Target Acquired
This post is for the econo-geeks in the crowd. On Thursday my Mises Daily article will turn the tide on this Sumner–DeLong double-team on poor Arnold Kling (who threw in the towel much too prematurely). I am giving advance notice for people who want to read up on the exchanges, and also so Scott can get his will in order. (I hope he has a sizable whole life insurance policy, but I’m betting he sank everything into indexed mutual funds.)
Suffice it to say, when we take a closer look at the data, we see that the Austrian/Klingian resource-misallocation thesis holds up very well.
What If All the World Were a Stage…?
No doubt one of the most difficult questions a Christian must face is this: Why would a benevolent God allow all the horrible things that happen on a daily basis? Worse still, why would He order the ancient Israelites to do things that we would now classify as war crimes?!
I do not take this question lightly. When I was an atheist, I found the Old Testament repugnant. So in terms of my own personal faith right now, my reason is simple: Hands down, Jesus Christ has a more refined moral sense than I do, and He said the God of the Hebrews was perfect and in fact the only Being who was good.
But OK, let’s put aside my “blind faith” in the character and judgment (as well as the historical accuracy of the accounts) of Jesus. Intellectually speaking, does it makes sense that a loving God would do such things?
I think it does. To reiterate, I would never have predicted a benevolent, omniscient Being would act the way He (sometimes) does in the Old Testament. But then again–and I’m not trying to be cute here–it’s to be expected that am omniscient Being would surprise us, isn’t it?
So here goes. Given that Jesus is telling me the God of the Old Testament is perfect and good, I have thought long and hard about how that could be possible. And here are some of my thoughts:
1) No matter how you die, in a very real sense, God killed you. (Ricky Gervais has a funny bit on this in his latest HBO act, when he says the insurance companies are absurd for refusing payment in cases of “acts of God”–since if you’re a believer, every time your property is damaged, it’s an act of God.) So it’s a bit weird to call God a murderer for killing a pagan baby with a plague, or even through ordering Joshua’s soldiers to do it with a sword, if you have no problem with him killing a pagan baby through some “natural” cause.
This should go without saying, but let’s not take chances: IT DOES NOT FOLLOW that a theist can go around killing people. Because YOU AREN’T GOD. You are a murderer if you take someone’s life for kicks. That’s because you don’t control everyone’s destiny, and there is a very real sense in which you can stand back and let the person live out his life without your intervention. But that is impossible for God to do. No matter what happens, it is because He willed it.
2) No matter how awful or tolerable the “worst thing that ever happens to humans” is, we would necessarily consider it to be the epitome of monstrous–because, we could quite rightly say, “this is the worst thing that has happened in world history.” But that doesn’t mean God is a cruel Being, who maliciously designed a universe to torment us. If we grew up in a world of pink bunnies and lollipops, and God said, “You had better follow my commandments, or else you will get a paper cut the next time you unwrap a lollipop,” then we would sulk and think He was a tyrant.
(Seriously, I am not trying to belittle the awful things that happen in our lives. But my point is, we really have no other experience to compare. My 6-year-old tonight told me he wished he were an orphan, because I turned off the faucet before he was done washing his hands and was hurrying him to take a bath. And he was serious; he really was outraged at what I had done, because he’s not used to many constraints on his behavior.)
3) I think it is a very useful analogy to consider God as an author; history is thus His story. Consider that in the Book of Jeremiah–where God is at His “meanest”–He sometimes refers to the king of Babylon as “My servant,” meaning the guy who will come in and execute God’s judgment on the idolatrous Israelites. That’s a really strange thing for God to say. It sounds fine for him to call the prophets His servants, but the Babylonian king?!
But he’s God’s servant, the same way that the freaky clown is Stephen King’s servant in the novel It. King is telling a story, and to achieve his purposes he needs bad guys to do awful things to the other characters in his story.
The crazy thing is, God is so powerful that in His story, the characters achieve self-awareness, and also have free will.
Someone Please Explain DeLong’s Intro
I am not being a wise aleck, I really want to know what DeLong is talking about in the opening of this post when he writes: “If the problem were on the supply side–that we had an excess supply of construction workers–then we would see excess demand for something else. But we don’t.”
Presumably he is riffing on Walras’ Law, but it’s not clear how he’s applying it in this context.
Furthermore, let’s suppose that DeLong is right, and that it is a problem for Arnold Kling and the Austrians, that we don’t see “excess demand” for stuff right now. But then by the same token, why can’t I write this?
If the problem were on the demand side–that we had a deficiency in demand for bridges and roads–then we would see a deficiency in supply for something else. But we don’t. We see overcapacity all over the place.
I think I have a resolution that works–the difference between an excess supply/demand in one particular industry versus all goods except money–but then, I don’t see why DeLong is characterizing his opponents as talking about “the supply side.” It seems instead he should have said, “If this is about sectoral imbalances, then…”
So help me out, you Keynesian fellow travelers.
I Was Wrong About Krugman
I said yesterday in this post that he would never pay Scott Sumner an explicit compliment. And then he (sort of) did today in this post, ripping Tyler Cowen and the Austrians. (Krugman is half right. You guess which half.)
I will let Scott (or my readers) correct me, but I am pretty sure that is the first time in history Krugman has acted like Sumner is his peer.
So now I have to wonder whether Krugman is reading this blog, and I actually influenced his post. (I.e. he complimented Sumner either consciously to disprove my jab, or subconsciously.) I mean, this Canadian guy is as much a punk to me, as I am to Krugman, and I watched the Canadian guy’s video. So….
Bank Reserves: Thesis, Antithesis, Synthesis
Ahh, I feel much better now. During the “office hours” for the Mises Academy “Anatomy of the Fed” class, I think I resolved something that had been bugging me for months.
We all know the standard textbook story of fractional reserve money creation: The Fed buys assets and creates new reserves (“out of thin air”). Armed with the new reserves, the commercial banks now have excess reserves, so they go lend it out. Thus, the causality goes like this: Fed creates new base money. ==> Banks have excess reserves. ==> Banks create new M1.
The only problem is, that’s not how it works in the real world. Doug French explained in our interview in the Lara-Murphy Report, when actual bankers are deciding on new loans, they never say, “Hey Jimmy, go check our excess reserves to see how much room we have to play with.” (I’m paraphrasing of course.) In fact, some critics of the textbook explanation go so far as to say that banks aren’t constrained by reserve requirements at all.
So this troubled me. It wouldn’t surprise me to learn that macroeconomics textbooks are completely wrong when it comes to explaining banking–they’re completely wrong about 19 other topics too. But surely the reserve requirements do something. If they didn’t, then why do banks pay interest on borrowed reserves in the federal funds market? And what’s the story with “sweep accounts,” if the official reserve requirements aren’t actually enforced?
So I think I came up with a resolution, and for those lucky students who attended the Office Hours session–they saw me do it in real time. Of course, this may be what (some of) the critics were saying all along, and I was too stubborn to listen…
(1) OK, suppose that an individual bank’s loan officers are granting loans based on the merits of each case; they don’t care what the bank’s “excess reserves” are, and in fact they don’t even know what that term means.
(2) If the bank’s lending decisions cause its total demand-deposit balances to rise so much that the bank is no longer satisfying its reserve requirements, it goes into the federal funds market and borrows the difference from another bank that has excess reserves.
(3) Now suppose a bunch of banks (in a bull market for example) are making loans, such that there aren’t enough excess reserves to go around. After all, if we were in an originally “fully loaned up” situation, then mathematically if banks make more loans, the system as a whole is deficient. The interest rate in the federal funds market shoots up, as the demand to borrow reserves increases and the supply to lend them decreases.
(4) Fed officials see that the fed funds rate has shot up, well above their target (announced at the last Fed meeting). Bernanke’s left eyebrow rises in tandem with the rate. They don’t know what to do, so they crack open Mishkin’s textbook. And yep, it says right there that when the fed funds rate is above the Fed’s target, the Fed will engage in “expansionary policy” by buying assets and adding more reserves to the system.
(5) Phew! Problem solved. The Fed’s injection of new reserves pushes the fed funds rate back to the Fed’s desired level.
Does everyone see how this story satisfies both camps? Yet the causality in this story is the exact opposite of the standard economist fable. In this new version, causality goes like this: Banks create new M1. ==> Banks have shortage of reserves. ==> Fed creates new base money.
Wenzel-Lira Cage Match
This is too funny. Just skim these, in this order:
1) Lira explains his shocking new discovery, based on new philosophical developments: Apparently voters irrationally vote for high spending and low taxes, even though any individual should know that this is unsustainable. Lira actually claims that this is something economists cannot explain.
2) Wenzel says of course economists have been studying this type of thing for either decades or centuries, depending on how you classify it.
3) Lira explains why Wenzel and his merry band need extra-strength prescription on their eyeglasses. My favorite quote:
The discursive dilemma [the concept Lira borrowed from philosophy to explain fiscal deficits] has absolutely nothing to do with the Tragedy of the Commons [the concept from biology/economics that Wenzel said had anticipated Lira’s “discovery”]—the discursive dilemma is about group agency: The will of a group of people, and how it is not necessarily the same as the will of the individuals who make up the group—how indeed, the group agency can go directly counter to the agency of all of the individuals making up the group.
To repeat, Lira is saying that this type of analysis–how individual, rational preferences can lead to crazy outcomes in democratic elections–is something that economists have no clue about, and that he has finally explained, for the first time ever, on his blog yesterday.
UPDATE: I know it’s not funny if you have to explain it, but in case some readers don’t “get” it, try this, this, and this, for starters.
Would You Want Mises Grading Your Term Paper?
I am trying to figure out how to work this into the study guide on Mises’ Theory of Money and Credit, but I don’t think I can. So, I share it with you. On page 125 of the LvMI’s latest edition, Mises says that only by acknowledging that money’s value derives not just from its industrial uses, but also its role as a medium of exchange, can one explain “phenomena such as the Austrian or Indian currency systems.” Then he says:
The naivety of the numerous writings which attacked this opinion and their complete freedom from the restraining influence of any sort of knowledge of the theory of value may occasionally lead the economist to regard them as unimportant; but they may at least claim to have performed the service of shaking deep-rooted prejudices and stimulating a general interest in the problem of prices.
I realize I am biased, but I think even Mises’ insults are cooler than Krugman’s.
Learn Principles of Economics Online–your second chance!
For those who were on jury duty in the fall, now’s your chance to take my Principles of Economics class. It starts in two weeks.
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