Disrupting the Equilibrium on Rizzo’s Discussion
The March 2017 “Liberty Matters” discussion was very nice, featuring contributions from several Austrian economists who are all my acquaintances/friends. Mario Rizzo was my dissertation chair at NYU.
Because my time is brief, I am not going to talk about the more important issues everybody discussed. Instead I am going to quibble with one little point that Mario made:
Ludwig Lachmann criticized Kirzner’s approach in a number of respects. First, purposiveness in the broad sense does imply alertness and learning. But this does not mean that people learn what is appropriate to move the system toward “equilibrium.” Second, entrepreneurs seek to make profits by exploiting price inconsistencies. However, this is not the same thing as moving the system toward equilibrium with respect to the underlying data. Consider that an entrepreneur can make money by exploiting the incorrect beliefs of others that a certain resource is undervalued. He will sell the resource to the party who overvalues it – thus making money but not correcting the error. Economists know that there can be bubbles and herd behavior. These are empirical issues.
I have retained the full paragraph so you can see the context, but I just want to focus on the part I put in bold. I think it’s wrong. Even in Mario’s example, the entrepreneur who realizes the stock is overvalued and sells it, is indeed moving the price in the right direction–relative to what otherwise would have happened. And that is surely the only relevant criterion.
First let’s make sure you get my modest point. Suppose Wise Willy knows that the “correct” price (and let’s put to the side the thorny issue of defining that concept) for Acme stock is $100 per share. But Bullish Billy comes along and is quite certain that Acme is undervalued; Billy thinks Acme should be priced at least at $130. So Billy enters the market and starts buying shares, bidding up the price of Acme.
Now as the price moves up, Wise Willy sees a growing profit opportunity. Now let’s be realistic here: Because of transaction costs, risk, borrowing constraints, a desire for a diversified portfolio, etc., it’s not the case that Wise Willy will short an infinite number of shares at any price above $100.01, or that Bullish Billy will buy an infinite number of shares at any price below $129.99. Rather, in the real world it is more accurate to say that each party will take on a certain exposure to either a short or long position (relative to their original holdings), based on how far the prevailing price is from what each believes is the correct price.
In that context, then, suppose that if Wise Willy does nothing, then Bullish Billy ends up pushing Acme’s price up to (say) $125 before he stops acquiring shares. In contrast, if Wise Willy decides to profit from what he perceives as a gross mispricing, then he sells into that counterfactual situation such that he and Billy stop adjusting their holdings when the price of Acme settles down at (say) $115.
So yes, Mario’s point is true if we take it to mean that profit-seeking entrepreneurship, even when correct, doesn’t move prices to their final equilibrium positions. However, it moves them in the right direction, relative to what would have happened in the absence of the action.
In my Acme example, it’s not correct to say that Wise Willy pushed prices away from equilibrium due to his correct entrepreneurial forecast. No, what happened is that Bullish Billy pushed prices away from equilibrium due to his incorrect anticipation of the future, and fortunately Wise Willy was there to mitigate the damage.
Israel Kirzner never argued that even incorrect forecasts would equilibrate the market. Cases like the above are hardly counterexamples to Kirzner’s views.
UPDATE: I’m not denying that there could be more complicated situations that would be better examples of what Mario is trying to get across. For example, in 2005 an investor might have thought, “I know housing is in a bubble, but I think I can flip this condo and get out before everything crashes.” In principle you can even have models where everybody is a perfect Bayesian and yet herd behavior forms if a few people early on get a bad signal; that’s presumably what Mario is talking about.
However, I thought it important to clarify that Mario’s particular illustration doesn’t work. And then once we start with that, we might extrapolate to the more exotic cases and see that even there, adding in more and more entrepreneurs who have perfect foresight is a good thing, relative to their absence.
Internet Atheists on Science vs. Religion and Women’s Rights
I recently came across this meme on Twitter, from the “Atheist Republic” account:
Now I grant you this is somewhat untestable, since I probably don’t think to tell you all the times my hunches are wrong, but for what it’s worth, I had a very strong suspicion when I saw this picture, that the woman on the left would be religious.
And sure enough, it looks like I was right. First, through some amazing sleuthing that would have impressed Bruce Wayne, I identified the woman as Dr. Tracy Caldwell Dyson. (She has a PhD in physical chemistry from UC Davis.) If you check out her Wikipedia entry, you’ll see that her image is the one they used for the meme above.
Then I found a short statement from her (total of 10 paragraphs) from her bio on NASA’s website. Here are the final two paragraphs:
Through the ten years astronauts have been living in space, NASA has gotten smarter about how to keep them happy and healthy. Much of that involves keeping in touch with family. Naturally, it’s a greater challenge from orbit, even greater when your husband is at the same time deployed on a naval carrier, flying jets, and helping to defend our country. Though we made contact almost every other weekend, there were often long periods of time when we didn’t hear from each other. With jobs like ours, we just kept faith in God that each other were safe. Time spent with him during family conferences certainly made for some of the most personally meaningful moments of my life on orbit.
One of the greatest lessons I’ve learned on my journey of becoming and serving as an astronaut for NASA, is to not give away my self-confidence. I believe it’s a lesson I’m still learning. You come into this world with a set of God-given talents, and who are you to shy away from them? It’s a strange fear that you’re not good enough. Add on top of that whatever experience you’ve gained in life to complement your set of skills and personality, and it’s the tumbles you make on the path of life that seem to stand beside you like a coach yelling from the sidelines. I’ve learned there’s a way to deafen that voice in your head that chips away self esteem and makes you hesitate. The easy road shelters you from failure so you don’t make a mistake. The road you want, though, takes belief, determination, and balance (there’s such a thing as too much confidence). Best course is to know yourself and like who you are. Understand what it is you enjoy doing and don’t worry if it doesn’t match what motivates “everyone else”. You are the best at being you (and not someone else) and are at your best when what you do makes you happy. Great is what you’ll be and confidence is the bag you carry it in. [Bold added.]
So notice, not only is the Atheist meme totally wrong, but it has things backwards. Dr. Caldwell is who she is, in part because of her faith in God. Yes, there are barriers to women in science (and the business world, etc.), even in “liberal” Western societies. But if you believe that you are a daughter of an omnipotent Father who loves you infinitely, then it’s easier to stand up to jerk bosses or crude colleagues.
I will also point out that someone in the comments at the original tweet complained: “Don’t use Abrahamic religions as representative of all religion.”
Well, boatloads of very accomplished women in science and other fields have come from Judeo-Christian societies. So really what this person should be saying is, “Don’t conflate Islam with all religion.” But of course that sounds too close to Fox News, so the person I’m sure sincerely believes that the problem is the God of Abraham.
People are horrible sinners, and men have done terrible things to women over the ages. Yet in response to these awful abuses, certain versions of modern feminism and progressivism teach that men are literally equal to women, in all respects, and that we must wipe out any specialized rules from our institutions and social norms. This extreme view of “equality” is clearly wrong. If you start with this notion of equality as your foundation, everything will fall apart.
The strongest women I know are Christians, and have very “old fashioned and patriarchal” views on marriage. The reason they are so strong is that they fear God, not men.
Murphy Wearing Flowers On His Scalp
I’ll be speaking (along with Patrick Byrne and others) for the Independent Institute in San Francisco this Friday…
Contra Krugman Episode 80: The Time Krugman Responded to Bob on ABCT
Krugman was talking about health care again in his op eds, so Tom and I discussed this blast from the past. An outline:
3:00 Bob summarizes a really old Krugman column on “hangover theories” of the business cycle: why isn’t there a consumption boom during the “recession”?
4:15 Bob then summarizes Tyler Cowen’s related objection: Why is there a boom period at all? If investment rises, shouldn’t consumption fall? Why empirically do we see comovement in these variables over the course of the business cycle?
5:40 Bob says the key issue: capital consumption.
6:00 Bob summarizes his “sushi example.” 100 people on an island, then Krugman shows up.
7:35 Why an illusion?
8:35 Why should there be unemployment if people are poorer? Wouldn’t they work more?
10:30 Tom summarizes Krugman’s response to my “sushi article.”
14:55 Bob points out Krugman’s response to me, is actually a concession, a retreat from his original claim that ABCT was akin to phlogiston theory of fire.
17:10 The problem lying behind Krugman’s questions (he conflates Austrian with RBC).
18:50 Central banks *can* slow growth.
22:00 What evidence do we have of Austrian malinvestment?
26:45 Bob goes through two examples distinguishing Keynesian versus Recalculation view.
35:40 Why aren’t slumps associated with accelerating price inflation?
Murphy on Tax Policy on Energy Markets
The greatest hits (of me) from the House Subcommittee on Energy hearing on Wednesday. The video has a short intro by the Chair of the Subcommittee, then my 5 minute opening statement, then the back-and-forth anytime a Congressperson asked me a question in the Q&A.
Would a Carbon Tax+Dividend Scheme “Financially Benefit” Poor Households?
I point out that such claims can be misleading, even on their own terms. Excerpt:
Suppose gas is originally $3 per gallon. Our poor household in a typical week buys 10 gallons. In contrast, the rich household in a typical week buys 20 gallons, because they drive more and because they drive an SUV.
Now imagine the government imposes a draconian $4 per gallon carbon tax that more than doubles the price of a gallon of gasoline to $7. In response, the poor household practically stops driving; people take the bus whenever they can. They end up buying only 2 gallon of gas per week. So they implicitly pay 2 x $4 = $8 total in carbon taxes per week.
The rich household however is better able to shoulder the blow. They reduce their gasoline consumption to 15 gallons per week. At this level of consumption, they implicitly pay 15 x $4 = $60 in carbon taxes per week.
Now if the government took these tax receipts and then issued an even rebate, the $8 + $60 = $68 total would get split into payments of $34 each. So Schultz and Halstead would conclude that the poor household “gained” $34 – $8 = $26 per week in net dividends from the scheme, while the rich household lost $60 – $34 = $26 per week in net payments. (This makes sense: If these are the only two households, the gain to one must be the loss to the other.)
But would we conclude that the poor household in our scenario is better off? Not at all! Yes, the household would have an extra $26 per week in money, but now (by assumption) gasoline would cost $7 per gallon. This artificially high price led the household to “choose” much lower gasoline consumption, but this was a coerced choice. The extra $26 per week in monetary terms would not mean the same as it would have in the original scenario, when gasoline was cheaper.
The Origin and Structure of the Universe
I saw “Is Genesis History?” a few weeks ago and thought it was very well done. Given its heroic (some would say impossible) task–namely, to interview a string of PhDs to say that it’s not crazy to believe in the Genesis account–I thought it was very impressive. I’m not saying it is a slam dunk that would convince Bill Maher, but rather I’m saying that there are several very good points that it raises, which I think would trip up the average internet atheist. (Note that “internet atheist” is not the same thing as “someone on the internet who happens to be an atheist.”)
(Disclosure: I am friends with the guy who made the documentary, so I’m biased. I mean, beyond my bias of being a Christian.)
Now let me relate one item that is ironic. When the narrator interviewed the astronomy guy (who believed in Genesis as history), they brought up the awkward fact that some galaxies are billions of light-years away. So how could the universe be only ~6,000 years old?
(NOTE: Some Biblical literalists, including the famous commentator Vernon McGee, do not believe in a Young Earth. They think, for example, that the list of generations–the basis for the 6,000 year view–only touches on the important people from the list. So be aware that people in this camp could believe “Genesis is history” and have no problem with light traveling billions of years to reach us.)
At the time, I thought the astronomer’s answer was unpersuasive. He said something like, “Well, I admit it’s definitely a puzzle as to how light could have traveled that far to reach us, if the universe is so young. But that perspective simply assumes that the processes Nature obeyed in the past, occurred just as they do today. That’s just an assumption.” (I am very much paraphrasing what he said, but the spirit is right.)
As I say, at the time I was watching the documentary in the theater, I thought, “The geologist made some great points, but oh man the atheists would blow up over this astronomer. You can’t just assume the laws of physics were different in order to get your theory to work.”
Welp, I stand corrected. As luck would have it, not long after watching that documentary, I took my kid to the Houston planetarium. In a well-done show about cosmology, Neil deGrasse Tyson ended up telling us that 95% of the universes consisted of “dark matter and dark energy”; only 5% of the universe was observable to us. Such quantities of dark stuff were necessary in order to make sense of observations; rotating groups of galaxies should be spinning apart if they are just composed of the stars we see in them.
Now I had heard about that stuff before, but the part that was new to me was the discovery that the rate at which galaxies were moving away from each other was accelerating. Back when I was really on top of this stuff (like in the mid-1990s), my understanding at that time was that scientists were trying to figure out if there were enough matter to make the expanding universe slow down and then reverse, to fall back into a Big Crunch. OR, would it just keep expanding forever, because the gravity wasn’t strong enough (i.e. not enough mass)?
But either way, clearly you would have expected that the universal expansion would be slowing. Yet in fact, it’s doing the opposite, as revealed by observations of different pairs of neighboring objects (at farther and farther distances from us, meaning we are peering back further and further in time). It’s not surprising that this was news to me; I just checked Wikipedia and the discovery was made in 1998, and some of the people involved got the Nobel Prize for it–scientists weren’t expecting it.
Now here are two things that I think are really interesting, relating this to the Genesis documentary:
1) It’s not simply that scientists are saying, “Oh, turns out the universe has been accelerating all along since the Big Bang.” No, as Tyson’s remarks and the Wikipedia discussion both state (someone tell me if I’m wrong), the accelerating universe only started about 5 billion years ago; before then, the universe’s expansion had indeed been slowing down since the Big Bang. So notice what we have here: Modern physicists can only reconcile observations with their theories by saying cosmological forces were very different in the past from what they are now.
2) When I was growing up, the standard scientific tale went like this: “Einstein was an unbelievable genius. But alas, even Homer nods. Even though the most elegant and straightforward version of general relativity–what popped out of his thought experiments concerning a guy in an accelerating rocket or standing on a planet–would have predicted either a shrinking universe or one that was expanding but slowing down, that offended Einstein’s sensibilities and so he inserted a fudge factor called the ‘cosmological constant’ to make the universe static. He later said it was his biggest blunder, because had he trusted his theory it would’ve anticipated Hubble by more than a decade.”
Now, however, I see physicists saying stuff like this: “In an ironic twist of history, it turns out Einstein was right! We now use the cosmological constant, or what can be called dark energy.” (This NASA discussion is typical.)
Does everyone see the irony here?
I BESEECH YOU, please don’t recite to me the Scientific Method in the comments, and explain that we can’t use the pages of a holy book written by shepherds to do science. I know, I promise.
I am also aware of the fact that the use of dark energy, the “inflation” theory of the early universe, etc. etc., are heavily constrained by known physical laws and what happens in particle accelerators.
My modest point is that an intellectual move that would be ridiculed when pulled by a Bible-believing Christian in a documentary, is treated with awe as “how science proceeds” when pulled by an atheist in a planetarium.
I watched a bunch of videos after the planetarium show to learn more. The video below of Lawrence Krauss is excellent, both for his presentation of the science and also his smug jabs on religion. (The religious jabs and/or question-begging statements occur at 16:45, 17:15, 18:11, and 33:10. There are also some jabs in the very beginning from Dawkins and Krauss.) If I could clone myself, I would get a PhD in physics and then debate this guy.
This video from Alan Guth is also good:
Finally, if those two videos are too heavy for you, here are shorter ones that are not as technical:
Who’s the Best Libertarian of All Time?
This guy (I don’t know him) seeks to answer the question.
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