And while I'm building my wish list . . .

In general, I try to assume that when someone does something professionally, they have some passing familiarity with the subject. This prevents me from looking like an utter fool when I triumphantly catch, say, a science journalist in some "error" that turns out to be my own misunderstanding.

In fact, I have caught professional economists and journalists in errors, sometimes embarassing ones; and in turn, I have been caught in a few bloopers of my own. But the flood of silliness in my comments from people who do not know what they are talking about, and do not know that they do not know, has to stop.

For the record, I have read the Austrian works to which I am being referred. The thing is, I have also read some other books about economics. This is clearly not true of the commenters who make basic errors such as calling me a Keynesian, thereby demonstrating that they have no idea who John Maynard Keynes was, or what he said. Approximately the only thing that Baron Keynes and I agree upon is that in the long run, we will all be dead. And not very long, if I keep having to respond to such silliness.

Comments

*pat*pat*

Here's to a better New Year with fewer . . . oh. It's an election year. Run away to Rome with me instead!

Posted by Michael Tinkler | December 29, 2007 8:48 AM

You didn't include the words "Ron Paul" in this post so none of the people you're talking about will read it.

Posted by Hei Lun Chan | December 29, 2007 8:58 AM

This pitched battle between Megan and the Paulites has been amusing to watch (mostly) from the sidelines. Sometimes she desrves criticism, but the economic ignorance of many Paulites is staggering.

It's clear from their comments that many have not even read a basic economics textbook. They only read Mises and Rothbard and think that's enough. Well, it isn't enough. Mises was a great economist but some of his ideas were just dead wrong (his whole a priori methodology for instance). And Rothbard was a crank.

So I offer this piece of advice to the Paulites: please, get Mankiw's "Principles" text, read it, and then come back better informed. I know you like free markets but so does Mankiw (and so do I).

Posted by rwe | December 29, 2007 9:28 AM

"This is clearly not true of the commenters who make basic errors such as calling me a Keynesian, thereby demonstrating that they have no idea who John Maynard Keynes was, or what he said. Approximately the only thing that Baron Keynes and I agree upon is that in the long run, we will all be dead."-MM

Keynes was right about some things, Megan. Wages and prices are sticky in the short run, for example. If that were not true, there would be no need for a discretionary monetary policy. Indeed, monetary policy would be ineffective, since wages and prices would adjust automatically to changes in the money supply, and attempts at monetary stimulus during downturns would always fail.

But very few economists believe that Fed policy is totally ineffective. The evidence indicates that it is quite powerful in the short-run, though it operates with "long and variable lags."

Posted by rwe | December 29, 2007 9:36 AM

It's clear from their comments that many have not even read a basic economics textbook. They only read Mises and Rothbard and think that's enough. Well, it isn't enough. Mises was a great economist but some of his ideas were just dead wrong (his whole a priori methodology for instance). And Rothbard was a crank.

Look, what you're saying is clearly wrong... in that there's no real evidence that any of these people have read Mises or Rothbard, either. They may have read some quotes from these guys on a website, or maybe even a whole series of columns on lewrockwell.com, but mostly just a few black helicopter stories about the Fed.

I agree that reading Mises is insufficient (and that Rothbard was a crank), but if one actually read Mises, one would have more insight than they demonstrate. They're just spouting cult mantras.

Posted by David Nieporent | December 29, 2007 9:47 AM

David, I stand corrected.

Posted by rwe | December 29, 2007 9:58 AM

I don't think, guys, that we're talking about a particularly large "they" here. I think instead we're talking about a small group of computer-savvy people using their abilities to appear larger in number.

Posted by Freddie | December 29, 2007 10:13 AM

If you'd just do your research, you'd realize that your ignorance of economics comes from never having read the works of the great Austrian economists. I, on the other hand, support Dr. Paul because he's the only candidate with the integrity to oppose Bush's Endless War, and the big freeway that heralds the destruction of our liberty at the hands of a government bent on destroying the economy with its filthy, imaginary fiat money. This is because Dr. Paul is the only candidate in the race who understands liberty--he makes you angry because you don't care about the Constitution. Which is why you say stupid girly things about how it can just be "amended" whenever our tyrannical government wants to.

That's a fantasy on the same level as our fantastic "currency," which isn't based on anything except the credulity of idiots like you who've never read any Austrian economists. You're only ridiculing me because you're angry about not knowing what you're talking about. Why don't you read an economics textbook--or, better yet, the work of the great Austrian free market economists. If you'd read Mises you'd know that the only reason you claim I've read nothing but Mises is because you're in the bag for Bush's Endless War. Ron Paul's not an isolationist, he's a non-interventionist. That's why he opposes the UN's plan to pave over our liberties with an anti-American superhighway. Do your research.

Posted by Ron Paul Cultist Post Generator | December 29, 2007 10:16 AM

Posted by Ron Paul Cultist Post Generator | December 29, 2007 10:16 AM

Funny, really, actually smiling.

Posted by MEH | December 29, 2007 10:43 AM

Well, Megan,

I can say that I haven't been rude. I am a Ron Paul supporter but I've been quite polite and measured in my comments and have tried to refrain from saying more than I clearly know.

That said, I must confess the MOST of economic layman reading has been Austrian though I have read Friedman's FREE TO CHOOSE and appreciate his differences of opinion with Austrians on Monetary Policy. The thing is though that I never thought that the differences were at "from scratch" level of theory. They are in agreement on many concerns and similar in some desired end results.

Nonetheless, I think the guys over The Austrian Economists have been writing some very good posts on this general matter over the past week or so. Dr. Horwitz has excellent one today that is a follow up from Boettke post from yesterday.

These guys are very well rounded and well read in many views of economics. Perhaps, a good reference to their writing and a post responding to their views would be in order.

Posted by John V | December 29, 2007 11:13 AM

John V,

Don't be dissuaded. Keynes, rightly, belongs in the same coursework one would find Edward Bernays
http://www.prwatch.org/prwissues/1999Q2/bernays.html

also:
http://blog.mises.org/archives/007585.asp

Posted by MEH | December 29, 2007 11:28 AM

Guys,

Don't you know that Megan is coming from the pragmatism of politics as usual ? Don't you know that She comes from a point of view that totally disregards principles and integrity?

It is sort of like the perptual rivalry between the forces of Good a.k.a Ron Paul and his supporters forces and forces of Evil ( everybody else ).

Posted by Apaulogist | December 29, 2007 11:31 AM

MEH,

I'm actually quite familiar with Keynes. And I do know enough about him to know that Megan is not Keynesian at all.

Posted by John V | December 29, 2007 11:44 AM

"This is clearly not true of the commenters who make basic errors such as calling me a Keynesian, thereby demonstrating that they have no idea who John Maynard Keynes was, or what he said. Approximately the only thing that Baron Keynes and I agree upon is that in the long run, we will all be dead. And not very long, if I keep having to respond to such silliness."

Well Megan, I agree that your Paulista commenters are ignorant of economics, and that it would be very silly indeed to call you a Keynesian (better a neo-liberal of the Chicago School--literally), but let's not sell Baron Keynes short. I suspect you both agree that the Gold Standard is a "barbarous relic," and that prices are sticky. Moreover, in your thinking about macroeconomics, I highly doubt that you don't think in Keynesian patterns. Greg Mankiw, for example, is a New Kenysian, and you seem to agree quite a lot. All of which is to say, Keynes isn't as dead as you would like him to be.

Posted by David | December 29, 2007 11:59 AM

I think Megan knows what I am talking about, but if any of you are interested in what I mean (especially you Paulistas--why not try reading something other than third-hand Von Mises?) here is a good start:

The Macroeconomist as Scientist
and Engineer N. Gregory Mankiw

http://folk.uio.no/sholden/E4325/mankiw-JEP.pdf

Posted by David | December 29, 2007 12:11 PM

David is right. Ms. McArdle is probably more Keynesian than she realizes, and more than she is willing to admit. The reason is that so much of Keynes' ideas have been subsumed into mainstream economic theory. The same is true of Freidman and Hayek.

Anyway, in defense of Keynes, who was, for all his failings, one of the greatest economists of all time, I offer this:

"People are often surprised when I say that I am both a Keynesian and a Friedmanite, because they view Friedman as the anti-Keynes. But that perspective is far too simplistic. In my view, unless you have learned a lot of economics from both of these great thinkers, you haven't learned enough."-Greg Mankiw

Let me emphasize [that] I think Keynes was a great economist. I think his particular theory in The General Theory of Employment, Interest, and Money is a fascinating theory. It's a right kind of a theory. It's one which says a lot by using only a little. So it's a theory that has great potentiality.

And you know, in all of science, progress comes through people proposing hypotheses which are subject to test and rejected and replaced by better hypotheses. And Keynes's theory, in my opinion, was one of those very productive hypotheses -- a very ingenious one, a very intelligent one.-Milton Friedman

Posted by rwe | December 29, 2007 12:28 PM

Approximately the only thing that Baron Keynes and I agree upon is that in the long run, we will all be dead. And not very long, if I keep having to respond to such silliness.

Heh! Good line. :)

Posted by Dan | December 29, 2007 12:36 PM

Maybe now you can start to understand how some mainstream economist feel about many libertarians.

Posted by spencer | December 29, 2007 12:55 PM

The comment I particularly love is the one two threads down, where, after Megan spends a significant amount of time going into detail about her disagreements with Ron Paul's economic proposals, some Paulista breaks out the "I'm still waiting for you to go into detail" post. In that very post's comments. Laugh riot. What can you do?

There is something to be said for questioning authority- I do it all the time- but wow.

Posted by liberalrob | December 29, 2007 1:11 PM

If you don't want to look foolish, avoid mentioning baseball anymore, particularly if you're going to ignore the effect of free agency on salaries.

Posted by Mike Schilling | December 29, 2007 1:31 PM

So this is funny.

I am actually personally familiar with Mankiw through his colleagues and friends who were my professors at a private, intense, north-eastern university. We used his introductory Macro textbook because of that. And it was rubbish.

Anybody, for that matter, who spouts the Philips curve as gospel has clearly not understood the difference between cause and effect - the curve's neat relationship is wonderful for academic theory, but under then harsh glare of reality, it explodes, vampire-like. It is typical of textbook macro, which finds it difficult to distinguish between the rooster's crowing making the sun rise and vice versa.

My hypothesis is that Megan, rwe and several other folks here who dismiss RP may have read the same clever books I had to, but haven't really meddled with international trade, real estate, or any major business for that matter, where the real effects of currency manipulation swing bottom lines dramatically.

There is a reason why the dollar is currently tanking. Its not really a mystery - nothing backs it other than the future productivity of the US economy, and the discipline behind the government temptation to increase the money supply through the printing press.

Sustained war increases that temptation substantially. Through backwards induction I got into a business - commercial real estate - that greatly benefits from an inflated money supply, and... the post-Iraq-invasion years have been marvelous to me.

So I feel somewhat better equipped than most to tell Megan etc. that... you're being silly. In carrying the banners of academic orthodoxy, you are missing reality, and today it is costing you your wealth - tomorrow it will cost you your liberty.

Posted by Rahul | December 29, 2007 1:51 PM

And Spencer... mainstream economists? Hahahahahaha For every one of those thats made any real money, there's hundreds working towards tenure.

I'd sooner put money on weathermen predicting hurricanes than mainstream macroeconomists predicting.... anything, really.

Posted by Rahul | December 29, 2007 1:53 PM

I. "My hypothesis is that Megan, rwe and several other folks here who dismiss RP may have read the same clever books I had to, but haven't really meddled with international trade, real estate, or any major business for that matter, where the real effects of currency manipulation swing bottom lines dramatically..."-Rahul

Rahul, I made my fortune through investments, both in equities and in real estate. So I have ample practical experience and am not the cloistered academic you wish to depict me as.

II. "Anybody, for that matter, who spouts the Philips curve as gospel has clearly not understood the difference between cause and effect - the curve's neat relationship is wonderful for academic theory, but under then harsh glare of reality, it explodes, vampire-like.-Rahul, again

Do vampires explode? Regardless, as for Mankiw's text being "rubbish," I disagree. And I doubt very much that you have sufficient knowledge to critique it. Your objection to his presentation of the Phillips Curve raises such doubts, since you seem unaware that Mankiw teaches that the Phillips Curve tradeoff does not hold in the long-run. Another way to say this is that the curve can shift.

The funny thing is that you undermine your own argument by claiming that you have benefited from a supposedly inflationary monetary policy by investing in commercial real estate. This implies that you agree that easy money causes an economic stimulus (at least in the short-run), but that means you are accepting the Phillips Curve tradeoff. And then you deny the Phillips Curve tradeoff. So you contradict yourself. That makes your argument gibberish. Entertaining gibberish, mind you, but gibberish just the same.

***

Some of Ron Paul's supporters have interesting things to say, like John V and MEH above. And they say them in a reasonable manner. And then there are others who are as sanctimonious and arrogant as they are ill-informed. I'll let others decide which category Rahul falls into.

Posted by rwe | December 29, 2007 2:33 PM

So wait a sec Rahul...
Through backwards induction I got into a business - commercial real estate - that greatly benefits from an inflated money supply, and... the post-Iraq-invasion years have been marvelous to me.
And so your gripe with the system is...?
You don't need to read Mankiw to know that keeping your money in a mattress is an asinine idea. Sounds like you figured that out long ago.
I'm still waiting for the sound argument countering Megan's assertion that Paul is a loon on economic issues. From what I gather, the Paulistas believe we need to return to the gold standard to counter inflationary tendencies of a fiat money, but, a quick review of inflation over the past ten years reveals..hmmm..a range of 2.3-3.4% annually. My investments far exceeded that rate of return over the same period, so I've determined, like you, that keeping money in a mattress is an asinine idea. The expanding money supply kept the economy growing, banks lending money, and made everyone, on average, wealthier.
Next idea?
Regarding taxes: Like most of us, I'm all for cutting taxes if you tell me what spending you're going to cut. None of this garbage such as "we'll just withdraw from Iraq and balance the budget." Uh, the budget was out of whack before we went to Iraq. I want to see hard numbers against hard programs. Saying you want to cut foreign aid is pandering along with most of the rest of his blather.
Next idea?
Withdrawing from foreign bases. Well, now, this is something I can go for, but it's not going to make much of a dent in the budget. We'll still have to pay and equip these troops even when they live in the states.
Come on, let's hear some specifics about how Paul's idea will interact in the real world. Where will the gold standard put us vis-a-vis the rest of the world? Canceling all foreign aid going to put us in better stead in the Islamic world? Should we care?
Any particular reason other countries aren't trying these same brilliant ideas?

Posted by Michael W | December 29, 2007 2:36 PM

Megan's assertion

LOL

Here is the definition of assertion

a declaration that is made emphatically (as if no supporting evidence were necessary)

I'm still waiting for the sound argument

You might end up waiting until the point of death, better solution would be to see an ENT specialist. Or learn to read english.

Posted by paulogist | December 29, 2007 3:19 PM

Reminds me of the bible-beaters...ask for evidence, get the 'hand'.
Fortunately Paul will help eject the Republicans from the WH by luring more Republican votes to his 'cause' than Democratic.
So, Go Ron Paul!

Posted by Michael W | December 29, 2007 3:24 PM

There is a reason why the dollar is currently tanking. Its not really a mystery - nothing backs it other than the future productivity of the US economy,

Gosh.

Posted by Paul Zrimsek | December 29, 2007 3:37 PM

Please, no more Ron Paul! This isn't the Gawker media economics blog--you aren't getting paid solely on pageviews and comments.

The only thing that Paul supporters have taught me is that the "Ms. McArdle" thing, condescending as it is, must be highly correlated with neckbearded survivalists and teenage lolbertarians posting out of their parents basement

Posted by Jack | December 29, 2007 3:56 PM

Well, Gosh, yes Paul Z, you're right. What else should the value of the dollar be based upon? The ability to dig more gold out of the ground and put it in Fort Knox? Are we going to start paying for our Wheaties with gold dust?
The dollar is tanking because other currencies, namely the Euro, look more attractive. Other countries are growing as wealthy as the U.S. and their currencies are gaining ground as a result. Why is this a bad thing? Did we think the dollar would be superior forever? Why would we even want such a thing? Guess what Paul Z, those other currencies aren't backed by gold either....
I travel a great deal so no one has to tell me the dollar doesn't buy what it used to, but I also know that we probably aren't at parity quite yet. Imported goods, even with a devalued dollar, still sell well, and British Airways is still flying hordes of tourists to London (yes, they use the Pound but it's also increased relative to the dollar) albeit in reduced numbers.
The Paulistas should be overjoyed as the price of a Cadillac will, eventually, look really good compared to a Japanese produced Lexus.
So, again, I'm asking for some examples where some of these brilliant economic ideas are being played out in the context of a Western capitalist economy. Yes, sure we can all say that we don't know they'll work if they haven't been tried, but I'm just asking for something concrete so that we may correlate results with theory.

Posted by Michael W | December 29, 2007 4:09 PM

RWE - my apologies for an incorrect hypothesis about your experience, it was a guess, turned out to be an incorrect one.

Now to address your point: my gripe with the Philips curve is not that it predicts the short run, but the principle behind studying it - its a pattern (almost a correlation) looking for a theory to back it, which seems back-asswards from most rigorous (micro)economics. Most explanations of it, including Mankiw's, ignore the monetary implications of easy money and its source.

The funny thing is that you undermine your own argument by claiming that you have benefited from a supposedly inflationary monetary policy by investing in commercial real estate. This implies that you agree that easy money causes an economic stimulus (at least in the short-run), but that means you are accepting the Phillips Curve tradeoff. And then you deny the Phillips Curve tradeoff.

Actually I did not address when and where the Philips curve holds or its tradeoff. My point is that... IT DOESNT MATTER.

The Philips curve discusses the 'tradeoffs' in the EFFECTS of the increase in money supply, without discussing or even remotely addressing the CAUSE or DESIRABILITY.

A rapid increase in the money supply rewards borrowers and punishes savers/ debtors, except if they can in turn borrow the money even cheaper - i.e. through banks, which can always borrow from the Fed during hard times, which can... effectively print money, devaluing the dollars in people's pockets and low-yielding bank accounts.

So the 'tradeoff' in the Philips curve is - how much do we impoverish current holders of dollars VS how much do we reward people who borrow large sums of money at below market rates, who may or may not have feasible rates of return/solvency.

In other words, LOSE-LOSE. The market can take care of capital allocation by itself, thank you very much. We don't need Uncle Sam screwing things up for us.

Yes, I've benefited substantially from this tomfoolery, but I resent having to make the choice between getting screwed by the govt, and being on the govt's side screwing everyone else.

I can make even more money in an economy that allows domestic sound money competition, while SIMULTANEOUSLY not piggybacking the screwing of my fellow citizens by the govt. I am a productive person and will thrive in any environment. That doesn't mean the current environment is good or fair.

Easy money through govt mandated interest rate shenanigans doesn't cause economic stimulus , it causes speculative bubbles . Somehow, rwe, you don't strike me as someone likely to think that the dot-com or california/miami residential housing housing collapse were unforseen losses from prudent investments.

Nice try at the snarky insults. At least mine were addressed at theory and practise, not personality.

Posted by Rahul | December 29, 2007 7:57 PM

And Michael W - if you think inflation has been 2-3% annually, you got another thing coming.

Simple theoretical exercise: If you were on a desert island, stranded with just 1 other person, and the currency on the island was old coke bottles, what would happen if you discovered some more coke bottles buried in the sand, and your neighbor didn't know?

What would happen to prices and the distribution of goods between you two?

Now... in America today, our currency is the dollar. What do you think happens when the govt/Fed increase the dollars in circulation?

Posted by Rahul | December 29, 2007 8:02 PM

And while we're on the subject...rwe, the Philips curve can break down in the short term too, when people stop believing in a currency or central bank discipline, no amount of increase in the money supply will cause 'economic stimulus', while unemployment will keep going up, together with inflation, due to an economic breakdown.

If you, Mankiw, etc. ignore the reasons for past correlations in inflation and unemployment, you will find it difficult to make predictions during the outliers, which is when it really matters.

Correlation, after all, does not imply causation, regardless of what Mankiw says.

Posted by Rahul | December 29, 2007 8:21 PM

Could an economist on this blog answer me this?

I believe most everyone accepts that price signals are what coordinate actions in market economies. It is precisely the stickiness of some prices which some economists (including Austrians) claim is at the heart of monetary-induced recessions (i.e., discoordination). So most economists naturally hate the idea of price-setting in most forms.

Why, then, do they not believe the price of borrowing money is another signal which coordinates economic actions? If they do not believe the rate of interests coordinates intertemporal actions*, then what do they believe does?

* I've never heard a neoclassical economist claim this, but I've never heard a mainstream economists comment on intertemporal coordination at all (beyond some abstracts, as I don't have access to many journals). I admit this would be a very silly position to hold, given how most universities teach business, finance and engineering majors to make future-oriented economic decisions based off of the rate of interest (e.g., present and future-worth analysis).

Posted by G | December 29, 2007 9:18 PM

Whoops, forgot one question...

If we do accept that the rate of interest coordinates intertemporal actions, why do economists believe this price can be more appropriately arrived at by the government than the market?

I do realize the Fed does not "set" the price and cause shortages, as it basically just manipulates supply. However, any lowering of the rate of interest makes long-term investment more attractive, altering business plans. Its interest rate manipulations must therefore have effects beyond the size of the money supply and the price level, right? So why is it beneficial for the government to influence intertemporal business plans?

Posted by G | December 29, 2007 9:31 PM

Rahul - If I were stranded on an island with one other person, I'm quite sure we'd be absolutely dependent on each other for survival so your example has no bearing on the situation.
As for the money supply. I accept inflation is a side effect of an expanding money supply. Given that the rate of economic growth is only known historically I accept that the two are not going to be matched. What do YOU suppose would happen if we just stopped printing money and everyone were forced to compete over just those dollars in circulation now? Would anyone but the most desperate be able to borrow money? I suppose you'd just rent until you were 45 then buy a house for cash...but starting a new business would be just about impossible unless Uncle Larry leaves you his millions. Do you dispute this?
Yes, I accept the official inflation figures because my own experience bears them out. If you've calculated the price of a typical basket of goods over the past 10 years, then lets see the list and the calculation before you challenge the figure as wrong. Waving your hand and saying the "government lies" doesn't do it for me.
Also, would anyone explain why 100% employment is deemed 'mandatory'? Given the demand for illegal labor, I'd say our employment rate of legal persons must be near the maximum sustainable.

Posted by Michael W | December 30, 2007 1:22 AM

Michael W, you say:
What do YOU suppose would happen if we just stopped printing money and everyone were forced to compete over just those dollars in circulation now? Would anyone but the most desperate be able to borrow money? I suppose you'd just rent until you were 45 then buy a house for cash...but starting a new business would be just about impossible unless Uncle Larry leaves you his millions. Do you dispute this?

During the eras where the federal government actually followed the gold standard, monetary growth was very, very slow compared to what it is now. None of the things you mentioned were serious problems, as America experienced its most rapid economic growth during that period (although I am not suggesting this was due to the gold standard; I am not a goldbug). We didn't have many other helpful financial institutions of course (such as secondary mortgage markets). With less monetary expansion, saving becomes a better option relative to borrowing, but that does not mean it is any harder to purchase a given good or service (e.g., you don't need a richer uncle with less monetary growth).

Printing money does not make it any easier to get a house* or start a business because printing money is just that: Printing money. Unfortunately, we cannot print houses* or businesses; the supply of those is unaffected by changes in the money supply and so competition over them isn't going to change with monetary policy.

* Well, this isn't exactly true under our current system, since many of the newly-created dollars go into housing, which effectively subsidizing the housing industry with fresh bills. In truth we can't really comment on how changes in the money supply will effect things without knowing where it enters and leaves the economy.

Posted by G | December 30, 2007 1:47 AM

Michael W,

What G said. And to add to that, its not possible to know precisely where the new dollars are going, which is why govt intervention in the economy, through the means of 'printing money' causes serious misallocations of capital, resulting in speculative bubbles that enrich a few at the expense of the many. The reason this is unfair is because the many don't have a say in their money being devalued by the govt.

I'm not a gold bug either, but I do believe that competing private currencies would serve as a pretty strong check on the govt to refrain from devaluing the dollar, and by extension, the savings of prudent, responsible investors.

As far as inflation goes - apart from how hard asset prices have gone through the roof in the last 6 years (how much do you pay for shelter?) - why shouldn't increases in productivity/trade result in the reduction of all or at least most goods?

I submit that if the govt stopped printing dollars we would have.... slightly declining prices for consumers coupled with increasing profits for competitive producers. You would also see significantly reduced price volatility in international trade with the noise of currency speculation significantly reduced.

Would you like to live in such a world?

PS - The reason for the 2 persons on the island is similar to a physics experiment where you attempt to approximate newtonian principles without accounting for minutae like friction etc., to focus on basic concepts. If 2 seems silly to you, make it 20. The original questions still stand.

Posted by Rahul | December 30, 2007 2:30 AM

"why shouldn't increases in productivity/trade result in the reduction of THE PRICE OF all or at least most goods?" (typo in comment above)

Posted by Rahul | December 30, 2007 2:37 AM

"So I feel somewhat better equipped than most to tell Megan etc. that... you're being silly. In carrying the banners of academic orthodoxy, you are missing reality, and today it is costing you your wealth - tomorrow it will cost you your liberty."

Rahul,

I really wonder if they'll bother to heed that insight.

The smugness of people like "Micheal W" is, to me, a true dome-scratcher. Even the FT is writing stories about Wall St. firms beating the bushes for anyone that can even spell: "Commodities".

MW,

try this link: http://www.shadowstats.com/

and, you may care to read this dude's valid take(s): http://globaleconomicanalysis.blogspot.com/

Also, MM how 'bout list of Financial Institutions that, you were intimating, were taking larger write-downs, earlier, so that they could 'surprise', on the upside, in the near future(?)

Posted by MEH | December 30, 2007 3:01 AM

Megan,

I confess I haven't read all the comments where you have been criticized by the Paulistas, but you come across a little thin-skinned here. Part of the problem might be that you are positioned as an economics blogger, but you aren't an economist -- and there is no shortage of actual economists who are also bloggers. So your Atlantic readers don't defer to you as much as they might to an actual economist and perhaps not as much as you would like.

Another part of the problem might be your tendency to pontificate about issues that aren't as cut and dried as you think: your recent declarations on the efficient market hypothesis come to mind.

Are you consigned to write about economics all the time? If not, maybe you should spend more time blogging about subjects where your statements will be less falsifiable.

Happy New Year, btw.

Posted by Juan | December 30, 2007 4:40 AM

Ms. McArdle:

Just keep writing. Don't worry about the Paulistas, because the personal psychology which drives them means that they are never going to be mainstream. Just keep writing, please. It is a great benefit to the rest of us to have a pragmatic libertarian (so rare!) with intelligence and a reputable forum, such as the Atlantic. Just keep writing; you stir the pot, and the character of the responses self-identify the ideological purists from the open-minded pluralists. The pragmatic libertarian is something which will grow in the near future, and your blog helps pave the way. Just keep writing.

Posted by a Duoist | December 30, 2007 5:40 AM

a Duo,

Maybe I'm missing something, but isn't 'pragmatic libertarian' a bit of an oxymoron?

Or, are yo going to take us down the Toll Road of 'Freeest'?

http://www.reference.com/search?q=pragmatism&db=web

http://www.reference.com/search?q=libertarianism&db=web

seems like you wind up w/:http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=http%3A%2F%2Fwww.lizmair.com

Posted by MEH | December 30, 2007 8:14 AM

"Why, then, do they not believe the price of borrowing money is another signal which coordinates economic actions? If they do not believe the rate of interests coordinates intertemporal actions*, then what do they believe does?"-G

G brings up an interesting question. I think most economists would agree that a discretionary monetary policy can cause some of the distortions you refer to, but that it is still worth doing to prevent-or at least mitigate--recessions.

The reason is that recessions involve idle capital and idle labor and are, therefore, tremendously wasteful. Economists generally believe, with Keynes, that autonomous shocks to aggregate demand can throw the economy into recessions, and that these recessions can be persistent because of wage and price rigidities.

Thus, they think it prudent for the government to use monetary and fiscal policy to offset these shocks. Many economists lean toward monetary policy these days because fiscal policy is slower (due to nature of the legistlative process) and because they worry about the accumulation of debt (in theory the government would run surpluses in times of plenty and deficits in tougher times--in practice it runs deficits all the time).

Now, you might still not find this convincing. I'm not sure I do entirely, which is why I think Mitlon Friedman's arguments for a constantly growing money supply (of say 5%) and Bernanke's arguements for inflation targeting have merit. I must say though that I think the Paulites focus too much on monetary policy, since money is neutral in the long run. They should be more concerned with the question "What policies can we put in place that will raise our long-run growth rate." The answer to that will come from growth theory, though, not changes in the monetary regime.

For a fairly conventional view of Fed policy, consistent with what I wrote above, you might want to look at this, though my pal Rahul might call it "rubbish".

Posted by rwe | December 30, 2007 8:51 AM

Those who are devoted to Austrian economics might also want to look at this.

"While the substantive contributions of Austrian economists to economics are significant, their sum from Human Action on is small compared to the progress that neoclassical economics has made over the same time period... Unfortunately, the foundations of their new paradigm are unfounded, and their most important applied conclusions unsound or overstated. The reasonable intellectual course for Austrian economists to take is to give up their quest for a paradigm shift and content themselves with sharing whatever valuable substantive contributions they have to offer with the rest of the economics profession - and of course, with the intellectually involved public. In sum, Milton Friedman spoke wisely when he declared that 'there is no Austrian economics - only good economics, and bad economics,' to which I would append: 'Austrians do some good economics, but most good economics is not Austrian.'"-Bryan Caplan

It is a grave error to think that the disciples of Mises and Rothbard hold a monopoly on economic truth. Neoclassical economics has made enormous contributions--the whole of growth theory, from Solow to Romer, among them.

Posted by rwe | December 30, 2007 9:01 AM

rwe,

"Economists generally believe, with Keynes, that autonomous shocks to aggregate demand can throw the economy into recessions..."

This, above, is the Trojan Horse.

With this: "Thus, they think it prudent for the government to use monetary and fiscal policy to offset these shocks" Being the ultimate Goal.

These: "in theory the government would run surpluses in times of plenty" & "and that these recessions can be persistent because of wage and price rigidities.." being paeans to supposed rationality/'Reason'...

The Market is big enough to take care of itself, we need not the impediment of Gov't intervention..

A refresher on : http://bastiat.org/en/the_law.html

and

http://bastiat.org/en/twisatwins.html
"Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade..."

may be helpful..

also, with: "money is neutral in the long run..", who thinks such?

Posted by MEH | December 30, 2007 10:19 AM

The reason prices might not always go down, Rahul, has to do with something you obviously understand very little: supply and demand. It is certainly true that a Model T would be much cheaper today given productivity increases, but no one would buy it for anything other than as a curiosity. OTOH, a Lexus is more expensive because it contains a great deal more value added than a Model T.
Commodities...just how many commodities are more expensive when adjusted for inflation. Of those that are, on an inflation adjusted basis, more expensive, how much of that is due to scarcity?
On your island example, it would seem that since you are an Austrian school fanatic, I would turn it back to you and say that currency would have little value as the economy is more likely to be based upon the exchange of labor as each found his or her 'comparative advantage' and exchanged this skill or commodity for something else needed. Yep, it's much like the 19th century. Ah yes, the 19th century. There are lots of things to like about it, and a few things that are best left back there...slavery, outdoor plumbing, antiquated monetary policy....
MEH, there's lots of crackpot links on the internet of which these are but two. Since I could not find the list of goods on which these "shadow stats" are based (without paying the $89), I can't pass judgement on the presented statistics. Again though, I don't see it representing anything I've experienced and I'm not exactly a hermit living in the Alabama backwoods.

Posted by Michael W | December 30, 2007 10:38 AM

MW,

the shadowstats chart is reconstructed from previous BLS lists, as he points out on the chart at the top of the page..

I'm not exactly sure what's 'crackpot' about the other link, but so be it.

maybe you'd like : http://bigpicture.typepad.com/comments/

instead, same difference really..

Posted by MEH | December 30, 2007 10:51 AM

rwe,

I've read Caplan's criticism before. In my view, Caplan presents a good straw-man of many Austrian positions. Referring to the paragraph you posted, I've seen many "Austrian" economists employ many mainstream tools (such as empirical studies and game theory) to get their points across.

I understand what you are saying about aggregate demand, but Austrians hardly disagree with Keynes that monetary shocks can cause problems because of stickiness in the economy. I've read a paper on how neokeynesian menu costs can be modeled in a ABCT framework:
http://paws.wcu.edu/mulligan/www/ABCSMC.htm

To ABCT, menu costs are just another form of allocated capital that can become mis-allocated by incorrect price signals. The idleness of capital is explained quite well. I could be wrong, but I believe the biggest Austrian disagreement with Keynes on the business cycle is that Keynes did not believe there was any tendency of a market economy to move towards full employment (excessive saving and all that), so a government-controlled monetary policy was necessary.

To be honest I've never been able to make much sense of Keynes' reversal of Say's law and his vicious-hording cycle. Not only does it seem to be somewhat absurd, his assertions that interest rates don't decrease with an increase in saving never made much sense to me.

I wouldn't associate all of Austrian econ with internet fanboys and some of the more dogmatic Rothbardians. In many ways I think Austrian econ is more intuitive than others (especially since Austrian macro is rooted in Austrian micro), and so attracts a larger lay-following.

I do agree with you that Paul focuses too much on monetary policy. I don't think he trusts what the Fed and Congress will do when the Medicare and Social Security liabilities start to become more significant. I can't say I blame him.

Posted by G | December 30, 2007 11:09 AM

Michael W,

As you said, prices of the same good tend to go down over time because productivity increases. Obviously the invention of new, more complex, goods can offset this.

No Austrian or any goldbug I've read of advocates returning to a 19th century monetary system. The bimetallic standard was a terrible, terrible idea. The majority of Austrian economists seem to support free banking, and not any sort of government-backed commodity standard (although many think a revised gold standard could be better than what we have now).

Anyone who is a "fanatic" or "disciple" of any positive science should not be taken seriously. You do not criticize real Austrian economics when you criticize those people.

Posted by G | December 30, 2007 11:17 AM

Thanks G. You're right. Too much coffee...too much commenting.

Posted by Michael W | December 30, 2007 11:27 AM

Mark, I admire Bastiat a great deal. And, in general, I agree with you that his arguments are pretty devastating to Keynesian ideas. If I had a choice between Bastiat and Keynes to control the American economy, I would choose the former without hesitation.

But, while I have serious reservations about Keynesian economics, I still believe that Keynes and his students filled a hole in classical economic theory. It does seem to me that some event, say turbulence overseas, can lead businesses and consumers to become fearful and reduce their expenditures. If wages and prices were perfectly flexible, this would pose no problem, since they would fall in response to aggregate demand and the economy would adjust smoothly. But the problem is that they are not flexible. Prices (and especially wages) tend to be very sticky on the downside. This means there will be a painful adjustment period (To use Bastiat's example, reducing the size of the military would certainly benefit the economy in the long run, but would cause some unemployment in the short-run). Keynesians therefore thought this implied a need for discretionary policies to offset a market failure (price stickiness).

Whether the benefits of discretionary policy outweigh the costs is another matter. I myself have doubts about it. And I certainly think that the government has focused far too much on the management of aggregate demand, and not enough on the supply side of the economy--that is on increasing the long-run rate of growth of output.

So, while I believe the Keynesians made an important theoretical contribution, I still think that classical economics reigns supreme. Adam Smith wrote the great book and Keynes merely added some footnotes.

Posted by rwe | December 30, 2007 11:46 AM

Incidentally, this brings to mind a question that has arisen in my mind lately. Why on earth does Megan wage war on the least intelligent of Ron Paul's supporters (or the proponents of Austrian economics) rather than engaging in a more serious debate with the most intelligent ones? Does she prefer the easy targets?

Posted by rwe | December 30, 2007 11:49 AM

rwe,

If people want to debate they post on forums; they don't blog. Blogging is for soapboxing, and rarely yields any sort of decent debate. I've seen a number of intelligent questions posed here which were not answered.

I'm not sure how Bastiat could possibly refute Keynes, as he doesn't say much about the stability of market economies. I agree that any market or command economy cannot react instantly to unforeseen circumstances (e.g., a sudden downturn in consumer spending). Recessions happen (although, I would have to point out the superiority of futures and prediction markets over government planning for the future).

The difference between Keynes and the Austrians (and classical economists as well) was that Keynes believed reductions in aggregate demand could be self-reinforcing, creating a downward spiral of hoarding, deflation, and depression. No one is arguing that sticky prices do not exist. Many Austrians argue that: aggregate demand cannot be stimulated through monetary policy, and there is no downward-spiral of hoarding in market economies. In other words, most Austrians believe market economies have a strong tendency to achieve full employment (of labor and resources) on their own.

Posted by G | December 30, 2007 2:16 PM

I echo MEH on Michael W's smugness. I would like to think MW has the right intentions and the intellect to examine reality, and eventually will see the point being made about 'true' inflation.

Also, I am NOT a die-hard Austrian. Although I was trained as a neo-classical, I am very sympathetic to the Austrian view on malinvestment because I have a ring-side view through my commercial real estate business. I think it gets exaggerated in this particular industry, which makes it easier to understand and, frankly, dread.

rwe, I agree with MEH's eloquent assertion about autonomous shocks to aggregate demand as the Trojan Horse for monetary and fiscal 'stimulus'. You seem to think the stimulus is warranted to avoid market failure, but I feel that the market gets better and better at taking care of itself through more and more sophisticated risk pooling, better hedging, global diversification, etc.

But, more importantly, the price stickiness justification for monetary intervention begs the question: does it not hurt citizens who are net savers for the govt to use monetary stimulus (i.e. inflation-causing money supply growth) to bail out citizens experiencing 'market failure' or net borrowers? It doesn't smack of American fairness and good faith to me.

Interestingly you do admire Bastait, even though he propounded Says Law, as opposed to Keynes who didn't buy into it. It would seem to me that Ron Paul's proposals are much closer to Bastait than Keynes, which, by your own assertion is who you would prefer running the economy.

As for the Chicago monetarist approach of a 5% annual growth in money supply: yes, that would be preferred, possibly, to the status quo, but it in turn begs the question: if the 5% growth is for the sake of predictability for entrepreneurs and risk takers, why 5%, why not 6%, 3% or 0%?

Inflation targetting has its own severe problems - CPI is a lagging indicator, and frankly a subjective one at that, which to me nullifies the entire approach. It is impossible to monitor all prices dynamically; even if it were, inflation targetting would still continue to reward those closest to the printing press.

What Ron Paul offers is two policy recommendations I think even rwe would be hard pressed to argue with: permitting competition from private currencies (including commodity backed currencies), and allowing citizens to opt out of social security and medicare, which should result in stability for (and gradual appreciation of) the value of the dollar, combined with a reduction in future liabilities.

Permitting domestic currency competition should let the market decide if the Friedmanite approach works, if the Bernanke approach works, or if the Mises approach works or if the Mickey Mouse approach works.

I don't claim to have the answer - all I know is that govt monopolies, whether on currency, or postal service, or healthcare or anything non-defence or judiciary related tend to be a bad, bad, bad idea.

(PS even on the judiciary front, its fascinating to see the rapid growth of private arbitration and social networks. I think a zero-privacy, reputation-based economy, in which your life is tracked facebook-style should internalize positive and negative externalities to the point that even judiciaries make become largely irrelevant, except for very few federal issues.)

Posted by Rahul | December 30, 2007 2:23 PM

"I'm not sure how Bastiat could possibly refute Keynes, as he doesn't say much about the stability of market economies."-G

I was thinking chiefly of Hazlitt's critique of Keynes, which was based on "the broken window fallacy." I imagine MEH could explain further if you are interested.

You might also want to look at this critique of a prominent Keynesian's argument, again based on Bastiat's parable.

Posted by rwe | December 30, 2007 3:32 PM

Rahul,
(PS even on the judiciary front, its fascinating to see the rapid growth of private arbitration and social networks. I think a zero-privacy, reputation-based economy, in which your life is tracked facebook-style should internalize positive and negative externalities to the point that even judiciaries make become largely irrelevant, except for very few federal issues.)

You mean the Internet? ;) I love to point market-haters to it as an example of how free markets (at least in non-rivalrous goods) can work, even in the absence of things usually considered necessary, such as tort (I won't say its lacking in criminal law, since its damn near impossible to violate someone's property rights on the Internet). In the 13 short years since it was opened up to commerce, the Internet has become incredibly successful and shows no signs of slowing down.

It would also be interesting to see what ethics would arise in such an environment. Perhaps "honor" would once again become important to people.

One thing mentioned by the GMU profs over at The Austrian Economists blog is that there many different "Austrian" positions. LvMI doesn't have a monopoly on Austrian economics, after all. I strongly disagree with LvMI's seeming denial of public goods and the free rider problem, for example. When you really break it down, are there really so many differences between neoclassical and Austrian economics?

rwe, I can't figure out how the broken window fallacy directly refutes the Keynsian idea that aggregate demand can fall on its own and thus requires stimulus. I know it points out that silly government spending is wasteful in and of itself, but I'm not sure Keynes would have ever said otherwise? I believe he stated that Say's law did not apply to money only, because according to him, hoarding drops the demand for goods and services at the same time it increases the demand for lendable funds (by lowering the rate of interest), right?

Posted by G | December 30, 2007 6:11 PM

Okay G. There are (at least) two serious problems with Keynes' ideas that the classical economists, including Batiat, would have spotted.

First, Keynes focused on the ability of an expansionary fiscal policy to stimulate the economy through a multiplier effect. But there is a serious problem there. According to Keynes the government should fund its expenditures through borrowing (in times of trouble). This will raise real interest rates and crowd out private investment. In the short run Keynesian fiscal stimulus might work, though even this is doubtful--Japan's efforts in the 1990's were hardly a stunning success. But in the long run it will diminish the capital stock and damage productivity.

I think this is very closely related to Bastiat's point about what is seen (the stimulus of government spending) and what is unseen (the crowding out of private investement). And this is the sort of muddled thinking that led Paul Krugman to argue that the terrorist attack would actually stimulate GDP due to an increase in government spending. We all know now that Krugman was very badly mistaken.

Second, Keynes was fairly enthusiastic about the prospects for central planning. I don't have with me, but as I recall it reports that Keynes wrote to Hayek something like this:

"Surely what we need is not less planning but more."

Now Bastiat, like other classical economists, knew how destructive government planning could be:

"If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of a finer clay than the rest of mankind?"-bastiat

"If socialists mean that under extraordinary circumstances, for urgent cases, the state should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions, we will, of course, agree. This is done now; we desire that it be done better. There is however, a point on this road that must not be passed; it is the point where governmental foresight would step in to replace individual foresight and thus destroy it."-Bastiat

The case against central planning had already been made by the classical economists. Keynes, for all his brilliance, just hadn't understood their teachings sufficiently.

I still believe that Keynes made important theoretical contributions to economcs, but the countries that tried to follow his policy advice didn't do very well. Meanwhile, in East Asian places like Hong Kong experienced robust growth by following classical prescriptions.

Keynes was a great economist, but his poicy advice hasn't fared well, for reasons Batiat and Smith could have predicted.

Posted by rwe | December 30, 2007 7:42 PM

Where are the examples of pure market related declines in aggregate demand that were not precipated by gov't action? The 1930's depression (the pretext for Keynes' General Theory) was initiated and enhanced by government policies of the time. It was the Smoot-Hawley tariff and the subsequent int'l tariff reaction that caused the economy to contract in the first place. The contraction would have been muted, as trade began to resume (obviously with less vigor because of the increased barriers to trade), if not for the governments of the time deciding to take action against the budget deficits they had incurred, which they proceeded to do tackle by dramatically raising taxes. The U.S. government raised marginal tax rates by threefold on the highest earners and quadrupled the rate for low-income earners in addition to introducing a host of new business and gift taxes. Of course, the tax hikes made the budget problem even worse as the economy crippled further under such dramatic penalties for production and capital formation. Further, the tax hikes, which were not made law until June of 1932, were made retroactive to January 1, 1932, exacting punishment upon economic transactions that had already taken place. The retroactivity feature was largely responsible for the Feb-March 1933 bank panic and bank holiday, as depositors withdrew funds en masse in order to meet the March deadline imposed for payment of 1932 tax liabilities.

It is easy to see that in the midst of an environment in which government has destroyed any potential for successful capital formation that there will exist an opportunity for people who propose socialism, money illusion,redistributionist policy and counterproductive things like digging up bottles filled with banknotes. Enter Keynes and his general theory.

Posted by Jeeves | December 30, 2007 7:56 PM

Megan, go ahead and criticize "science journalists." You can hardly go wrong. Anyone who stayed awake for half of a high school science class can catch them out at will.

Posted by Occam's Beard | December 30, 2007 9:14 PM

G, fascinating question on the subject of 'honor'. I think honor was important in the past because of the fact that people rarely left their home-towns for generations, and the towns were usually small to begin with, as were people's social/work circles. Hence, effectively, zero privacy and the importance of reputation.

Today, through online connectivity and close to zero cost of communications, once again we have... a de-facto reputation system!

I think it will make much of govt's functions irrelevant, and its happenning much faster than even an optimist like myself would expect.

Maybe thats why the primaries are getting so competitive as well - candidates are almost having to stand on their actual records and accomplishments, with their past and reputations getting much greater scrutiny than any race in the past. I love it!

Posted by Rahul | December 30, 2007 9:44 PM

rwe-

"Keynes was right about some things, Megan. Wages and prices are sticky in the short run, for example. If that were not true, there would be no need for a discretionary monetary policy."

you may care to give this some additional thought..to me, wages, and, therefore, prices, are 'sticky' due to People's acclimation to amounts of spending via their, respective MPC (marginal propensity (to) consume).

to: "It does seem to me that some event, say turbulence overseas, can lead businesses and consumers to become fearful and reduce their expenditures. If wages and prices were perfectly flexible, this would pose no problem, since they would fall in response to aggregate demand and the economy would adjust smoothly. But the problem is that they are not flexible. Prices (and especially wages) tend to be very sticky on the downside. This means there will be a painful adjustment period (To use Bastiat's example, reducing the size of the military would certainly benefit the economy in the long run, but would cause some unemployment in the short-run). Keynesians therefore thought this implied a need for discretionary policies to offset a market failure (price stickiness)."

--Keynesians therefore thought this implied a need for discretionary policies to offset a market failure (price stickiness).--we should wonder how they acheive this--simply, by any means they choose, they set up the Economy for a Truly negative reinforcing loop--the larding of Debt, on any balance sheet, will increase the dreaded 'price stickiness', as well, will Revenue negation, Taxation. The Economy becomes ever more brittle.

btw, your succinct piecing together of Bastiat v. JMK was well done.

also, with this: "I think a zero-privacy, reputation-based economy, in which your life is tracked facebook-style should internalize positive and negative externalities to the point that even judiciaries may become largely irrelevant, except for very few federal issues."-rahul

This author has some interesting things to say on similiar themes:
http://www.amazon.com/Cult-Amateur-Internet-Killing-Culture/dp/0385520808/ref=sr_11_1?ie=UTF8&qid=1199071969&sr=11-1

also, The MEH posting is for, mainly, keystroke economy, seeing how this site's software doesn't seem to be fully operational..

Posted by Mark E Hoffer | December 30, 2007 11:12 PM

No one's making you respond. Just quit.

Posted by anon | December 31, 2007 2:48 PM

It is threads like this one that reminds of why I find Megan McArdle's blog so superior to most others. I can't imagine a discussion of this quality taking place on Yglesias' or Drum's blog.

Posted by Yancey Ward | January 2, 2008 12:56 PM

Below, you will find the central misunderstanding of the common lay person:

What do YOU suppose would happen if we just stopped printing money and everyone were forced to compete over just those dollars in circulation now? Would anyone but the most desperate be able to borrow money? I suppose you'd just rent until you were 45 then buy a house for cash...but starting a new business would be just about impossible unless Uncle Larry leaves you his millions.

Money is just the medium of exchange, nothing more. Any quantity of money can perform the function of money, regardless of the size of the economy. The use of money is simply barter in which one side every transaction consists of the same commodity. No Austrian economist denies the stickiness of prices, in wages or any other good or service, but they do recognize that the adjustments must be made- no economy is ever static, even if the actual supply of the money commodity is managed.

Michael W,

When you borrow to build a home or a business, it isn't "money" that you are borrowing. What you are borrowing are the final consumer goods that producers have decided not to consume in the present, and those final goods are used to feed, clothe, entertain, etc. those people who build your house or your business. What you are borrowing are the wood, the metal, the ceramic, the plastic, etc. that are not being consumed in the present to make pencils or plama televisions for immediate consumption. And when you pay back the loan, you are really paying back to the creditors a part of your future production of goods and services. G, above, asked the most important rhetorical question in his very first comment.

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