20 Mar 2013


Economics, Foreign Policy, Potpourri, Scott Sumner, Shameless Self-Promotion 30 Comments

==> Some of you may have heard of the ethanol “blend wall.” In brief, the US government is literally requiring gasoline refiners to do contradictory things: One regulation insists they make the gas content higher than 10 percent ethanol, while another regulation forbids them from doing so. My colleague Mary Hutzler was the lead author in this blog post on the issue, which gives you all the background. Then in this shorter piece, I dug up a graph showing how much gasoline exports have risen in the last few years. (One of the consequences of the absurd regulations is that US refiners now have an incentive to ship gasoline out of the country, driving up prices domestically above what the world price of crude would warrant.)

==> The bookish von Pepe sends this Glasner post on Hayek vs. Hawtrey. I loved this quote from Hayek: “[W]hat Mr. Hawtrey, in common with many other English economists…lacks is an adequate basic theory of the factors which affect [the] capitalistic structure of production.” Although I must also appreciate the zinger Hawtrey delivered:

The result has been to make Dr. Hayek’s work so difficult and obscure that it is impossible to understand his little book of 112 pages except at the cost of many hours of hard work. And at the end we are left with the impression, not only that this is not a necessary consequence of the difficulty of the subject, but that he himself has been led by so ill-chosen a method of analysis to conclusions which he would hardly have accepted if given a more straightforward form of expression.

==> I don’t like his conclusions, but Scott Sumner has been doing a very nice job laying out his worldview in some recent posts (here, here, and here).

==> I loved this quote from Don Boudreaux, who was criticizing a Jonah Goldberg column:

In what universe is a human being, one called “president of the United States,” who cannot be trusted to spend other people’s money wisely – who is held to be rash and irresponsible when pushing legislation to extend health-insurance coverage – who is regarded as arrogant and ignorant for his support of greater government regulation of financial markets – who is accused of being a dangerous social engineer when he launches schemes to redistribute wealth – who is exposed as a typical, high-on-hubris, popularity-grabbing politician who never lets his incomprehension of matters soothe his itch to tax, spend, and issue diktats all in ways that conservatives correctly understand to be destructive – in what universe is such a person to be trusted and saluted as Our Protector and as a paragon of prudence whenever he turns his attention to deploying military force?

Like conservatives, I look with deep suspicion upon any politician who exercises authority to spend other people’s money, to regulate wages, or to plan a ‘green’ economy. Unlike too many conservatives, however, I look with even deeper suspicion upon any politician who exercises authority to kill.

30 Responses to “Potpourri”

  1. Bob Roddis says:

    Glasner writes:

    To accuse Hawtrey of toleration of inflation, he insinuates that the 50% rise in wages from 1913 to 1929, was at least in part attributable to the inflationary policies Hawtrey was advocating. In fact, I believe that it is clear, though I don’t have easy access to the best data source C. H. Feinstein’s “Changes in Nominal Wages, the Cost of Living, and Real Wages in the United Kingdom over Two Centuries, 1780-1990,” in Labour’s Reward edited by P. Schoillers and V. Zamagni (1995). From 1922 to 1929 the overall trend of nominal wages in Britain was actually negative. Hayek’s reference to “frankly inflationist advice” was not just wrong, but wrong-headed.

    So, does that source actually say that? Were nominal wages bid up via inflation during WWI, but then came down a bit nominally but were still too high in 1929? Further, if Britain went back on a “gold standard” at too high of a par value, wouldn’t those nominal wages still be too high?

    At the same time, “Lord Keynes” finally engages our observation that prices determine everything and declares it is not so:

    The fundamental flaw in Hayek’s economic theory is his emphasis on prices.

    For Hayek, the “coordination of economic activities [sc. in modern economies] … is due to our relying for guidance on prices formed on competitive markets which generate the indispensable signals which tell us what to do” (Hayek 2012: 333). Even at the end of his life, Hayek was stuck in the largely fictional neoclassical view of the role of prices in market economies: the idea that all or most prices are flexible and adjust towards their equilibrium values and tend to clear markets, and signal what to produce via profit and loss (Hayek 2012: 339, 345).


    Who needs prices, right? I thought “aggregate demand” consisted of an accumulation of sales prices for finished goods during good times that Keynesians, in their anointed wisdom, have declared “just right” in the “Goldilocks and the Three Bears” sense. Although prices mean nothing and no one employs them before engaging in economic activity, when asset and housing prices fall, those low prices mysteriously take on an incredible importance to the Keynesian.

    Since prices mean nothing, why don’t businesses just give away their finished goods to broke consumers during bad times?

    If you want to make $75,000 a year driving a truck in west Texas, who cares if the motel rooms cost $3000 a week? Prices mean nothing and we have Lord Keynes to thank for opening our eyes.

  2. Bob Roddis says:

    I do not think either LK or Hawtrey (or Krugman or DeLong or any of the rest of them) understand the knowledge problem and how it is solved by the pricing process.

  3. Lord Keynes says:

    (1) First, I thought your last stupidity was to deny that Hayek believed in a real-world tendency to flexible market-clearing prices and wages? Didn’t you deny that Hayek had any belief in a market tendency towards a market clearing wage and price vector?

    Changed your tune yet again, have you?

    (2) Nobody said that prices do not matter at all, idiot.

    What is said in the post is that the belief in universal, flexible, market-clearing prices is untrue.

    (3) The widespread existence of fixprice markets destroys the Hayekian fairy tale about smoothly adjusting prices and the tendency to market clearing in every market. Businesses are well able to satisfy consumer demand and plan investment with administered prices, and to increase real output.

    The “knowledge problem,” to the extent that markets have coordination (as opposed to fictitious tendencies to long run equilibrium states) is solved — in the real world as opposed to the imaginary world of Hayek — largely by “quantity signals,” that is, demand, sales volume, and signals from changes in inventories/stocks.

    • Bob Murphy says:

      Hey LK, I intentionally allow you to throw around “stupidity” and “idiot” from you, since it probably evokes sympathy from casual readers for the victims of your assault, but can you try to tone it down? It’s fine to claim we are horrible economists but such extreme statements are not conducive to civil debate.

    • Bob Roddis says:

      LK, since from you we know that there was never an era in the 1800s of the “gold standard” and from DK we know that prices got all out of whack before 1920 due to the Fed funding WWI, what is your theoretical or evidentiary basis for claiming that prices do not tend to clear (assuming that prices have volition) on a free market?

      • Lord Keynes says:

        In the modern world, the main thing that demonstrates that prices are mostly not set by the imagined dynamics of supply and demand curves is administered prices and widespread fixprice markets.

        This should be clear to any *well read* Austrian, since your own literature describes it:

        “Those who glibly speak of ‘market clearing prices’ tend to forget that over wide areas of modern markets it is not with this purpose in mind that prices are set. They seem unaware of the important insights into the process of price formation, an Austrian responsibility, of which they deprive themselves by clinging to a level of abstraction so high that on it most of what matters in the real world vanishes from sight.”

        Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford. p. 134.

        Now that I have answered your question: Didn’t you deny that Hayek had any belief in a market tendency towards a market clearing wage and price vector?

      • Lord Keynes says:

        Also, cost of production pricing — the basis of administered prices before the profit markup — was described by Wieser and Böhm-Bawerk, and recently by George Reisman. So again any *well read* Austrian ought to be familiar with the concept.


        • Major_Freedom says:

          If you had bothered to read those authors further, you would have learned that cost plus mark-up pricing is grounded upon supply and demand pricing for the factors of production. Cost plus markup is not a fixed concept. Costs can fluctuate on the basis of changed demand for factors of production.

          • Lord Keynes says:

            “Costs can fluctuate on the basis of changed demand for factors of production.”</I

            You mean precisely as Post Keynesian price theory say?

            • Major_Freedom says:

              Every economics theory holds that costs of production can fluctuate on the basis of changed demand for factors of production.

            • Major_Freedom says:

              And curiously, Keynes didn’t seem to grasp the fact that costs can fluctuate in the downward direction when wage rates fall. He took the context of falling wage rates, and then made a case for why deficits are justified, by assuming a RISE in costs of production.

              So while every economics theory holds that costs can in principle fluctuate, Keynes had trouble integrating that into various applications.

    • Major_Freedom says:

      “What is said in the post is that the belief in universal, flexible, market-clearing prices is untrue.”

      Flexible according to what standard? I can make anything untrue by using a word that is based on a standard that is literally impossible to be practiced.

      In a free market, prices to tend to clear markets, because of the fact that humans act, i.e. because they seek gains and avoid losses. This is the force that affects prices.

      “Administered pricing” does not refute the fact that prices are flexible, if by “flexible” we mean something other than a supernatural, out of this world standard where time does not move forward, where humans are omnipotent, and where information is spread instantaneously.

      You are straw manning Hayek by insinuating that he adhered to that out of this world standard for how quickly prices in fact have to adjust, and how quickly information is supposed to spread from person to person.

      • Lord Keynes says:

        Flexible according to the standard expressed by, for example, Mises:

        “The characteristic feature of the market price is that it equalizes supply and demand. The size of the demand coincides with the size of supply not only in the imaginary construction of the evenly rotating economy. The notion of the plain state of rest as developed by the elementary theory of prices is a faithful description of what comes to pass in the market at every instant. Any deviation of a market price from the height at which supply and demand are equal is – in the unhampered market – self-liquidating.” (Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala pp. 756–757).

        This is an utterly untrue description of the market.

        • Major_Freedom says:

          That is an utterly non-response to my post. That quote isn’t suggestive of the standard for flexibility.

          That quote is one interpretation of how to integrate the mental tool of “plain state of rest” and prevailing prices in the market.

          The claim “this is utterly untrue” is empty rhetoric.

          • Lord Keynes says:

            The plain state of rest is, according to Mises, is “a faithful description of what comes to pass in the market at every instant.”

            It is not just some “mental tool” like the “final state of rest”

            As usual, you have no idea what you’re talking about.

  4. Bob Roddis says:

    I think we have a problem here with the terms being used. When Hayek and the Austrians are discussing “prices”, we mean the terms of completed transactions. Those terms are the essential source of information for others to be informed about what is being demanded and supplied and on what terms. That is what we mean by economic calculation. Whether or not “markets clear” at a particular time or under a particular regime is a different topic altogether. During a 25 year long funny money boom, markets “clear” all of the time until the economy does its Wile E. Coyote thing and goes over the cliff.

    Further, this discussion about “administered” prices is a meaningless red herring. The fact that a firm might guesstimate and/or use formulae to set a multiplicity of prices is irrelevant to this discussion. The issue is whether such a program creates prices that produce sustainable profits. Further, the process still tells the firm and others what the going rate is for whatever is being traded.
    LK still does not understand economic calculation.

    • Lord Keynes says:

      There you have it!

      Further, this discussion about “administered” prices is a meaningless red herring. The fact that a firm might guesstimate and/or use formulae to set a multiplicity of prices is irrelevant to this discussion.

      So in the real world (you say) there is a tendency towards flexible market clearing prices, but even though most business do not do that, nevertheless this is irrelevant.

      Outstanding, really.

      • Bob Roddis says:

        People will tend to engage in profitable economic activity. Or else they will starve to death. The concept of the essential information provided by prices is a different topic than whether or not “markets will clear” in a particular situation. The information provided by prices aids in allowing one to know what profitable activities are available. Funny money distorts that information flow and solves nothing.

        You either do not understand what we are saying or else you are purposefully attempting to obfuscate about a rather simple and self evident proposition.

        • Major_Freedom says:

          If some humans aren’t omnipotent, omniscient, and instantaneous, then violent statism over them is justified.

          That’s LK’s workdview in a nutshell.

          LK isn’t promoting anything rational or intellectual. He’s inadvertently promoting unbridled egoism, an offspring of Young Hegelianism. This philosophy holds that if A is unable to defend himself against B’s aggression, then B’s aggression is justified. If A can defend himself successfully, then B’s aggression is not justified. Might makes right. What is actual is rational, and what is rational is actual.

          Everything else is smoke screens and fog machines.

  5. Bob Roddis says:

    Obviously, prices of goods and services for sale also provide important information. Funny money creation and funny money loans distort the prices of things being offered for sale and the prices of completed transactions because they do not represent actual assets owned by the parties but are based upon the temporary infusion of purchasing power swiped from others via the funny money creation process, a process which is not sustainable.

  6. Bob Roddis says:

    “Corn ethanol has not only been a disaster for consumers, most farmers and taxpayers; it’s also been a disaster for the environment. In fact, it’s worse for the environment than Canadian tar sands.

    “By dramatically increasing the price of corn, the corn ethanol mandate has, in just the last four years, contributed to the conversion of 23 million acres of wetland and grassland – an area the size of Indiana – to cropland. Thanks to the mandate, we have lost more wetlands and grasslands in the last four years than in the previous 40.

    “By encouraging farmers to plow up wetlands and grasslands, the corn ethanol mandate is causing more carbon to be released into the atmosphere, causing more fertilizers and pesticides to wash off farm fields and destroying more habitat that supports wildlife – and millions of jobs. What’s more, burning more and more corn ethanol in gasoline releases more benzene, a known carcinogen, and other toxic air pollutants that are linked to asthma, bronchitis, and other respiratory ailments.”


  7. Tel says:

    On an unrelated historical note.


    By the way, the economics is not historically accurate. Schacht did make great efforts to stabilize the German mark against gold during the 1930’s even to the point of imposing import and export controls. The damage of the hyperinflation was already done before 1930.

    The joke does conveniently play to most people’s lack of understanding about what went on. I do like the subtle implication that Keynesian stimulus inevitably leads to war though.

  8. Bob Roddis says:

    Stop the presses! “Lord Keynes” may have discovered Mises and economic calculation.


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