Russell Roberts's Blog, page 1452

Papola talks economics

The latest EconTalk features John Papola talking with me about the economics in Fight of the Century.

Fight of the Century now with English captions

If you'd like to see the lyrics as you listen to the latest Keynes-Hayek rap video, just click on the little CC button near the bottom-right corner of the YouTube frame and they should appear.

Garrison on Keynes and Keynesians

I know of no one who is a more careful and complete student of Keynes's writings – and of the writings of every variety of Keynesian and post-Keynesian and Post Keynesian and neoKeynesian and YouNameItKeynesian – than Auburn University's Roger Garrison.  This May 2010 essay by Roger – a review of a collection of essays on the proper interpretation of Keynes – is relevant to the debate over Russ's and John's not-so-audacious accusation that Keynes had a soft-spot for top-down direction of the economy.  Here are some key passages from Roger's essay:

The inherent uncertainty of the future, in his [Keynes's] view, gave centralized decision making a clear advantage over the decentralization that characterizes market economies. Keynes advocated the "socialization of investment" and the "euthanasia of the rentier." The rate of interest, which "rewards no genuine sacrifice," could and should be driven to zero, at which point capital would cease to be scarce and the distribution of income would be more equitable. In a matter of two generations, the economic problem of scarcity can be solved, such that our grandchildren can occupy themselves with questions of aesthetics rather than questions of economics.

This is the uninterpreted Keynes. Post Keynesians emphasize Keynes's vision of utopia and the associated reform proposals almost to the exclusion of his diagnosis of depression and prescription of short-run, demand-management policies. In fact, standard textbook Keynesianism, whose graphics and equations make the case for monetary and fiscal activism, are repeatedly described in the Davis volume as "bastardized Keynesianism" (Joan Robinson's term) so as to provide an appropriate contrast with the more radical Keynesianism adopted by the volume's contributors. If "post Keynesians" did nothing but embrace these utopian aspects of Keynes, they would more accurately be described as Keynesian fundamentalists.

….

As with almost every other aspect of Keynes's writing, the phrase "socialization of investment" is in for some interpreting. What did Keynes have in mind? While no one believes that he was thinking of outright state ownership of the means of production, other possible meanings involve further questions that neither Keynes nor his followers have adequately addressed. It is clear in his discussion following the call for socialized investment that Keynes is concerned with the "volume" and not the "direction" of employment.

Keynes argues as if the government — or rather, "forces outside the classical scheme of thought"— could control the volume without affecting any other aspect of the market economy. What sort of powers would government have to wield to be able to exert such a force? And how would the quality of entrepreneurial decisions be affected if entrepreneurs had to anticipate the use — and possible misuse — of such powers? There are no answers to these questions that put socialization in a favorable light.

The simple fact is that the conceptually distinct aspects of "volume" and "direction" as applied to employment or output are governed by a single set of market forces. Joan Robinson, who recognized the actual unity of these market forces but favored a more wholesale form of socialization, chided Keynes for even wanting to control volume without controlling direction. Direction, in her view, needed some controlling, too.

Keynes and central planning

Barkley Rosser at EconoSpeak says John Papola and I have accused Keynes of having "a central plan" in our rap video. After saying some nice things about the video, he says:

However, I do find it disturbing that increasingly Austrians and some others have taken to charging Keynes with having supported "central planning," as indeed done in this video. Is this correct? I think that the answer is largely "no," with it certainly being that answer if one means by that command central planning of the Soviet type that Hayek criticized in his Road to Serfdom (which Keynes praised, btw, when it first came out).

He then discusses whether Keynes's writings offer any support to the charge. Keynes did talk about the virtues of the "socialisation of investment." Rosser concludes:

One can argue again here that Keynes is setting himself up for some sort of impossible contradiction, and Hayek may well have argued that such control of investment would lead to his road to serfdom slippery slope. However, it is clear from later passages that what Keynes had in mind was ultimately the control of the aggregate of investment rather than of its specific forms or details.

These almost certainly provide the strongest evidence for Keynes supposedly supporting there being a "central plan." But it looks at most, putting the two together, like one that involves lots of provision of information and data along with some sort of control of aggregate investment, while leaving most of the decisions up to "private initiative." This hardly constitutes a "central plan," and certainly not one of the sort that the actually existing Hayek criticized. The fictional one in the video should have spoken more carefully.

Brad DeLong agrees and says Keynes did not believe in central planning.

Paul Krugman doesn't even want to get in on the debate–he calls it "truly stupid."

There's only one problem with all this and that's that the accusation against us is something of a straw man. Here's the line that Rosser is referring to, but in context:

HAYEK

Creating employment's a straightforward craft

When the nation's at war, and there's a draft

If every worker was staffed in the army and fleet

We'd have full employment and nothing to eat

REFRAIN

HAYEK

Jobs are a means, not the ends in themselves

People work to live better, to put food on the shelves

Real growth means production of what people demand

That's entrepreneurship not your central plan

Hayek isn't saying Keynes is a socialist or wants to centrally plan the entire economy. He is singing about Keynes's plan to create jobs via government spending. Surely having the government spend, say, $800 billion in stimulus is a central plan of sorts. Maybe we should have said "centralized plan" but it wouldn't scan as well.

Tyler Cowen comes to our defense. He asks if Keynes favored central planning:

Barkley Rosser and Brad DeLong say no, but it depends on definition and context. Barkley tries to talk his way out of it, but Keynes in the General Theory did advocate "a somewhat comprehensive socialisation of investment."  "somewhat" — that's my kind of weasel word!  In any case this was not the same as classical central planning circa 1920, but in a rap video I consider that acceptable license.  By my count "central plan" comes up once in a ten-minute video and most importantly Keynes does not accept the characterization but rather responds that the debate is about spending.  The video is not suggesting that each and every rapped point is true at face value, and if the two characters seem to debate past one another that too reflects the reality at the time.

He then says:

Also consider another piece of evidence, namely the Keynes-approved preface to the German-language (uh-oh) edition of the General Theory:

"Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire."

Read the rest of Tyler's post. He cuts Keynes some slack but also adds some tension back to the rope.

I'm not going to weigh in here on precisely where Keynes sits on the central planning meter on a scale of 1-100. Or where his policies might lead. That's another questions. My point here is our lyrics. Are they fair to the views of Keynes and Hayek? I don't think John Papola and I accused Keynes of being a central planner or a socialist.

Here is the refrain of the Fight of the Century. It is heard six times in the video:

Which way should we choose?

more bottom up or more top down

…the fight continues…

Keynes and Hayek's second round

it's time to weigh in…

more from the top or from the ground

…lets listen to the greats

Keynes and Hayek throwing down

Keynes's roadmap for recovery and prosperity is more top down. Hayek's is more bottom up. I think that's a fair assessment. Paul Krugman is not a socialist. Neither is Brad DeLong. Both, however, want a lot more top down control or steering of the economy than John Papola and I want. So in that sense, I think the lyrics are fair to Keynes and Hayek and their modern-day fans.

 

 

Digging deeper into the Fight of the Century

We have now posted some background reading if you want to dig deeper into the issues raised in the Fight of the Century rap video. The readings are here.

Fight of the Century in the classroom

If you have already used the Fight of the Century rap video in the classroom or have seen it as a student, I'd love to hear from you.

The Circus

Here's a letter to the Washington Post:

Kathleen Parker is understandably disgusted that so much public discourse is driven by buffoons such as Donald Trump who appeal to Americans who are, as Ms. Parker notes, "unconvinced by facts" ("Birthers, buffoonery and a sad discourse," May 1).

The problem, however, extends beyond the rantings of megalomaniacs with no prospect of winning office.  It includes also the rantings of megalomaniacs who succeed in winning office.

Consider, for instance, claims by Sen. Sherrod Brown (D-OH) and Bernie Sanders (I-VT) that American manufacturing is declining and that the way to fix this alleged problem is with higher tariffs.  There is no factual basis for their assertions that 1) Americans no longer manufacture enough stuff (the real value of U.S. manufacturing output today is at an all-time high); 2) that America is economically successful the greater are the number of manufacturing jobs 'created' in America (Do Messrs. Brown and Sanders encourage their children to work on the factory floor instead of becoming doctors or web-designers?); and 3) that protecting domestic producers from foreign competition promotes economic growth (see the past 235 years of intense economic research into this matter).

So while Ms. Parker justifiably laments the reality that many Americans remain "unconvinced by facts" regarding Mr. Obama's birthplace, this idiocy is just one of many bits of evidence that politics is a circus run by clowns performing stupid stunts for gullible audiences.

Sincerely,

Donald J. Boudreaux

Fight of the Century with Hebrew subtitles

Damn Martians!

The indispensable Mark Perry offers these data showing that manufacturing's share of world GDP has declined significantly and steadily since 1970 – from roughly 26.5 percent of world GDP in 1970 to (gasp!) a mere 16.6 percent in 2009.

Recall how some trade skeptics (such as the intellectually flailing Ian Fletcher) – who will (because they must, in order to give their arguments even a patina of plausibility) twist, distort, and misrepresent facts and theories – insist that, even though U.S. manufacturing output has risen in absolute amounts, its decline as a share of U.S. GDP is evidence of economic naughtiness practiced by other countries and, also, a sign of U.S. economic decline.

I wonder how Dr. Fletcher and his like-minded protectionists explain the facts highlighted by Perry regarding manufacturing output as a share of world GDP.  Are aliens from other planets damaging earth's economy with unfair interplanetary trade practices?  Or is humanity across the entire globe foolishly switching to the production of services out of a collective failure to understand that manufacturing – because only it results in the production of tangible, real, masculine stuff – must not decline as a percentage of world GDP lest we earthlings be cast back into poverty by our short-sighted insistence on consuming and producing too many girly-girl services?

Buffaloed

In this post, "How Free Trade killed the Buffalo," Olaf Storbeck links to a paper (forthcoming in the American Economic Review) by M. Scott Taylor on the late-19th-century slaughter of bison in America.  Storbeck describes Taylor's paper as showing that "the most important driver of the extinction of the American bison was technical innovation, globalisation and unfettered capitalism."

Although I can pick several nits with Taylor's paper, I read it not as a morality tale about what an unholy trinity "technical innovation, globalisation and unfettered capitalism" are, but, rather, as describing an historical instance in which capitalist institutions worked.

Yes, innovation that allowed for the successful tanning of bison hides prompted hunters to slaughter more bison in order to help meet the global demand for leather.   And for a while this increased hunting did indeed reduce the size of bison herds to dangerously low levels.  But only for a while – as Taylor himself notes when describing the

numerous private parties who found buffalo to be such a valuable resource that they established property rights on their own by capturing and then breeding live buffalo.  Several entrepreneurial ranchers in the 1870s and 1880s established private herds that, until federal legislation arrived in the mid 1890s, probably saved the buffalo from extinction [p. 33].

Taylor needn't have qualified his conclusion with the word "probably."  Such private property rights certainly saved bison from extinction.  Private owners of bison are no more likely to let their herds be slaughtered to extinction than are Jim Perdue and other private owners of chickens to let their flocks be slaughtered to extinction.

Storbeck also errs when he asserts that, in the late-19th-century bison market, "the law of supply and demand was not working."  What Storbeck here refers to is the fact that dwindling supplies of bison put no upward pressure on the price of bison leather and, therefore, the dwindling supply of bison hides was not choking off the quantity of bison leather demanded by consumers.   But all this fact means (assuming it to be a fact) is that bison leather and cattle leather were such good substitutes for each other that – because bison leather was only a tiny fraction of the world supply of leather – the global price of leather did not rise noticeably when the supply of bison leather became threatened by bison extinction.

To repeat, though: there was a perfectly predictable (see Harold Demsetz 1967) private market response on the supply side – namely, private entrepreneurial efforts to establish private property rights in a resource whose market value increased enough to justify the costs of establishing and enforcing such property rights.

UPDATE: My friend Dave Rose, at Univ. Missouri at St. Louis, upon reading this post, e-mailed to me a great line: "The only thing that trade ever destroyed is privilege."  Indeed so.