Archive for March, 2009
| Dick Langlois |
One of my students sent me this link to a recent South Park episode, which not only effectively skewers the bailout but also has its own take on the nature and meaning of “the market.” A mini-Fable of the Bees for modern times.
| Peter Klein |
The indefatigable Gavin Kennedy explains, for the umpteenth time, that Adam Smith was ambivalent about market capitalism and that the famous metaphor of the “invisible hand” was not meant as a generalized defense of the market. As Gavin points out, Smith’s detailed analysis of the market economy appears in Books I and II of the Wealth of Nations, while the invisible hand metaphor appears only once, in Book IV, where Smith defends British merchants who, despite mercantilist export subsidies, preferred to keep their capital invested at home, to the benefit of the British economy. Notes Gavin:
So inconsequential was [Smith's] use of The Metaphor that neither he, nor anybody else until the late 19th century, commented upon it. . . .
Moreover, it was only in Chicago in the 1930s that The Metaphor was generalised into Smith’s so-called “law” of markets. Paul Samuelson (1948, 1st edition), in his famous textbook, Economics (16 editions), publicised this invention with the inevitable affect on modern economics, as tens of thousands of his readers took it on trust as true.
To be sure, the relevant passage in Smith also includes the famous lines, “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good,” and the remark that “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” But Smith’s statements need to be understood in context; he is discussing the specific problem of trade monopoly, arguing against trade and industrial policies that subsidize particular markets or industries.
| Peter Klein |
If Twitter had been around way back then (courtesy of Norman Chad):
Michelangelo: “Sistine Chapel ceiling larger than it looks; back is killing me.”
Christopher Columbus: “No sign of land yet.”
Robert Peary: “Man, it’s cold up here.”
And Adam Chudy imagines Obama’s tweets:
Just spent $3.5 billion …
Just spent $30 billion …
Just spent $787 billion …
Smoke break …
Just spent $285 billion …
On a related note, here’s a new stream worth following: Twecipie.
| Peter Klein |
In light of our recent discussions of salaries for US college coaches (1, 2), I note that Missouri basketball coach Mike Anderson, whose team lost over the weekend to the Connecticut Huskies (good thing Dick Langlois and I didn’t have a wager on that), is likely to get a big raise this year. Anderson’s base salary is $850,000, a pittance compared to Jim Calhoun’s $1.6 million. (Indeed, Anderson’s predecessor Quinn Snyder, fired at the end of the 2006 season, pulled down $1.2 million.) Local media outlets guess that at least $1.3 million will be required to keep Anderson from bolting for openings at Georgia, Virgnia, or Arizona (and Memphis, if John Calipari takes the Kentucky job). University System President Gary Forsee, Chancellor Brady Deaton, and even Missouri Governor Jay Nixon made public statements over the weekend expressing their desire to keep Anderson. Not one mentioned the University’s delicate financial situation (a huge revenue shortfall has led to cuts in academic programs, research support, faculty and staff benefits, and other expenditures). I can understand the argument for “investing” in a big-time coach but, given the recession, wouldn’t you expect campus officials to be a wee bit more discrete when tossing around these big numbers?
| Peter Klein |
Thanks to the Mises Institute, the Institute of Economic Affairs, the Library of Economics and Liberty, and other organizations, great works in social science continue to appear in free online editions. Some of the newest include:
- Carl Menger’s Investigations into the Method of the Social Sciences (1883), which features the famous section (book 3, chapter 2) on unintended consequences;
- Larry White’s Free Banking in Britain (1984); and
- Hayek’s Individualism and Economic Order (1948), which contains the classic essays “Economics and Knowledge,” “The Use of Knowledge in Society,” and “The Meaning of Competition,” among others.
| Peter Klein |
Hate to keep flogging a dead horse, and perhaps preaching to the choir, but the point can’t be made often enough: relative prices matter. The childish Keynesianism of people like DeLong and Krugman, like Bernanke and Geithner, understands only aggregate concepts like “national output,” “employment,” and “the price level.” A consistent theme of this blog’s rants is that resources are heterogeneous (1, 2) and, consequently, relative prices must be free to adjust to changes in demand, technology, market conditions, and so on. When government policy generates an artificial boom in a particular market, such as housing — drawing resources away from other parts of the economy — the key to recovery is to let resources flow out of that market and back to the sectors of the economy where those resources belong (i.e., to match the pattern of consumer demands). It’s quite simple: home prices should be falling, interest rates should be rising, savings rates should be going up, and debt levels should be going down. The Administration’s policies, like that of the last Administration, are designed to achieve exactly the opposite. Why? Because relative prices don’t matter, the allocation of resources across activities doesn’t matter, all that matters is to keep any sector from shrinking, any prices from falling, any firms from failing, any consumers from reducing their consumption. A child thinks only about what he can see. The unseen doesn’t exist.
Here are some excellent posts on the subject. Craig Pirrong notes that Sherwin Rosen had a colorful way of emphasizing relative price effects. Mario Rizzo (1, 2) points to data on the housing market and the Fed’s continuing attempt to keep resources from flowing out of this bloated sector. And here’s a snippet from Israel Kirzner’s short book on Mises explaining that insolvent financial institutions should be liquidated, not rescued. Good reading for grown-ups.
| Peter Klein |
A surprising aspect of the recent growth in the entrepreneurship literature is the number of papers, projects, courses, centers, etc. studying entrepreneurship in non-market settings: “social entrepreneurship,” “cultural entrepreneurship,” “environmental entrepreneurship,” and so on. At my own university students can take entrepreneurship courses not only in the Colleges of Business or Engineering but in the College of Agriculture, the School of Natural Resources, the College of Journalism, and even the School of Social Work. (One of my colleagues organized a conference last year aimed at cattle ranchers seeking to market their, um, byproducts as fertilizer, with the classic title: “Manure Entrepreneurship: Turning Brown into Green.”
Translating concepts, theories, and research methods from the entrepreneurship literature to non-market settings raises challenging issue, however. How is entrepreneurship defined? What corresponds to entrepreneurial profit and loss? What is the entrepreneur’s objective function? Are there competitive processes that select for the better entrepreneurs? None of the classic writers on entrepreneurship — Cantillon, Say, Schumpeter, Knight, Mises, Kirzner — wrote explicitly on entrepreneurship in non-market settings, as far as I am aware. Mises, in fact, distinguishes sharply between “profit management” (or entrepreneurial management) and “bureaucratic management,” identifying the former with initiative, responsibility, creativity, and novelty and the latter with rule-following within strict guidelines (see Bureaucracy, 1944, and chapter 15, section 10 of Human Action, 1949). (more…)