The curtain rises, showing six nerds in a house, all shivering and breath visibly coming out of their nostrils.
BEN: While you clowns were sitting around yapping away, I alone had the courage to push the thermostat all the way up to 80–as high as it would go. Furthermore, our utility bill this month will be higher than all previous utility bills combined. I clearly did as much as could be expected of me, and the house is indeed getting warmer, we just need to give it some more time to heat up.
PAUL: Yes, good job Ben. There’s no one I would have preferred to be manning the thermostat. However, you really were dealt a bad hand, because it is just so darn frigid outside. As you note, the thermostat is only capable of being pushed up to 80. But since my thermometer says it’s 43 degrees in here, ideally what we’d like is to set the thermostat to about 95, to really get that furnace blasting for a few hours and warm this place up. But for now, we just have to grin and bear it, because for technical reasons we simply can’t push the thermostat above 80. I just wish we erroneously thought someone was trying to break into the house–then we’d all run around, checking that the windows and doors were locked. The exercise would warm us up so that the thermostat being set at 80 would actually work out fine.
BOB and SCOTT: Riiiiiight.
JOHN: I’m thinking maybe you guys are making a huge mistake here. Doesn’t it seem weird to you that the one time in the history of this house that we’ve got the thermostat pushed all the way up, we also are shivering like crazy? Maybe there’s some weird mechanism where the furnace is bouncing around so violently that it knocked open a hole outside and all the heat is escaping–?
PAUL and SCOTT: Riiiight.
PAUL: Yeah that’s cute John, but everybody knows that Ben has done what he could. Look at how high he’s pushed up the thermostat. That’s a heating policy if ever there were one–not one that could be responsible for the freezing house.
SCOTT: Whoa whoa whoa, let’s not reason from a thermostat change. As a general rule, a high thermostat setting means that the owner has engaged in a cold policy.
JEFF: Good point Scott. So guys, this policy is clearly not working. We’re running up huge utility bills, and I’m concerned that we’re doing permanent damage to the furnace. So let’s turn the thermostat down a notch–
SCOTT: Whoa! That would be a disaster! Why would we suddenly implement a cooling policy?
BOB: Huh? Didn’t you just tell us to never reason from a thermostat change?
SCOTT: *sigh* Obviously any given turn down of the thermostat makes things cooler than they otherwise would be.
BOB: Right, and every HVAC guy thinks the same thing. So why do you keep lecturing us on committing some type of fallacy?
SCOTT: Because you guys think that the thermostat being set to 80 somehow indicates “a heating policy.” No it doesn’t, if anything it indicates that the thermostat policy has been incredibly cold.
BOB: That’s a really weird way of looking at it. In any event, shouldn’t your lecture then be, “Never reason from the level of the thermostat,” rather than “a thermostat change”?
SCOTT: I can’t continue with this basic stuff. Go brush up on a Lee manual.
BOB: *sputtering* I was studying Lee before it was cool!
PAUL: Hey hotshot, what do *you* think we ought to do with the thermostat? You seem to have all the answers.
BOB: Well I don’t know; nobody can know what single temperature is right for millions of people in the house. I think you should let people go live in their own houses, and set their own thermostats.
PAUL, SCOTT, BEN, JOHN, and JEFF: Riiiiiiight.
Tom and I respond to Krugman’s pro-ObamaCare article.
As Free Advice readers know, I have had my differences with Scott Sumner. But in a recent exchange he told me: “I’d encourage you to brush up on the Wicksellian theory of interest rates, it might help you to better understand my argument.”
More generally, it seems that all the cool bloggers are talking about natural interest rates now. Here’s a good summary post from Tyler Cowen (HT2 von Pepe).
==> I am actually somewhat familiar with this concept. For example, check out this paper I prepared for a Liberty Fund conference a few years ago, which drew heavily on work from my (2003) dissertation. You see “natural rate” jumps out quite a bit, including the very first sentence of the paper.
==> The reason for that, of course, is that Mises-Hayek business cycle theory is founded upon the market interest rate being pushed below the natural rate. And any well-read Austrian can go further, and say that that term comes from Knut Wicksell. From my recent book Choice:
…Mises drew on Bohm-Bawerkian capital theory, the interest theory of Swedish economist Knut Wicksell (1851-1926), and the earlier work of the British Currency School on the role of banks in economic crises, in order to advance what Mises called the circulation credit theory of the trade cycle. This is nowadays known as Austrian business cycle theory, the teaching of which is a major objective of the present book. (Murphy, Choice, p. 8)
==> As Scott himself acknowledges, the original Wicksellian approach said the natural rate would keep prices stable. So since prices have been rising since 2009, we can only conclude that actual interest rates have been… (I’ll let you guys fill in the blank.)
I will return to Scott’s thermostat analogy at some point soon, because if that’s the analogy he wants to use, he’s dead in the water. Any normal human being would reject Scott’s approach to monetary policy as crazy in the house-heating analogy that Scott himself picked.
In the meantime, in case Scott sees this post and thinks I’m wrong, all I can say is: Brush up on your Robert Lucas, and then I’m sure you’ll see how I’ve been right all along.
P.S. That last line is a joke, for those of you who are wit-challenged. I’m saying that Scott telling me to go read Wicksell is like me telling him to go read Lucas.
My Bible study partner and I typically read from at least two different (English) translations when covering a portion of scripture. Often it doesn’t make much difference, but once in a while it does.
For example, tonight we noticed that the famous “be fruitful and multiply” command from Genesis 1 is followed by “fill the earth” in the New International Version (NIV), but as “replenish the earth” in the King James.
Some commentators believe that something major happened (involving Lucifer’s fall) that is not spelled out in Genesis 1. One of their pieces of evidence (for example Vernon McGee starting at 11:10) is this use of “replenish,” which suggests that the earth had previously teemed with life.
I don’t know if Scott Sumner’s world view contained contradictions all along and I am just recently noticing them, or if he decided to punt on most of his original views and focus on “we need more inflation” to not muddy the waters.
In any event, Scott used to lecture people when they thought about central bank policy in terms of interest rates. Nowadays, all Scott talks about is how it would be a mistake for central banks to raise rates.
It used to be that Scott said “there is no such thing as wait and see” when it comes to evaluating monetary policy. For example, here and here. If you read those links, you’ll see that this was a principle he used to try to ram into people’s heads; I don’t just mean he adhered to it the way, say, he might like vanilla ice cream. No, to say “there is no such thing as ‘wait and see’ when it comes to monetary policy” was a tenet of Scott Sumner, blogger.
But now things have totally flipped. Not only does Scott think the last six years have amply proven that the hawks were wrong, but he in fact is aghast that some people might deny that you could look at several years of experience and then determine whether the hawks in 2009 had been right or wrong:
I argued against a rate increase in September, and will probably argue against one in December. If it turns out that 2 or 3 years from now the Fed is setting rates where the Fed currently expects to set rates, then I will have to concede that my current views are wrong, and that a rate increase in December would have been called for.
In contrast, if 2 or 3 years out in the future the Fed is setting rates where the market currently thinks they will be setting rates, then the Fed hawks (and even some doves) that now favor a rate increase in December will have clearly been wrong.
What discourages me most is not that people are right or wrong (there’s a good chance my views will turn out to be wrong.) Rather what discourages me most is that people don’t seem to even understand that after the fact it is possible to ascertain who was right and who was wrong about monetary policy. For instance, in retrospect Richard Fisher was clearly wrong in advocating a rise in interest rates in July 2008.
Last thing: As with Krugman’s Kontradictions, I am sure Scott can reconcile all of the above. But 99% of his EconLog readers of that recent post would walk away thinking, “Scott Sumner is saying that after waiting three years, we will have convincing evidence about whether today’s hawks or doves are right.” If that’s not “wait and see” to evaluate monetary policy, I’m not sure what is.
I discuss my new book (co-authored with ER doctor) here.
To order the book, go here.
There are Christians who are scientists (I don’t want to use the term “Christian scientists” since it might confuse readers). They think that the wonder, detail, and beauty of nature in their narrow area of study provides yet even more evidence–as if more were needed!–that there is a loving God who created it all.
You’re skeptical, I know. Well let’s look at the subject matter I study: economics. Here, the economists who (generally speaking) are most worried about doing their job without violating general rules of morality–in today’s world, the free-market economists–end up seeing the market take the most ambitious and successful leaders, and making them servants of the masses.
So a Christian familiar with free-market economics can easily conclude, “God took the base instincts of man and turned them into altruistic outcomes. What man intended for greed, God turned to service.”
If you are an atheist, then add this to the list of all the crazy “coincidences” that had to occur in order for us to even be alive, pondering our existence. If, for some reason, humans had to rely on only altruism and willpower in order to make it worthwhile to brainstorm about “How do I make others happy?” we would have died out as a species.
You still think I’m grasping at straws? OK, well the most obvious candidate (though there are others) for “father of economics” was a moral philosopher who was awed by a market economy that operated “by an Invisible Hand.”
Let me put it this way: Suppose the Christian God is true. Don’t you think He could be surprised that few economists marvel that “Don’t steal” and “Don’t kill” make civilization possible and even flourish, the more people who observe them?