08
Aug
2016
Potpourri
==> I really don’t have time to jump into this, but FWIW, the WSJ ran a story criticizing Piketty. (You will not be surprised to hear that Daniel Kuehn on Facebook thought this was a ridiculous critique because of course Piketty never said what all of Piketty’s fans thought he said…)
==> I haven’t read this FEE article yet, but people sharing it on social media were saying it proved you should vote 3rd party rather than wasting your vote on the Rs or Ds. I doubt I would be convinced of *that* conclusion but I’m guessing the author is more nuanced.
==> A *Reason* article on the Left’s war on free speech. Naturally, the author can’t resist bringing up Donald Trump (twice).
==> Stock prices and the Fed, my update at Lara-Murphy.com.
Daniel Kuehn also swears up and down that he heard all of the really good economic arguments against the minimum wage while growing up, despite everyone he encounters having exactly the opposite experience.
I’m not sure exactly what you’re referring to (which is interesting if I really “swear up and down”). I learned the disemployment result in my senior year of high school econ class and in freshman year micro. Are you really telling me that’s an atypical experience? Or are you referring to something else?
That’s what a graph of stocks and money supply would look like when money is too tight and is constraining economic activity.
I can’t imagine what you’d think it would look like if it wasn’t.
Then again your worldview is totally asymmetric. there is no such thing in it as money that isn’t tight.
Speaking of Piketty, this may be old news but apparently he has a blog. And he’s still describing the minimum wage history in the U.S. like this:
“Here we witness once again a total reversal after the election of Reagan in 1980. In the absence of an automatic indexation mechanism, the minimum federal wage was frozen for long periods, with occasional upgrades under Clinton and Obama…”
http://piketty.blog.lemonde.fr/2016/03/06/inequality-in-america/
Thanks Zach M this is jaw-dropping!
That’s an interesting way of phrasing your reference to me Bob.
Are you willing to say that the fundamental laws of capital were his primary explanation for rising inequality, or are you just going to stick with saying that most people think that’s the case?
fwiw the study is better on this than the WSJ article. The study is still something of a head scratcher. I’m not sure what to make of a world where r-g doesn’t affect the capital share. If that is really true then he is understating the impact of his own paper by focusing it on Piketty.
On the war on free speech, the article makes mistakes.
“First of all, comparing tobacco to fossil fuels is not just absurd, but malicious, given that smoking actually directly kills smokers. Now before you argue that global warming might one day kill people too, remember that fossil fuel is a source of cheap power without which countless millions of poor people, especially in Third World countries, would perish here and now, not in some distant future when the Earth heats up.”
Whether or not global warming is “as bad as ” tobacco is not the point. What has that got to do with whether or not there should be an investigation into whether the company lied to shareholders? is there a new “must the same as tobacco” rule before investigations can begin?
“As for those so-called smoking gun memos, they were mere speculations that repeatedly and correctly emphasized the deep uncertainties in climate science at the time. ” If this is the case then surely the investigation will show that. Otherwise we have the author’s opinion.
This is an interesting point “But the First Amendment protects all corporate lobbying—even deceptive corporate lobbying.”
Is there not some level of dishonesty that moves into “fraud”? Surely this cannot be protected.
On the FEE article on voting. The authors say a wasted vote is one either cast for the loser, or an excess vote for the winner (over and above those needed to win). They then argue that wasted votes may not be wasted, as they can send other signals. Fair enough, but you can’t really spend half the article explaining in detail what a wasted vote is, then conclude you should vote third party because a wasted vote is not really wasted. I do not think anyone who does not vote because they believe it is pointless will be persuaded by this.
Keynesianism is a lie and hoax. Let’s investigate Keynesianism and put the perpetrators in jail. And then sue them until they are broke.
Hi Bob Roddis,
“Keynesianism is a lie and hoax. … until they are broke.”
You must be joking, right. Most mainstream economists hold to a synthesis of new classical and new Keynesian macroeconomics. Why such hostility towards Keynesians?
John Arthur
I think “hoax” about covers the answer to your question.
I think we need to understanding there is different types of Keynesianism such as the new Keynesian mention above vs. post Keynesianism. The conservative new Keynesians are much more in agreement with the benefits of capitalism vs. the post Keynesians who many in there ranks are social democrats.
Hi Hoodnick,
New Keynesians like Greg Mankiw are conservative whereas others like Paul Krugman and Joseph Stiglitz are more social market liberals in politics.
Post Keynesians can vary in politics but most are probably social democrats. It is also possible for New Keynesians to be social democrats.
Austrian economists have also varied politically. Although most are probably either classical liberals and others anarcho- capitalists and some left libertarians, yet historically some have been social market liberals (e.g. Von Wieser).
Social democrats and social liberals believe in the benefits of capitalism but also believe that there needs to be government intervention to correct for market failures where the benefits of intervention are likely to exceed the costs of government intervention.
John Arthur
This is just about the first exposure I ever had to Keynesianism in 1977, Hayek on “Firing Line”. Back then, everyone was an explicit commie. No hipsters were Keynesians. Hayek expressly said that TGT was an ad hoc argument to lower British wages which were the result of prior interventions. Since the market does not and did not fail, there is no basis for a Keynesian cure.
http://bobroddis.blogspot.com/2014/02/being-polite-to-keynesians.html
Hi Bob,
Thanks for the clarification. What do you mean that “back then everyone was an explicit commie”?
John Arthur
The short version: In the 70s, the hipster crowd cheered for a Viet Cong and Khmer Rouge victory while insisting that Keynesian was just another form of the hated “capitalism”.
After the 2008 Keynesian bust, I personally thought Keynesianism had been totally exposed as the cause of the bust and had been discredited forever. I failed to anticipate its adoption by the hipster crowd.
Hi Bob,
What do you mean by “Since the market does not and did not fail, there is no basis for a Keynesian cure.”
Are you assuming that there is high and rapid price flexibility in labour markets? How does this apply when there are staggered wage contracts which keep the nominal wage rate constant for the period of the wage contract (e.g. yearly or 3 yearly)?
What happens (at least in the short run) when there is imperfect competition in labour markets. Can we say that markets clear to the point where the quantity demanded equals the quantity suppled?
John Arthur
Hi Bob,
What happens in those times when there is unemployment above say 7% of the workforce for extended periods of time. Are not many of these involuntarily unemployed? Why wouldn’t Keynesian stimulus coarse tuning be applicable, in these circumstance,s through fiscal policy?
John Arthur
Peter Boetkke states the Keynesian claim: “The Keynesian theory re-enforced the socialist viewpoint that capitalism was inherently unstable. The Great Depression, for example, was a consequence of aggregate demand failure which periodically results from chaotic and irrational investment decisions. Free-market competition could not be relied upon to self-correct for the systemic consequences of errors committed by private economic actors, let alone promote stability and security. John Maynard Keynes argued persuasively that laissez faire was dead as a legitimating ideology”. P. 237-238
http://tinyurl.com/hd4n2tj
The claim is totally baseless.
John Arthur: The cause of unemployment is the distortion of prices by artificial credit expansion or other government intrusions into the market. The solution is always to allow a return to honest pricing. More funny money or government spending will simply continue the distortions. As Hayek put it:
These discrepancies of demand and supply in different industries, discrepancies between the distribution of demand and the allocation of the factors of production, ARE IN THE LAST ANALYSIS DUE TO SOME DISTORTION IN THE PRICE SYSTEM THAT HAS DIRECTED RESOURCES TO FALSE USES. It can be corrected only by making sure, first, that prices achieve what, SOMEWHAT MISLEADINGLY, WE CALL AN EQUILIBRIUM STRUCTURE, and second, that labor is reallocated according to these new prices.
Lacking such price readjustment and resource reallocation, the original unemployment may then spread by means of the mechanism I have discussed before, the “secondary contraction,” as I used to call it. In this way, unemployment may eventually become general. The primary cause of the appearance of extensive unemployment, however, Is A Deviation Of The Actual Structure Of Prices And Wages From Its Equilibrium Structure [which is not exactly an “equilibrium structure”. See above]. Remember, please: that is the crucial concept.
The point I want to make is that this equilibrium STRUCTURE OF PRICES IS SOMETHING WHICH WE CANNOT KNOW BEFOREHAND BECAUSE THE ONLY WAY TO DISCOVER IT IS TO GIVE THE MARKET FREE PLAY; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.
The theory which asserts that unemployment is an effect of a deviation of the actual price structure from the equilibrium structure is thus a theory that cannot be confirmed by statistics. It’s the kind of theory which I believe you find in many other fields of economics. What we can confirm from daily observation are the elements from which a theory is built up, our knowledge of the behavior of individuals in various situations. But we cannot test statistically the resulting conclusions, which are derived from these empirical data about individual behavior.
In contrast, the modern fashion demands that a theoretical assertion which cannot be statistically tested must not be taken seriously and has to be discarded. As a result of this belief, a theory which, in my opinion, is the true explanation has been discarded as not adequately confirmed, and a false theory has been generally accepted merely because it happens to be the only one for which statistical evidence, even though very inadequate evidence, is available.
http://tinyurl.com/hh2ya4o
Hi Bob,
Thanks for your responses. I understand, that as a supporter of the Austrian school of economics, you would blame co-ordination failures for high levels of unemployment and that you would see governments and central banks as largely responsible for this.
But, does this explain all of the unemployment or even most of it? Theories that examine a deficiency in Aggregate Demand look at Keynesian explanations as you are well aware.
How can we asses the likelihood of a correct explanation for business cycles (Keynesian, Austrian, new Classical, Monetarist) without empirical evidence. Most economists use econometric methods to test hypotheses, and most of those who do, do not favour Austrian explanations of the business cycle.
Why do you think that it is impossible to use such methods? I have read that, at the George Mason University (I think it was there but I may be mistaken), there has been some econometric testing of Austrian theory, so some Austrians are not averse to such methods.
John Arthur
” Since the market does not and did not fail, there is no basis for a Keynesian cure.”
..says the idiot who fails to notice that debt deflation obviously stops allegedly rapid and effective free market clearing from taking place by flexible wages and prices, which is a market failure.
John Arthur: you’re wasting your time here. These people are clowns
Debt deflation is the invariable and inevitable result of the artificial boom caused by artificial credit expansion. It’s the bust phase of the ABCT boom. Duh.
John Arthur: “Lord Keynes” is a monstrous liar and coward who hides behind his internet anonymity. After years and years, he still does not comprehend the central Austrian concepts of economic miscalculation and false, unsustainable and artificially induced prices. No Keynesian does. They wouldn’t dare even think about those concepts as it would mean the complete implosion of their hoax.
Once again says the fool who is so ignorant of basic Austrian concepts he thinks market clearing prices exist in a boom:
“As I’ve said before 387 times, MARKET CLEARING PRICES EXIST ALL THROUGHOUT THE UNSUSTAINABLE BOOM until that moment when the bust begins.”
http://consultingbyrpm.com/blog/2014/04/austrian-business-cycle-theory-surprisingly-useful-even-among-its-critics.html#comment-434540
LK can you turn down your aggression dial just a tad? Man.
I stand by that claim. When an artificial auto boom is ongoing and cars are flying out the door, they are selling for “Market Clearing Prices” which are also artificial and unsustainable.
I thank LK for calling me names about that truthful assertion of mine on his blog while hiding behind his internet anonymity.
I had made an audio tape of the Firing Line show back in 1977. I sent some of the audio to Bob Murphy in 2008. Since then, his links went dead but the show later came out on DVD.
http://consultingbyrpm.com/blog/2008/12/hayek-tells-bill-buckley-that-even-keynes-was-afraid-of-the-keynesians.html
Piketty doesn’t even understand basic finance:
Piketty’s equation, α=rxβ, aggregates all these individual decisions so that while it is accurate in an accounting sense, it is misleading in an economic sense. Piketty makes it appear that because capitalists have β, they get α. That is not true.
This can be illustrated with an example from Piketty’s book. He says the long-term return on capital, r, is around 4-5% per year, and gives an example (p. 54) of a Paris apartment that is valued at 1 million euros and “…rents for slightly more than 2,500 euros per month, or an annual rent of 30,000 euros, which corresponds to a return on capital of only 3 percent per year… This type of rent tends to rise until the return on capital is around 4 percent. … Hence this tennant’s rent is likely to rise in the future.”
As the example shows, Piketty assumes that the value of capital, β, determines the amount it earns, α. But surely the reverse is actually the case.
Piketty uses the relationship α=rxβ, but a more accurate way to depict the economic relationship is β=α/r. The expressions are mathematically equivalent, but Piketty’s way of showing it assumes that the value of capital determines its return, rather than the more economically accurate depiction in which the return produced by the capital determines its value.
The rent on an apartment will be determined by the supply and demand for apartments, so α in this example is 30,000 euros a year, which is market-determined. If r = .04 as Piketty assumes, then because β=α/r, β=30,000/.04=750,000 euros.
The rental rate is determined by the supply and demand for apartments, so following Piketty’s assumptions about the annual rent and the rate of return the landlord will earn, the apartment is worth 750,000 euros and will fall in value.
The value of the apartment is determined by the rent it can command, and not the other way around.
http://blog.independent.org/2014/05/15/pikettys-capital-ii/
Right, as usual it’s not enough to appeal to an accounting identity, especially if you incorrectly interpret it as certain causal relationships. You have to actually work through the logic of what is going on.
Alpha, r, and beta are all market determined and will change simultaneously as r converges to r* depending on exactly why it was out of equilibrium in the first place. You only get this result because you’re for some reason assuming the rental price is fixed but the price of the asset isn’t.
Piketty says pretty clearly on the next page “it bears emphasizing that the la alpha=r*beta does not tell us how each of these three variables is determined”, so I think you’re barking up the wrong tree with this Levi.
There’s also costs in being an apartment owner and risks, and time consumed keeping on top of managing it.
If a lot more supply comes onto the market then both the returns and also the capital values will be reduced. Regulations could change also imposing capital loss. Sovereign risk, tax, etc.
I think his estimate of 4-5% return per year sounds kind of suspicious once you take into account all the time spent, and risks, taxes and inflation. I’m guessing he conveniently ignores anyone who ended up failing, probably ignores a lot of maintenance too. For what it’s worth, I haven’t read the book, and I don’t want to waste my time going through it. I don’t see much value in doing so.
Bob,
The argument in the FEE article is one you’ve explicitly criticized in another context, so I suspect you wouldn’t find the article convincing.
Bob –
Perhaps we should write Piketty again and remind him that he reneged on his promise to fix all those “typos” in his book.
I’m also curious if Daniel will be penning a tirade any time soon in which he questions Richard Sutch’s competence to critique Piketty’s data manufacturing techniques. Sutch’s findings look an awful lot like our own, after all 😉
http://economics.ucr.edu/repec/ucr/wpaper/201602.pdf