Milton Friedman on how New Keynesian Macroeconomics is mostly monetarism
06 Feb 2015 Leave a comment
The competing visions of stabilisation policy have been defined by Franco Modigliani and Milton Friedman
26 Jan 2015 Leave a comment
in business cycles, economics of information, history of economic thought, macroeconomics, Milton Friedman, monetarism, monetary economics Tags: Franco Modigliani, Keynes in macroeconomics, monetary policy, stabilisation policy, The fatal conceit, The pretence to knowledge
Paul Samuelson and Robert Lucas both agree that economists have solved the problem of economic depressions
24 Jan 2015 Leave a comment
in business cycles, fiscal policy, great depression, great recession, history of economic thought, macroeconomics, monetary economics, Robert E. Lucas Tags: Paul Samuelson, prosperity and depression, The fatal conceit, The pretence to knowledge
Sorry, Conservatives—Basic Economics Has a Liberal Bias By Matthew Yglesias
22 Jan 2015 Leave a comment
in history of economic thought, occupational regulation Tags: academic bias, political bias
…here are some ideas that I’ve seen in most of the introductory economics textbooks I’ve looked at:
- Governments (typically through central banks) need to manage the demand level of national economies to prevent catastrophic recessions and mass unemployment.
- Absent carbon pricing, a market economy will massively overproduce greenhouse gases.
- Many industries, such as broadband Internet, are “natural monopolies” where an unregulated market will lead to higher prices and less investment than is socially optimal.
- Due to asymmetrical information, consumers in a market economy will be unable to bargain effectively with doctors and other providers of health care services.
- Due to adverse selection, consumers in a market economy will be unable to effectively insure themselves against health risks.
- Due to the declining marginal utility of money, taking $100 from a rich person and giving it to a poor one will increase human welfare.
- Increasing the number of immigrants, raising taxes on the rich, and making Social Security benefits more generous will make almost everyone better off.
I could go on like this. But suffice it to say that one of the main reasons that so many economists are Democrats is that on a whole lot of issues the basic econ 101 view supports the liberal position.
via Economics is liberal: Chris House on conservative economics..
Noah Smith wouldn’t have his fantasies about the right-wing politics of economists if he had been job-hunting in the mid-1980s and the 1990s
10 Jan 2015 1 Comment
in history of economic thought
Noah Smith somehow persuaded himself that the economics profession is moving to the left after a period on the right. There is ample evidence to show that the economists who make up the economics profession were never right-wingers. To be specific, Smith says in his recent op-ed that:
A lot of people see economics as a “conservative science” that makes up unrealistic theories in order to push a free-market agenda. I don’t know if that was ever true — maybe in the 1970s? — but if so, those days are long gone.
And that
Back in the 1970s, the public face of economics was Milton Friedman. A consummate public intellectual, Friedman would travel around the country giving lectures about the power of free markets and the virtues of capitalism. Just search YouTube and you can easily see highlight reels of Friedman smacking down socialists and idealistic leftist youths. He inspired a generation of bright young conservatives to go into economics. And before Friedman, there was Friedrich Hayek, whose tirade against Keynesian government intervention is still revered by many on the right.
Noah Smith received his PhD in economics from the University of Michigan, graduating in 2012. He is a blogger, professor and writer for Bloomberg view.
It is well known, and easy to locate on the web, a large number of papers showing that the average economist is a moderate Democrat and has been so for the several decades since these surveys and other research has been undertaken. The cleverest of these cross-tab voter registrations with faculty homepages.
For example, Dan Klein showed that for Stanford, an overall Democrat: Republican ratio was 7.6:1. Indeed, registered Democrats easily outnumber registered Republicans in most economics departments in the USA. The registered Democrat to Republican ratio in sociology departments is 44:1! For the humanities overall, only 10 to 1. As people register for vote in the USA and political donations are a public record, it’s relatively easy to find out their political bias.
Little wonder that Dan Klein titled one of his papers “Is there a free-market economist in the house” in which he said:
We find that about 8 percent of AEA members can be considered supporters of free-market principles, and that less than 3 percent may be called strong supporters. The data are broken down by voting behaviour (Democratic or Republican). Even the average Republican AEA member is “middle-of-the-road,” not free-market.
The Bush administration was populated by new Keynesian macroeconomists. Indeed, there are so few leading economists who are Republicans, especially in the macroeconomics field, that it was difficult for President Bush to recruit a chairman of his Council of Economic Advisers that was of high standing in the profession as a macroeconomist.
As for Milton Friedman been the spokesman for the economics profession in the 1970s, I wish he had been. It would have made my job hunting a lot easier in the 1980s and 1990s in Canberra.
Mentioning Milton Friedman’s name in the mid-1980s at job interviews in Canberra would have been extremely career limiting. Not much better in the early 1990s.
Back in the 1980s, Milton Friedman was just graduating from being ‘a wild man in the wings’ to just a suspicious character in policy circles.
If you name dropped Hayek in the 1980s and 1990s, any sign of name recognition would have indicated that you were been interviewed by educated people.
I know from first-hand experience working in the economic division of the Prime Minister’s Department that Friedman certainly had no influence on macroeconomic policy in Australia in the late 1980s. The economists in the monetary policy section have great difficulty even describing what Friedman stood for in terms of monetary policy.
I wrote two papers in 1995 for the then Industry Commission in Canberra on merger and price control policy. I was required by the deputy chairman (and the champion of my paper) to delete all of my references to Richard Posner and Robert Bork because they were too contentious. They were merely Chicago school of anti-trust economics.
As I mentioned at the start, Noah Smith completed his Ph.D. in 2012. I put his ignorance of the left-wing bias of the economics profession down to his youth and inexperience.
Deirdre McCloskey compares John Kenneth Galbraith with Joseph Schumpeter
16 Dec 2014 Leave a comment
Joseph Schumpeter’s Adam Smith
14 Dec 2014 Leave a comment
in Adam Smith, history of economic thought Tags: Adam Smith, Joseph Schumpeter
Global Warming Was Worth It – And if we had to, we’d do it again
13 Dec 2014 Leave a comment
in climate change, development economics, environmental economics, global warming, growth disasters, growth miracles, history of economic thought, liberalism, population economics, technological progress Tags: capitalism and freedom, The Great Enrichment, The Great Escape, The Great Fact
Now, my conception (read: European) of progress and a better standard of living would place many advances above composting, organic farming, or even urban chicken coops.
- Higher incomes that allow people to make livings that afford them more than merely survival or avoiding starvation.
- A low poverty rate.
- High quality and diversity of employment opportunities. Rather than the choice of being a farmer or being a blacksmith, the average citizen should have an array of careers to choose from, and the ability to be industrious and take risks for profit.
- The availability of housing. On an average night in the United States, a country with a population of somewhere around 350 million, fewer than one million people are homeless.
- Consistent GDP growth.
- Access to quality health care.
- The availability of quality education. (I suppose we could quibble over the word “quality,” but certainly there is widespread free education availability.)
- High life expectancy. Worldwide life expectancy has more than doubled from 1750 to 2007.
- Low frequency of deadly disease.
- Affordable goods and services.
- Infrastructure that bolsters economic growth.
- Political stability.
- Air conditioning.
- Freedom from slavery, torture and discrimination.
- Freedom of movement, religion and thought.
- The presumption of innocence under the law.
- Equality under the law regardless of gender or race.
- The right to have a family – as large as one can support. Maybe even larger.
- The right to enjoy the fruits of labor without government – or anyone else – stealing it.
There’s much more, of course. If the “sustainability movement” had its way, many of these advances would be degraded.
And since Caradonna offered a few charts highlighting climate change and population growth (a bad thing), I too was assembling a number of graphs that could offer visual examples of the rise of positive developments since the Industrial Revolution. I also soon noticed that all of them looked virtually identical.
So below is what a graph encompassing nearly every one of my bullet points looks like:
Recessions as reorganisations
12 Dec 2014 Leave a comment
in business cycles, F.A. Hayek, history of economic thought, job search and matching, macroeconomics, Robert E. Lucas, unemployment Tags: FA Hayek, recessions, recoveries, Robert Lucas
Most models of the shape of recoveries draw on a learning process. A long tradition in business cycle theory holds that limited knowledge of relative price changes can temporarily disrupt labour demand and supply because of errors in wage and price perceptions (Alchian 1969; Sargent 2007; Hellwig 2008).
Pricing, investment and production plans are made on the basis of incomplete and conflicting knowledge of constantly changing aggregate, industry and local conditions. Firms and workers will over- or under-supply when they misperceive wages and prices.
With imprecise information, it takes time for employers and workers to sort out temporary from permanent shifts in demand and supply, inflation-driven changes from real changes in prices and input costs, and general changes from the local changes that may be more important to particular firms. As Hayek explained in his Nobel prize lecture:
The true, though untestable, explanation of extensive unemployment ascribes it to a discrepancy between the distribution of labour (and the other factors of production) between industries (and localities) and the distribution of demand among their products.
This discrepancy is caused by a distortion of the system of relative prices and wages. And it can be corrected only by a change in these relations, that is, by the establishment in each sector of the economy of those prices and wages at which supply will equal demand.
Recoveries are shaped by the speed of entrepreneurial learning about the new labour and product market conditions, the relative cost of adjusting capital and labour rapidly or slowly and the costs and benefits of labour market search. This new learning is necessary because the old constellation of prices and wages is no longer valid.
It was a misdirection of resources brought about by the initial inflationary firm, as Hayek explained in a visit to Australia in 1950:
During a process of expansion the direction of demand is to some extent necessarily different from what it will be after expansion has stopped.
Labour will be attracted to the particular occupations on which the extra expenditure is made in the first instance.
So long as expansion lasts, demand there will always run a step ahead of the consequential rises in demand elsewhere.
And in so far as this temporary stimulus to demand in particular sectors leads to a movement of labour, it may well become the cause of unemployment as soon as the expansion comes to an end…
If the real cause of unemployment is that the distribution of labour does not correspond with the distribution of demand, the only way to create stable conditions of high employment which is not dependent on continued inflation (or physical controls), is to bring about a distribution of labour which matches the manner in which a stable money income will be spent.
This depends of course not only on whether during the process of adaptation the distribution of demand is approximately what it will remain, but ‘also on whether conditions in general are conducive to easy and rapid movements of labour.
In a recession, employers and workers do not immediately know that demand has fallen elsewhere as well as in their own local markets and recognise the need to adjust to their poorer prospects everywhere, and it is not known how long the drop in demand will last (Alchian and Allen 1973).
The cost of learning about available opportunities restricts the speed of a recovery. Workers and entrepreneurs must gather information on the new state of demand and the location and nature of new opportunities. This information is costly and is quickly made obsolete by further changes, and the cost of acquiring information is more costly the faster the information is sought to be acquired (Alchian 1969; Alchian and Allen 1967).
The process of recovering from a recession would be a faster process if the new constellation of wages and prices that are the best alternative uses of resources was known immediately and was credible to firms and workers (Alchian and Allen 1973).
Workers and employers must first have sufficient time to discover what new knowledge they now need to know to serve their interests well, leave enough room for the unforeseeable and keep their knowledge fresh in ever-changing markets.
New wage levels must be created by workers and employers testing and retesting in the labour market the new relative scarcities of labour. Imbalances between the allocation of labour supply and demand to different firms and sectors and the new level and pattern of consumer demand are gradually remedied by changes in relative prices and wages, layoffs, business closures and job search.
Prices are a signal wrapped in an incentive. Growing demand induces higher employment and rising wages. Wages stagnate, and there are layoffs where there is an excess supply.
These changes give the unemployed an incentive to move to new uses and entrepreneurs to profitably hire the unemployed. The ensuing reorganisations are time-consuming and information-intensive because a job seeker and an employer with an apt vacancy take time to find each other.
Prices and wages must change sufficiently for firms to profitably create new jobs. New jobs require time to plan and build new job capital. This is the human, physical and organisational capital underlying a new job. There are also job creation costs when reopening existing positions that were mothballed during the downturn.
How is this to be done? Hayek explained again in 1950 in his speech in Australia:
Full employment policies as at present practised attempt the quick and easy way of giving men employment where they happen to be, while the real problem is to bring about a distribution of labour which makes continuous high employment without artificial stimulus possible.
What this distribution is we can never know beforehand. The only way to find out is to let the unhampered market act under conditions which will bring about a stable equilibrium between demand and supply.
Utopia, you are standing in it! 
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