Market Process Blog

Business Week had a cover story last week by Peter Coy “What Good are Economists Anyway?” In it he suggests that economists did not see the recession coming, and that macroeconomists cannot even know whether or not the current fiscal policies being undertaken will work. He writes “To be fair, economists can’t be expected to predict the future with any kind of exactitude. The world is simply too complicated for that. But collectively, they should be able to warn of dangers ahead. And when disaster strikes, they ought to know what to do. Indeed, people pay attention to economists at times like this precisely because of their bold claim that they know how to prevent the economy from sliding into a repeat of the Great Depression. But seven decades after the Depression, economists still haven’t reached consensus on its lessons. The debate has only intensified in recent weeks.”

First, is it the economist’s role to predict these types of downturns? To my knowledge that is not the definition of economics. Second, many economists did see this coming and warned about it, but these are not the economists that CNN, Fox News, and other media outlets interview. Mostly because they will not provide the kind of certainty or precision that media outlets often desire. There is a macroeconomics debate here, but it is not new and despite what Peter Coy implies it never really went away. One has to realize that economists are not policy makers, and while they may advocate one policy or another it is the politicians in charge at any moment that implements the policy. Is it possible that some economists who were weary of the economic situation were ignored by policy makers?

A final thought, a colleague Ed Lopez recently brought to my attention this quote by economist G. L. S. Shackle on what it means to be a complete economist. It is very interesting and a lot to live up to. I think the best any us can hope for is to be a real economist. It seems an interesting juxtaposition to the Business Week article.

“To be a complete economist, a man need only be a mathematician, a philosopher, a psychologist, an anthropologist, a historian, a geographer, and a student of politics; a master of prose exposition; and a man of the world with experience of practical business and finance, an understanding of the problems of administration, and a good knowledge of four or five languages. All this in addition, of course, to familiarity with the economic literature itself.”
[...]
The potential real economist is “…the outstanding intellectual all-rounder with some leaning towards the arts rather than the natural science side. The person who finds mathematics fascinating without, perhaps, marching through the school course with that instinctive and professional certainty that would mark him as an out-and-out mathematician; who betrays a connoisseurship of words and a delight in language, a gift for expression in English and a sufficient pleasure in the classical languages to awaken thoughts of scholarships, without really promising to become a Porson’s prizeman; who can find in every chapter of the history book the universal and eternal problems of man’s dependence on his fellow-men side by side with his rivalry and conflict with them, and can see with the historian’s eye the age-long empirical struggle to reconcile self-interest and enlightened compassion; who delights in maps and finds them, perhaps, more interesting than test tubes…. [T]his is the potential real economist.”

G. L. S. Shackle, Uncertainty in Economics and Other Reflections (1955: p.24)

John Tammy a columnist for Forbes Magazine has a piece entitled Ayn Rand Rises Again. As the article notes Atlas Shrugged has recently been in great demand and continues to be timely and prophetic.

Peter Klein’s Blog Oganizations and Markets has a nice post on simplfying Keynsian Economics taken from Robert Barro.

Below is a letter to the editor that appeared in the WSJ on April 15, 2009. The letter is from Bill Anderson (a colleague of mine from grad school at Auburn) and he comments on Wikipedia’s inspiration coming from the work of F.A. Hayek. Now I have been told that Mark Thornton who is given credit for teaching Jimmy Wales as clearified that he did not have him in his class, but they did meet and discuss these ideas.

Regarding Gordon Crovitz’s “Wikipedia’s Old-Fashioned Revolution” (Information Age, April 6): The genesis of Wikipedia was an economics class that Jimmy Wales took when he was a student at Auburn University. Taught by Mark Thornton, much of the discussion centered around the 1945 paper by Nobel-winner F.A. Hayek titled “The Use of Knowledge in Society.”
That paper argued that socialism with its central planning simply could not keep up with the real knowledge in society because the kind of knowledge needed to power an economy is dispersed in society and cannot be brought together with central planning, with its political arrogance. Instead, it is brought together via a price system and private property, the key ingredients of a market economy.

Mr. Wales brought that concept to Wikipedia, and that is why it has flourished. The founding truth of Wikipedia also is the truth behind the reason that President Barack Obama’s attempt at a “planned economy” will fail, as all socialist or quasi-socialist “experiments” always do.

William L. Anderson
Frostburg, Md.

A while back a colleague of mine gave me short article from the Wall Street Journal about Starbucks anti-capitalist views. In the article economist David Boaz writes about being given a Starbucks gift card by a friend that could be personalized. Being a good free market economist he wanted the words Laissez Faire printed on the card. Starbucks refused suggesting at first it was too political, and then that it was foreign. However, the phrase people not profits was ok, and they accepted “another foreign phrase — “Si Se Puede,” or “Yes we can.” It’s the United Farm Workers slogan, now adopted by Barack Obama’s presidential campaign.” Starbucks had no explanation as to why these were ok and Laissez Faire was not. In addition, when one walks into a Starbucks they are hit over the head with fair trade vs. free trade propaganda, and all the ways in which they environmentally friendly.

Now here is the point, whether I agree with the Starbucks philosophy on any of these issues (and I do not) is not important. The important point of a market economy is that I do not have to like you, or share your beliefs to cooperate with you. What matters is that Starbucks wants to serve their customers. When I walk into my local Starbucks I am always greeted warmly by the staff. The coffee is fresh and made to order, they are conveniently located to my office, and have a high quality product at a price I am willing to pay. The atmosphere is warm and inviting and I often hang out there when I want to hide from my students and colleagues.

The sad part is that I am not sure if Starbucks realizes why they are so profitable. I do not think it is because they put people before profits, or that they are environmentally friendly it is because they have great customer service. The point is that being profitable is not inconsistent with Starbucks other goals as long as they are willing to serve the customer. It is a shame however, if the management of Starbucks does not understand that it is the freedom to trade with whoever they wish in any way they wish that has made them a success. We have a local group in town called the Bastiat Society, named after the 19th century French economist and statesman Frederic Bastiat. There motto is “those who work in freedom should know how freedom works.” More business people should try to live up to this motto.

Yesterday, April 13 was tax freedom day. That means that starting yesterday you get to keep your income and are working for yourself. According to the Tax Foundation: Tax Freedom Day® will arrive on the 103rd day of 2009. That means Americans will work about three and a half months of the year, from January 1 to April 13, before they have earned enough money to pay this year’s tax obligations at the federal, state and local levels. Tax Freedom Day falls a full two weeks earlier in 2009 than it did in 2007. In fact, not since 1967 has Tax Freedom Day come earlier than this year’s April 13 date.

This shift has been driven by two factors: the recession has reduced tax collections even faster than it has reduced income; and the stimulus package, a.k.a. HR 1, the American Recovery and Reinvestment Act of 2009, includes large temporary tax cuts for 2009 and 2010. Nevertheless, in 2009, Americans will pay more in taxes than they will spend on food, clothing and housing combined. See the full report here (more…)

This is a newspaper clipping that I think appeared on the Tonight Show with Jay Leno when he does his headlines bit. I am not even going to write anything about government inefficiencies I think this headline is self explanatory.

The idea of a one world currency has been mentioned in light of the recent world-wide financial crisis. I would argue that this idea is both a good one and a bad one. Under the current fiat monetary standard I think this would be disastrous as inflation would be a world-wide phenomenon with no alternative currency to hedge against an expanding money supply. On the other hand the world had a single currency when we had a gold standard. Recently, Judy Shelton wrote an article in the Wall Street Journal suggesting we return to a gold standard. Whether this practical or politically feasible it is an interesting thought during this current financial meltdown. Specifically she writes:
“Let’s go back to the gold standard.

If the very idea seems at odds with what is currently happening in our
country — with Congress preparing to pass a massive economic stimulus bill
that will push the fiscal deficit to triple the size of last year’s record
budget gap — it’s because a gold standard stands in the way of runaway
government spending.

Under a gold standard, if people think the paper money printed by government
is losing value, they have the right to switch to gold. Fiat money — i.e.,
currency with no intrinsic worth that government has decreed legal tender –
loses its value when government creates more than can be absorbed by the
productive real economy. Too much fiat money results in inflation — which
pools in certain sectors at first, such as housing or financial assets, but
ultimately raises prices in general.”

Richard Todd and Jack Hunter, from WTMA 1250 AM a Charleston Talk Radio station, recently interviewed Thomas E. Woods, Jr., the New York Times bestselling author of nine books. A senior fellow at the Ludwig von Mises Institute, Woods holds a bachelor’s degree in history from Harvard and his master’s, M.Phil., and Ph.D. from Columbia University. I first met Thomas when we were both in graduate school. He has a very intersting take and a new book on the financial crisis. You can listen to the interview by clicking on the audio link.