutions without coercing anybody to do it.

    • Free Radical
      March 4, 2014 at 9:44 pm

      Thanks again Thomas. I think most of your arguments with the things I say come back to a failure to fully appreciate the fundamental distinction between what governments do and what individual citizens of a free society do. For instance you say “we might find ways to encourage useful institutions without coercing anybody to do it.” But everything the government does is coercive. That’s the only distinction between a government and a private entity. When I go to the store and buy a loaf of bread I am finding a way to “encourage” people to grow grain, bake it into bread, ship it to my proximity and give it to me. I do this by paying them more than it costs them to do this. But I have to offer them something that gets them to do it voluntarily (makes them better off). Similarly, if I donate money to a charity that provides food for the homeless, I am finding a way to get those people to voluntarily provide bread to the homeless. But just about anything that can be made mutually voluntary does not require government to accomplish (at least not direct government decrees, you still need a government to define and protect property rights). The only special power of government is to force people to do things that they otherwise wouldn’t be willing to do. So if the government gives the poor person food stamps, they are forcefully taking from the production of someone else (against their will) and using that to then provide the incentive for the farmer/baker/grocer to provide the bread. You can say that the person may have been willing to contribute to feeding the homeless but if this is the case, the government is not required, let them do it voluntarily.

      You make the same mistake when you accuse big banks of “regulation” the economy. This is a strange definition of “regulation.” A big bank certainly has an effect on the economy (so do I when I buy a loaf of bread, it’s just smaller) but this is fundamentally different from when a government “regulates” the economy because the bank cannot force people to do things that they otherwise wouldn’t do, the government can.

      I have no doubt that there are a lot of things that you think would be better if the government prevented/imposed them. Everyone has a lot of things like this. The problem is that if you go around making arbitrary judgments about what would be good and bad and then empowering the government to impose them on other people who disagree with you, you undermine the entire foundation of a free market and a free society. Everyone wants to do this just a little bit in certain cases but everybody’s cases are different. Look where that’s gotten us.

      • J Thomas
        March 5, 2014 at 12:09 am

        “For instance you say “we might find ways to encourage useful institutions without coercing anybody to do it.” But everything the government does is coercive.”

        Suppose that you and I think about the economy and we agree that some particular new sort of economic entity would be useful. Unless we got government to pay for it, or it ran from private charity, we would need a way for it to make enough money to support itself. OK, that’s a constraint. Suppose it could pay for itself, but it could not hope to make as much profit as existing organizations that do more harm and less good — because they have ways to benefit people a little bit while they benefit a lot. Maybe if we spread the word about how good it would be, we could find people who would run that organization even though it can’t make the most profits. And maybe customers would find they like it better, and switch. It might thrive even without being the most profitable.

        But existing institutions might use their piles of money to influence the government to shut down our new improved competitor. Or regulate it out of existence. We might hope to avoid that….

        If we find ways to get an improved economy, we might not need government to get them started. Let’s first look in detail at what works and what could work better, and then look at ways to actually make improvements.

        It’s possible I might see an improvement that I think could be made by coercive government. I can’t say ahead of time. And it’s possible that I’d later see that the problems of government would make it not an improvement after all. I might look for ways to get government to function better, or I might give up on that approach. I’m not ready to prejudge it. I won’t say that government must always be bad and I won’t say that it can sometimes be good. I might look at individual cases and think carefully about those. But I’d prefer to find improvements that can work without government involvement.

        “When I go to the store and buy a loaf of bread I am finding a way to “encourage” people to grow grain, bake it into bread, ship it to my proximity and give it to me. I do this by paying them more than it costs them to do this.”

        Yes, and when you go to the store and tell them “I’d really like to buy a frozen pizza that has squid with teriyaki sauce, peruvian chicken, and falafel on it” do they notice? They almost entirely try to create things they think you will like, and you can guide them by buying or not buying. There’s room for a lot more persuasion here.

        “you still need a government to define and protect property rights”

        It’s possible that a different arrangement of property rights might serve us better. If you and I agreed on one we would have the task of persuading the public, and eventually the government.

        “I have no doubt that there are a lot of things that you think would be better if the government prevented/imposed them.”

        At the moment I have just a couple like that. I don’t like the way the Fed manages the banks. I don’t like what I’ve read about how the banks worked before the Fed. I would prefer a system that does not have the Fed and does not have banking the way we do it. I’m not sure what I’d rather have, and I suspect it would be hard to change without government involvement.

        The other is about TBTF institutions. When one single business gets too big, it interferes with free markets. So I would prefer that when businesses get too big in terms of number of employees or cash flow or some other criteria, they should each split into two smaller corporations, preferably ones that will compete with each other and also with their other competitors. We might arrange that voluntarily — which would be better — but it might require a certain amount of government action.

        I’m open to being convinced that our current banking system is the best, or that giant corporations that are especially good at lobbying the government are best. I’m not completely certain that any improvement is possible.

        Did I say something that sounded like I want government to micro-manage businesses? I didn’t intend to say that.

  2. J Thomas
    March 5, 2014 at 12:45 am

    “A big bank certainly has an effect on the economy (so do I when I buy a loaf of bread, it’s just smaller) but this is fundamentally different from when a government “regulates” the economy because the bank cannot force people to do things that they otherwise wouldn’t do, the government can.”

    A bank can create money without my permission. This is inflationary. If I did that and got caught I would be called a counterfeiter and put in prison. But banks have a government license to create money, within regulated limits.

    After banks created and destroyed money for awhile, with serious economic effects, governments decided they needed to “regulate” the things that banks have always done for their own profit. When government does it on purpose, it’s “regulation”. When banks do it as a side effect of creating money for themselves, it’s — not regulation?

    Government theoretically does it for the public good. Banks do it for themselves alone. I haven’t seen a whole lot of evidence that either one has supported the public good all that much, though I’m willing to be convinced. Government has sometimes stabilized things for a long time and then had a big sudden crisis, as opposed to banks creating big instabilities and many small crises. A pox on both their houses!

  3. Free Radical
    March 5, 2014 at 9:30 pm

    “But existing institutions might use their piles of money to influence the government to shut down our new improved competitor. Or regulate it out of existence. We might hope to avoid that….”

    That’s exactly why it is problematic to give government control over the economy. By the way, profits are a measure of the “good” a company does. You can say that one does more good and is less profitable but when you do this you are applying your own completely arbitrary notion of “good.” Nobody says they want government to “micro-manage” business, everyone just has their little laundry list of things they thing “business” should be forced to do (or not do). Add them all up and give the government discretion to decide which it likes and which it doesn’t and the power to impose them on whomever they like and it adds up to “micro-managing.”

    For the record, the Federal reserve system is not what I would call a free market, nor was what we had before (even in the “free banking” period) perfect but I think if the government got out of it entirely it would work out fine. You don’t need to centrally engineer an alternative. We don’t need to prevent banks from creating money, we should just let anyone create money if they want and let people decide what money to accept and what not to.

  4. J Thomas
    March 6, 2014 at 1:21 am

    “That’s exactly why it is problematic to give government control over the economy.”

    Yes, exactly.

    “By the way, profits are a measure of the “good” a company does. You can say that one does more good and is less profitable but when you do this you are applying your own completely arbitrary notion of “good.”

    If you choose to use profits as a measure of the “good” a company does, that’s another completely arbitrary notion of “good”. Maybe we can come up with something that isn’t so arbitrary, but I will agree with you that you and I have not agreed on one yet.

    “You don’t need to centrally engineer an alternative.”

    If you come up with a good alternative that a lot of people agree they think is good, you might get it started by consensus. It doesn’t have to be done centrally. Most good ideas come from individuals and small groups and spread from there.

    “We don’t need to prevent banks from creating money, we should just let anyone create money if they want and let people decide what money to accept and what not to.”

    Maybe. There are lots of ways to do it. What I don’t like about just letting anybody create money, is that we let just any business create corporate bonds, right? And since people don’t want to research much about that, we wound up with private ratings agencies that rate the bonds AAA, AA, B etc. People choose how much interest to demand when buying them (not exactly, but it amounts to that) based on the rating. And we’ve seen that the rating agencies can do a bad job of it, and can take kickbacks etc. (And if they can sometimes be bribed to give a favorable rating, maybe they can be bribed to give somebody’s enemy an unfavorable rating.) I figure, if something like this is the default, I’d rather look around at alternatives before I accept it. Maybe it’s the best we can do, but I don’t want to just assume that.

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