Thoughts on the “Nobel” Prize in Economics
This is that special time of year when MarginalRevolution destroys Free Advice in not only objective but also subjective value. Alex and Tyler have so many posts on the new economics laureates that I would just direct you to MR on October 14, 2013.
The most obvious reaction is to ask: Did the committee just give the award to two guys who said the opposite thing? Namely, I am pretty sure all of the following are correct statements:
(1) Eugene Fama is the father of, and believe in, the Efficient Markets Hypothesis (EMH).
(2) Robert Shiller did not believe in the Efficient Market Hypothesis.
(3) Fama and Shiller shared the Nobel for their work on asset prices and financial markets.
Ishn’t zat veird? (Scott Sumner kinda sorta agrees.)
I never got into the technical papers on the EMH, so I do not feel competent to weigh in on them. I know there are varying strong and weak forms of the EMH, that it’s not merely a tautology, that they performed falsifiable tests, etc.
However, what I am confident in saying, is that when commenting on the economy for a lay audience, the believers in the EMH use it in a non-falsifiable way. That would be fine, except that they don’t realize they’re doing it.
My two articles (here and here) lay out exactly what I mean by such an accusation. If you’ve been reading me a while, you know that I am the epitome of humility, but those two articles I just linked are really awesome, incidentally.
Yglesias vs. Mises on War Inflation Finance
In this intriguing post (since he mostly heaped praise on Ferguson in spite of the latter’s attack on him) Matt Yglesias writes:
[T]he moral of [Ferguson’s book discussion of World War I] here is that when it comes to major sovereign states, strict considerations of public finance and the government deficit are not so important. All major belligerants dealt with wartime financial issues in part by leaving the gold standard. The shift to fiat money meant that the contest was one of real resources (men, bullets, food, steel) rather than cash, which could be printed in unlimited quantities. Notwithstanding allied casualties, Britain and France were not running out of able-bodied people. On the contrary, they were managing to recruit new allies (Italy and then more importantly the USA) into the battle. Germany, by contrast, was running out of food due to the effect of conscription on the agricultural workforce and the efficacy of the Entente blockade of fertilizer imports. Just as control of the Western food supply makes House Tyrell more powerful than House Lannister, Germany’s notionally sounder budget posture was of little practical value in light of Anglo-American control of the seas.
I’ve carried this Fergusonian view over into peacetime. What matters for national prosperity is a) the availability and distribution of real resouces and b) the capacity to mobilize those real resources. Public finance—the joint conduct of fiscal and monetary policy—is best seen as a tool of mobilization, rather than something to sweat in its own right.
At the time I really didn’t like this “moral,” but I let it go because it detracted from the more important catfight between Krugman and Ferguson. However, in my other work I just ran across this quotation from Mises, which takes a decidedly different approach to these issues:
It is maintained that inflation is unavoidable in times of war. This, too, is an error. An increase in the quantity of money does not create war materials—either directly or indirectly. Rather we should say, if a government does not dare to disclose to the people the bill for the war expenditures and does not dare impose the restrictions on consumption which cannot be avoided, it will prefer inflation to the other two means of financing, namely taxation and borrowing. In any case, increased armaments and war must be paid for by people through restriction of other consumption. But it is politically expedient—even though fundamentally undemocratic—to tell the people that increased armaments and war create boom conditions and increase wealth.
I especially like how Mises refers to inflationary finance during wartime as “fundamentally undemocratic.”
Krugman on ObamaCare: If We Can Insure Just One Person…
In light of the disastrous problems people are having signing up with ObamaCare–on NPR they just said the White House is still refusing to release any numbers–we’ve had some fun with Krugman’s proclamation on October 1, in a post titled, “Good Glitches,” where Krugman triumphantly informed us:
So, very early reports are that Obamacare exchanges are, as expected, having some technical glitches on the first day — maybe even a bit worse than expected, because it appears that volume has been much bigger than predicted.
Here’s what you need to know: this is good, not bad, news for the program….
The big fear has been that a combination of ignorance and misinformation would keep people away, that they wouldn’t sign up either because they didn’t know that insurance was now available, or because Republicans had convinced them that the program was the spawn of the devil, or something. Lots of people logging on and signing up on the very first day — a day when the Kamikaze Kongress is dominating the headlines — is an early indication that it’s going to be fine, that plenty of people will sign up for the first year of health reform. [Bold added.]
Now to my knowledge, Krugman has never apologized for writing such a blatant falsehood; there’s no post with a title of, say, “Hey, I Was Just Foolish, Not Lying.”
On the contrary, today Krugman has a post titled–I kid you not–“ObamaCare Success,” that starts like this:
This morning I talked to someone who successfully signed up for Obamacare — with great difficulty, but she did succeed in the end. Since New Jersey is one of the states that defaulted to a fed-run exchange, this shows that people are starting to trickle through. I know, one example — but the plural of anecdote is data.
Oh, and she was very happy with the low cost.
And to think, some neanderthals warned people about this program. It’s astonishing how right Krugman has been, guiding us through the political economy of these turbulent times.
Danny Sanchez Interviews Me: Part 3 of 5 (Water/Diamond etc.)
This is part 3 of 5 of Danny’s interview with me. Remember to sign up for my class, starting this Thursday!
Free Will and Jonah
We’re going through the book of Jonah at my church, and last week (I think?) the pastor said something that blew me away. He pointed out that in the story, there are times when God commands the wind and the sea, the fish, and a worm to do various things.
Not only do they obey the Lord’s commands…it’s not even a question that they will. It wouldn’t even make sense to be reading along, see the text say, “And God commanded the fish to vomit Jonah onto dry land,” and then read, “But the fish ignored the LORD and swam for Joppa.” If you had been in the rhythm of the story up till that point, you’d do a double take and go, “Huh?!” Because when God decrees something, it happens, to avoid negating all existence.
Except for just one thing: There is an element of the creation that flagrantly disobeys God’s commands: the man Jonah.
(Now back to my thoughts.) Yet even here, all is well: God manages to take Jonah and still fulfill His plan. Everybody knows that, but here’s something that only occurred to me upon this reading: There’s more to Jonah than simply, “He disobeys God.” No, see, Jonah knows the Lord. He understands His nature quite well, as he discusses at various points throughout the book. And not because he is preaching, but he says it matter-of-factly: to the sailors in the beginning of the story, and to God at the end.
Furthermore, Jonah is very stubborn, and he doesn’t think much of others. So he is just the kind of guy the Lord needs to send His message to Ninevah. But first, He needed to bolster Jonah, to give him absolute confidence and not be afraid of getting laughed at, let alone beaten and killed, as he walked through the streets of Ninevah.
So God very particularly singled out this man Jonah, perfect for the job, gave him His initial order–knowing full well Jonah would flee on a ship–so that He could have a fish (/whale) swallow Jonah and let him fester for three days, really coming to appreciate what he already knew intellectually, that the Lord is in control.
And then, after that crucible, the Lord physically delivered Jonah to the land and had him march through Ninevah. We don’t know exactly what Jonah said or how he said it, but we do know it was enough to convince an entire city to repent.
So just remember: You’re exactly the person God needs to carry out His wonderful plan, whether you’re on board or not.
Why Misesians Need to Tread Cautiously When Disparaging Bitcoin
In my EconLib article on Bitcoin, I wrote:
Some critics rely on the work of Ludwig von Mises and his “regression theorem” to argue that the world will never embrace Bitcoin as a true money. According to this argument, Mises demonstrated that all money—even today’s fiat money—must have been, at some point in the past, linked to a commodity that was useful in the days of barter. Since Bitcoin has no such history, the critics argue, we have the authority of Mises himself to show that Bitcoin will never be more than a fad.
This article won’t address the question of whether this is a valid interpretation of Mises’ writings. Instead, I will make the modest point that if Mises is used to rule out Bitcoin’s acceptance as money, then it seems that Mises has already lost. If this logic is correct, then Bitcoin should never have been adopted as even a medium of exchange because it served no useful role as a regular commodity. (Recall that money is simply a medium of exchange that is accepted by everyone in the community.) But Bitcoin has already surpassed that hurdle, as there are websites on which people from all over the world exchange their bitcoins directly for goods and services.
In my current project for the Independent Institute I’m going methodically through Human Action, and can now make my case much more simply. Mises didn’t make his case of the regression in terms of money, he made it directly in terms of a medium of exchange, thus skipping the step I thought I was making in the quotation above. So here’s Mises from page 407 (Scholar’s Edition): “[N]o good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments.” And later on page 423:
A medium of exchange without a past is unthinkable. Nothing can enter into the function of a medium of exchange which was not already previously an economic good and to which people assigned exchange value already before it was demanded as such a medium.
So my point is, the certain group of Misesians who keep deriding Bitcoin and saying it will eventually collapse, it’s a passing fad, it will never take off beyond internet geeks, etc. etc., because of Mises’ regression theorem, aren’t making any sense. Mises’ regression theorem wasn’t making an empirical prediction about a medium of exchange never attaining the status of money, unless it started out as a regular commodity. No, Mises is saying we can’t conceive of even a medium of exchange (which is a weaker condition than money) that didn’t start out as a regular commodity. Bitcoin is clearly, unequivocally a medium of exchange right now. There are websites where people trade Bitcoins directly for “real” goods. There are people who will sell a “real” good for Bitcoin, intending only to trade away the Bitcoin in the future for something else “real.” Thus Bitcoin is right now a medium of exchange, no doubt about it.
So, am I saying Mises was wrong? Not necessarily. If you want to reconcile his claims with the existence of Bitcoin, you can argue along the following lines: What actually happened is that in the very beginning, when Bitcoin was first introduced and no one had any idea of its purchasing power, the very first people to trade for it did so because it provided them with direct utility because they knew there was at least a chance that it would serve to chafe the governments of the world with their printing presses. So just as someone might chip in a nickel to someone raising donations for his plan to hand out copies of What Has Government Done to Our Money?, by the same token, the early adopters of Bitcoin were doing it for ideological reasons, not for pecuniary reasons. Then, once Bitcoin got off the ground because of such motivations, people had a framework for evaluating its purchasing power, and then it was off to the races in terms of standard Misesian theory.
Note that I’m not even saying that the above reconciliation is my preferred way to handle the situation; I would need to think about it. I think an important piece of the puzzle here is that in the very early days, Bitcoin was practically free. In other words, it had an extremely low market value. So I’m open to the idea that there actually is a loophole in Mises’ categorical statements, since someone might acquire something as a medium of exchange at a very low price just on the off chance that it might take off. As a general rule, this would be an odd policy; nobody would even expend the labor effort to pick up a stone in the forest, on the off chance that stones of that size and composition would one day become the global money.
But, it’s not as farfetched to say that somebody might be willing to be the first person to give up something of market value in order to acquire a completely new good with no usefulness except as a medium of exchange, even without having any history of its purchasing power, so long as (1) the price were very very low and (2) there was something special about this new good that made it extremely suitable as a medium of exchange, if only enough people began to adopt it too. This is arguably what actually happened with Bitcoin.
So to be clear: I do not think Bitcoin is money, at least not yet. In fact, if governments got out of the way, I am very confident that gold and silver would once again become the world’s market monies. My modest point in this post is that fans of Mises need to stop saying that the regression theorem proves Bitcoin can’t ever become money, since that argument really doesn’t make sense, and if anything just shows Mises was wrong.
(One last request: Not only am I currently writing a book for the Independent Institute on Human Action, but I’ve also written the study guides to it and The Theory of Money and Credit. So in the comments, if you want to say I’m wrong, please by all means, I love defenses of Mises more than most people. But please don’t lecture me on the basics of the regression theorem. I know what it is. And also keep in mind that not a single professional economist–many of whom are card-carrying Austrians–used the regression theorem to say Bitcoin couldn’t possibly be money, when Robert Wenzel recently polled us. [Hans Hoppe, not in the survey, did not seem to be using that argument either, namely that the regression theorem means Bitcoin can’t ever be money, according to Stephan Kinsella’s account.])
Someone Tell Krugman: More “Good Glitches” on Health Exchanges
Remember that on opening day of Healthcare.gov, Paul Krugman said the fact that people were hitting snafus with the website was actually a good thing, a sign of how many people were signing up.
Well, Tyler Cowen links to Bob Laszewski’s alarming report on his investigations into the implementation of the ACA (aka ObamaCare). Here’s Laszewski:
Based upon my survey of a large number of health plans accounting for substantial market share in the 36 states the federal insurance exchange is operating in, not more than about 5,000 individuals and families signed-up for health insurance in the 36 states run by the Obama administration through Monday.
It is not uncommon for a major health insurer with a large market share to report less than 100 enrollments in the first week.
Reports today say the enrollments continue to trickle in at about the same rate.
Worse, the backroom connection between the insurance companies and the federal government is a disaster. Things are worse behind the curtain than in front of it.
Here is one example from a carrier–and I have received numerous reports from many other carriers with exactly the same problem. One carrier exec told me that yesterday they got 7 transactions for 1 person – 4 enrollments and 3 cancelations.
For some reason the system is enrolling, unenrolling, enrolling again, and so forth the same person. This has been going on for a few days for many of the enrollments being sent to the health plans. It has got on to the point that the health plans worry some of these very few enrollments really don’t exist.
The reconciliation system, that reconciles enrollment between the feds and the health plans, is not working and hasn’t even been tested yet.
When health plans call the special health plan “help desk” they are lucky to get through. When they finally get through, the feds are creating a “help desk ticket” to be researched.
Now, if we are enrolling 20 to 50 people per day per health plan per state through the federal exchange, that might be sort of manageable. But if this thing ever ramps up to thousands of enrollments a day…
In summary, big market share health plans are getting maybe 50 enrollments per day per state from the feds and that little bit of new business is a mess.
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