Wednesday, January 30, 2013

4th Quarter GDP

Nassim Taleb Talks Antifragile, Libertarianism, and Capitalism's Genius ...

Nassim Nicholas Taleb is a former trader and hedge fund manager, a best-selling author, and a groundbreaking theorist on risk and resilience.
His new book is Antifragile: Things that Gain with Disorder, which argues that in order to create robust institutions we must allow them to build resilience through adversity. The essence of capitalism, he argues, is encouraging failure, not rewarding success.
Nick Gillespie's interview with Taleb is the latest offering from Reason TV. Watch the interview above and click below for full text and links.

Monday, January 28, 2013

Chief Rabbi Sacks on Comparative Advantage

Chief Rabbi Sacks on Comparative Advantage

National School Choice Week

National School Choice Week

Our Whistle-Stop Train Tour runs from January 25 to February 2, 2013.

From Los Angeles to New York, with 14 stops, the National School Choice Week Special will bring messages of hope and optimism from coast to coast.

Saturday, January 26, 2013

ASET Bookclub book - Feb. 19 - The Grand Pursuit

We will be reading The Grand Pursuit by Sylvia Nasar at our February, 2013 ASET book club.

“A fascinating excursion into the economic ideas and personalities that have deposited most of us at a standard of living unparalleled in human history…engrossing…Nasar, who wrote A Beautiful Mind, …is drawn to intellectual giants. They stomp across the idiosyncratic and readable pages of Grand Pursuit, which unfurls with a David McCullough-like knack for telling popular history….On these pages, the dismal science shines.”--Karen R. Long, Cleveland Plain Dealer

“Grand Pursuit is a worthy successor to Robert Heilbroner’s The Worldly Philosophers. . . . Nasar’s aim is to put the reader into the lives of the characters of a sweeping historical drama that extends from Victorian England to modern-day India. That she largely succeeds reflects the depth and breadth of her research but also the elegance of her prose.”

--Steven Pearlstein, The Washington Post

I read the book during the year of publication and thoroughly enjoyed it. I have completed Act one in my reread in anticipation of a thoughtful discussion next month. Of the 5 chapters, the one on Schumpeter is the best, but I had forgotten my initial reaction to the descriptions of Beatrice Webb and Irving Fisher. Webb, is presented as a key supporter of the emergent Welfare State and I have been thinking about Amnity Schale's book, The Forgotten Man and the really clear consequence of the hubris that accompanies the pretense of knowledge. Churchill certainly comes across as a Clintonian politician in Nasar's work. For a review of what this consequence is, click here to read Wendy McElroy.

Fisher's impact is very interesting - I couldn't help but think of Paul Krugman as I read with fascination Irving's intellectual and personal journey.

Table of Contents

Preface: The Nine Parts of Mankind xi

Act I Hope

Prologue: Mr. Sentiment Versus Scrooge 3

Chapter I Perfectly New: Engels and Marx in the Age of Miracles 11

Chapter II Must There Be a Proletariat? Marshall's Patron Saint 48

Chapter III Miss Potter's Profession: Webb and the Housekeeping State 91

Chapter IV Cross of Gold: Fisher and the Money Illusion 139

Chapter V Creative Destruction: Schumpeter and Economic Evolution 171

Act II Fear

Prologue: War of the Worlds 197

Chapter VI The Last Days of Mankind: Schumpeter in Vienna 207

Chapter VII Europe Is Dying: Keynes at Versailles 235

Chapter VIII The Joyless Street: Schumpeter and Hayek in Vienna 262

Chapter IX Immaterial Devices of the Mind: Keynes and Fisher in the 1920s 281

Chapter X Magneto Trouble: Keynes and Fisher in the Great Depression 306

Chapter XI Experiments: Webb and Robinson in the 1930s 338

Chapter XII The Economists' War: Keynes and Friedman at the Treasury 354

Chapter XIII Exile: Schumpeter and Hayek in World War II 372

Act III Confidence

Prologue: Nothing to Fear 383

Chapter XIV Past and Future: Keynes at Bretton Woods 390

Chapter XV The Road from Serfdom: Hayek and the German Miracle 399

Chapter XVI Instruments of Mastery: Samuelson Goes to Washington 409

Chapter XVII Grand Illusion: Robinson in Moscow and Beijing 426

Chapter XVIII Tryst with Destiny: Sen in Calcutta and Cambridge 446

Epilogue: Imagining the Future 461

Nate Silver, author of The Signal and the Noise (a great book to consider for bookclub):

And on a political level, cuts to entitlement programs are liable to be more noticeable to individual voters than cuts to things like infrastructure spending. A 10 percent cut to Social Security or Medicare benefits will surely draw the ire of voters. A 10 percent reduction in the amount allocated to bridge repair, or in the amount of government-sponsored energy research, will affect individual citizens less directly (even if they are perhaps ultimately more economically damaging: most of the academic literature is supportive of high long-run returns to infrastructure and research and development spending on private-sector productivity and economic growth).

Nevertheless, the declining level of trust in government since the 1970s is a fairly close mirror for the growth in spending on social insurance as a share of the gross domestic product and of overall government expenditures. We may have gone from conceiving of government as an entity that builds roads, dams and airports, provides shared services like schooling, policing and national parks, and wages wars, into the world’s largest insurance broker.

Most of us don’t much care for our insurance broker.

Friday, January 25, 2013

EH review of The Grand Pursuit

The review concludes:

But let us set these objections aside so that we may emphasize the most important aspect of this book. For too long the history of economic thought has not had an accessible, fun, and potentially popular book that we can recommend to our friends, colleagues, and students who are not members of our “guild.” While Nasar’s political commitments are very different, her entertaining style and captivating narrative suggests that her book has the potential to occupy the several niches once dominated by Robert Heilbroner’s The Worldly Philosophers. Should this occur, and her work contribute to a revival of interest in the history of economic thought, we will all be in debt to Professor Nasar.

Monday, January 21, 2013

NY Times review - The Grand Pursuit

NY TimesIn her haphazard new book “Grand Pursuit,” Ms. Nasar says she set out to tell that story through the lives of “protagonists who were instrumental in turning economics into an instrument of mastery.” Unfortunately her selection of those people is so arbitrary— she says she “chose men and women with ‘cool heads but warm hearts’ ” whose “temperaments, experiences and genius led them, in response to their own times and places, to ask new questions and propose new answers” — that the book fails to give the lay reader an overarching understanding of how modern economic thinking has evolved, or how major schools of thought have fared in light of various political and fiscal developments.

Ms. Nasar spends a lot of space talking about Keynes and his disciples, for instance, but fails to put his views fully in context. There is little discussion of Adam Smith and his laissez-faire philosophy, which stands in such contrast to Keynes’s belief in the often necessary role of government. And while Milton Friedman’s early days as a Keynesian and supporter of the New Deal are mentioned, there is no real examination of his evolution into an influential champion of free markets.

What Ms. Nasar does brilliantly here — much as she did in “A Beautiful Mind,” her absorbing 1998 biography of the mathematician John Forbes Nash Jr. — is give us intimate portraits of her subjects, tracing the ways in which personal experiences informed their thinking. Ms. Nasar — a former economics correspondent for The New York Times who is now a professor at the Columbia Graduate School of Journalism — writes with ease and authority about complicated economic matters, but shows even more fluency evoking the inner lives of her subjects and the social worlds they transited. . . . . Because of its discursive, disorganized structure, “Grand Pursuit” is read best not as a primer on the emergence of modern economics, but as a sort of Selected Lives of the Economists. Ms. Nasar introduces us to Alfred Marshall, whose own metamorphosis from scholarship boy to Cambridge don informed his “optimism about the improvability of man and his circumstances.” We meet Irving Fisher, the Yale economist, who argued, that “individual action would never give rise to a system of city parks, or even to any useful system of streets.” And Beatrice Webb, of whom Ms. Nasar writes: “No one had a greater claim to the invention of the idea of a government safety net — indeed, the modern welfare state” than she did.

Among the more compelling portraits in this volume is that of Joseph Alois Schumpeter, the brilliant European economist who argued that the distinctive feature of capitalism was “incessant innovation” — a “perennial gale of creative destruction” — and who identified the entrepreneur as the visionary who could “revolutionize the pattern of production by exploiting an invention” or “an untried technological possibility.”

Although Ms. Nasar does a concise job of explicating what her various subjects thought about the role government should play in regulating the markets — as well as their thoughts about the causes and possible solutions to problems like unemployment and inflation — she does little to show the reader how their theories might shed light on the current economic difficulties of the United States and Europe: another disappointment in this immensely gifted writer’s ungainly, though sometimes inspired, book.

Sunday, January 20, 2013

Reviews of The Grand Pursuit">James Grant - a nice summary of the book and Grant would have liked Nasar to have included Murray Rothbard -

BusinessweekNeither Nasar’s topics nor her characters conform to a neat, linear organization. Economics has no agreed-upon catechism, and Nasar has written the book she chose to write, not a book that a conventional reading of history demands. Curiously, she includes a fine portrait of the young Milton Friedman as a New Deal bureaucrat, but not of the later free-market apostle who achieved influence and fame. And she is too forgiving of the modern academy’s enslavement to the computer. “The fear that using mathematics would cause other languages to wither turned out to be overblown,” she asserts. If anything, they were underblown. Formula-derived economic models, embraced by economists with utter certainty, helped to foster the financial crisis and other modern traumas. Perhaps inevitably in a broad survey, some of Nasar’s transitions are abrupt, but overall Grand Pursuit is artfully rendered and a delight to read.

LA TimesBeginning her book in the era of Charles Dickens, "when the specter of hunger was stalking England," Nasar takes us through the times that influenced economic thinkers and the theories they put forth. We see Marx — a lazy procrastinator who impregnates his wife and a housekeeper in the same year — walking through the streets of London with his generous, patient sponsor Engels, "their extreme myopia and the sulfurous yellow London fog obscur[ing] everything more than a foot ahead."

We also see Joseph Schumpeter, who theorized that entrepreneurs were the key to economic progress and who had a habit of challenging university librarians to duels and arriving at lectures in jodhpurs. Beatrice Potter Webb, who advanced the idea of a welfare state and advocated for a government safety net, arrived at that conclusion only after a failed love affair with Joseph Chamberlain, the father of a future British prime minister. Alfred Marshall, a founder of modern economics, wore a handlebar mustache and took up knitting during an illness, and discovered, Nasar writes, that businesses didn't just exist to produce a profit for their owners. He realized they were also meant to "produce higher living standards for consumers and workers."

Friday, January 18, 2013

Don’t pay for all of your kids’ college education

Don’t pay for all of your kids’ college education

Arnold Kling, the MCCD Honors Speaker scheduled for February 20, 2013 may well have something to add to this analysis. Intuitively, this seems obvious and, my experience has been that students with skin in the game tend to better grasp the opportunity cost of higher education and weigh the future benefits of that education with greater precision than do their counterparts who are in school at low opportunity cost and low or no money cost to themselves.

Thursday, January 17, 2013

Dodd-Frank: What It Does and Why It's Flawed | Mercatus

More than 360,000 words in length, the Dodd-Frank Wall Street Reform and Consumer Protection Act is the longest and most complex piece of financial legislation in American history. The nature and magnitude of its effects, both intended and unintended, will become clearer as regulators exercise the broad discretion given to them under the law.
In this new book, the contributors ask whether the law is an effective response to the financial crisis that so deeply rattled our nation. Taking a hard look at the law’s celebrated objectives, they reveal that it not only fails to achieve many of its stated goals, it also creates dangerous regulatory pathologies that could lay the groundwork for the next crisis.

Dodd-Frank: What It Does and Why It's Flawed | Mercatus

Wednesday, January 16, 2013

I recently had a conversation with a liberal friend that touched on the scale and scope of government. This friend, a proud, livelong Democrat sees a wide distinction between the right and left in "serving" society to work toward social justice. I could not find adequate words to present my strong and hopefully civil disagreement with this view. This recent media report does a nice job, I think, of outlining my concern about expanding state presence in our lives - an expansion that is stimulated by both groups of political operatives.

The FBI – Drowning In Counter-Terrorism Money, Power and Other Resources – Will Apply The Term “Terrorism” To Any Group It Dislikes And Wants To Control And Suppress

It should be anything but surprising that the FBI – drowning in counter-terrorism money, power and other resources – will apply the term “terrorism” to any group it dislikes and wants to control and suppress (thus ushering in all of the powers institutionalized against “terrorists”). Those who supported (or acquiesced to) this expansion of unaccountable government power because they assumed it would only be used against Those Muslims not only embraced a morally warped premise (I care about injustices only if they directly affect me), but also a factually false one, since abuses of power always – always – expand beyond their original application.

Tuesday, January 15, 2013

Tawney Lecture,AAAAkPubcZk~,_5wRjVEP-2SIvcgAVJb7BdaXYOAzFnZO&bctid=1741477278001

Tawney Lectures Available as Podcasts

The Economic History Society has made available videos of the Tawney Memorial Lecture, beginning in 2007. The most recent talk posted is that for 2012, when Sir Roderick Floud delivered a lecture entitled "Historian, measure thyself! Innovation in the social sciences and economic history."

Monday, January 14, 2013

Buchanan, Goldin and Glaeser are discussed

Goldin, president of the AEA was the author of the December ASET book title - The Race Between Education and Technology, Glaeser is the author of our April read - The Triumph of the City.  Of course, Buchanan was a titan and Warsh's discussion in this post is worth a read.

Saturday, January 12, 2013

The Market Economy and the Distribution of Wealth

The Market Economy and the Distribution of Wealth

Everywhere today in the free world we find the opponents of the market economy at a loss for plausible arguments. Of late the “case for central planning” has shed much of its erstwhile luster. We have had too much experience of it. The facts of the last forty years are too eloquent.

Who can now doubt that, as Professor Mises pointed out thirty years ago, every intervention by a political authority entails a further intervention to prevent the inevitable economic repercussions of the first step from taking place? Who will deny that a command economy requires an atmosphere of inflation to operate at all, and who today does not know the baneful effects of “controlled inflation?” Even though some economists have now invented the eulogistic term “secular inflation” in order to describe the permanent inflation we all know so well, it is unlikely that anyone is deceived. It did not really require the recent German example to demonstrate to us that a market economy will create order out of “administratively controlled” chaos even in the most unfavorable circumstances. A form of economic organization based on voluntary cooperation and the universal exchange of knowledge is necessarily superior to any hierarchical structure, even if in the latter a rational test for the qualifications of those who give the word of command could exist. Those who are able to learn from reason and experience knew it before, and those who are not are unlikely to learn it even now.

Reprinted from Mary Sennholz, ed., On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises (New York: D. Van Nostrand, 1956).

Confronted with this situation, the opponents of the market economy have shifted their ground; they now oppose it on “social” rather than economic grounds. They accuse it of being unjust rather than inefficient. They now dwell on the “distorting effects” of the ownership of wealth and contend that “the plebiscite of the market is swayed by plural voting.” They show that the distribution of wealth affects production and income distribution since the owners of wealth not merely receive an “unfair share” of the social income, but will also influence the composition of the social product: Luxuries are too many and necessities too few. Moreover, since these owners do most of the saving they also determine the rate of capital accumulation and thus of economic progress.

Some of these opponents would not altogether deny that there is a sense in which the distribution of wealth is the cumulative result of the play of economic forces, but would hold that this cumulation operates in such a fashion as to make the present a slave of the past, a bygone an arbitrary factor in the present. Today's income distribution is shaped by today's distribution of wealth, and even though today's wealth was partly accumulated yesterday, it was accumulated by processes reflecting the influence of the distribution of wealth on the day before yesterday. In the main this argument of the opponents of the market economy is based on the institution of Inheritance to which, even in a progressive society, we are told, a majority of the owners owe their wealth.

This argument appears to be widely accepted today, even by many who are genuinely in favor of economic freedom. Such people have come to believe that a “redistribution of wealth,” for instance through death duties, would have socially desirable, but no unfavorable economic results. On the contrary, since such measures would help to free the present from the “dead hand” of the past they would also help to adjust present incomes to present needs. The distribution of wealth is a datum of the market, and by changing data we can change results without interfering with the market mechanism! It follows that only when accompanied by a policy designed continually to redistribute existing wealth, would the market process have “socially tolerable” results.

This view, as we said, is today held by many, even by some economists who understand the superiority of the market economy over the command economy and the frustrations of interventionism, but dislike what they regard as the social consequences of the market economy. They are prepared to accept the market economy only where its operation is accompanied by such a policy of redistribution.

The present paper is devoted to a criticism of the basis of this view.

In the first place, the whole argument rests logically on verbal confusion arising from the ambiguous meaning of the term “datum.” In common usage as well as in most sciences, for instance in statistics, the word “datum” means something that is, at a moment of time, “given” to us as observers of the scene. In this sense it is, of course, a truism that the mode of the distribution of wealth is a datum at any given moment of time, simply in the trivial sense that it happens to exist and no other mode does. But in the equilibrium theories which, for better or worse, have come to mean so much for present-day economic thought and have so largely shaped its content, the word “datum” has acquired a second and very different meaning: Here a datum means a necessary condition of equilibrium, and independent variable, and “the data” collectively mean the total sum of necessary and sufficient conditions from which, once we know them all, we without further ado can deduce equilibrium price and quantity. In this second sense the distribution of wealth would thus, together with the other data, be a DETERMINANT, though not the only determinant, of the prices and quantities of the various services and products bought and sold.

It will, however, be our main task in the paper to show that the distribution of wealth is not a “datum” in this second sense. Far from being an “independent variable” of the market process, it is, on the contrary, continuously subject to modification by the market forces. Needless to say, this is not to deny that at any moment it is among the forces which shape the path of the market process in the immediate future, but it is to deny that the mode of distribution as such can have any permanent influence. Though wealth is always distributed in some definite way, the mode of this distribution is ever-changing.

Only if the mode of distribution remained the same in period after period, while individual pieces of wealth were being transferred by inheritance, could such a constant mode be said to be a permanent economic force. In reality this is not so. The distribution of wealth is being shaped by the forces of the market as an object, not an agent, and whatever its mode may be today will soon have become an irrelevant bygone.

The distribution of wealth, therefore, has no place among the data of equilibrium. What is, however, of great economic and social interest is not the mode of distribution of wealth at a moment of time, but its mode of change over time. Such change, we shall see, finds its true place among the events that happen on that problematical “path” which may, but rarely in reality does, lead to equilibrium. It is a typically “dynamic” phenomenon. It is a curious fact that at a time when so much is heard of the need for the pursuit and promotion of dynamic studies it should arouse so little interest.

Ownership is a legal concept which refers to concrete material objects. Wealth is an economic concept which refers to scarce resources. All valuable resources are, or reflect, or embody, material objects, but not all material objects are resources: Derelict houses and heaps of scrap are obvious examples, as are any objects which their owners would gladly give away if they could find somebody willing to remove them. Moreover, what is a resource today may cease to be one tomorrow, while what is a valueless object today may become valuable tomorrow. The resource status of material objects is therefore always problematical and depends to some extent on foresight. An object constitutes wealth only if it is a source of an income stream. The value of the object to the owner, actual or potential, reflects at any moment its expected income-yielding capacity. This, in its turn, will depend on the uses to which the object can be turned. The mere ownership of objects, therefore, does not necessarily confer wealth; it is their successful use which confers it. Not ownership but use of resources is the source of income and wealth. An ice-cream factory in New York may mean wealth to its owner; the same ice-cream factory in Greenland would scarcely be a resource.

In a world of unexpected change the maintenance of wealth is always problematical; and in the long run it may be said to be impossible. In order to be able to maintain a given amount of wealth which could be transferred by inheritance from one generation to the next, a family would have to own such resources as will yield a permanent net income stream, i.e., a stream of surplus of output value over the cost of factor services complementary to the resources owned. It seems that this would be possible only either in a stationary world, a world in which today is as yesterday and tomorrow like today, and in which thus, day after day, and year after year, the same income will accrue to the same owners or their heirs; or if all resource owners had perfect foresight. Since both cases are remote from reality we can safely ignore them. What, then, in reality happens to wealth in a world of unexpected change?

All wealth consists of capital assets which, in one way or another, embody or at least ultimately reflect the material resources of production, the sources of valuable output. All output is produced by human labor with the help of combinations of such resources. For this purpose resources have to be used in certain combinations; complementarity is of the essence of resource use. The modes of this complementarity are in no way “given” to the entrepreneurs who make, initiate, and carry out production plans. There is in reality no such thing as A production function. On the contrary, the task of the entrepreneur consists precisely in finding, in a world of perpetual change, which combination of resources will yield, in the conditions of today, a maximum surplus of output over input value, and in guessing which will do so in the probable conditions of tomorrow, when output values, cost of complementary input, and technology all will have changed.

If all capital resources were infinitely versatile the entrepreneurial problem would consist in no more than following the changes of external conditions by turning combinations of resources to a succession of uses made profitable by these changes. As it is, resources have, as a rule, a limited range of versatility, each is specific to a number of uses.1 Hence, the need for adjustment to change will often entail the need for a change in the composition of the resource group, for “capital regrouping.” But each change in the mode of complementarity will affect the value of the component resources by giving rise to capital gains and losses. Entrepreneurs will make higher bids for the services of those resources for which they have found more profitable uses, and lower bids for those which have to be turned to less profitable uses. In the limiting case where no (present or potential future) use can be found for a resource which has so far formed part of a profitable combination, this resource will lose its resource character altogether. But even in less drastic cases capital gains and losses made on durable assets are an inevitable concomitant of a world of unexpected change.

The market process is thus seen to be a leveling process. In a market economy a process of redistribution of wealth is taking place all the time before which those outwardly similar processes which modern politicians are in the habit of instituting, pale into comparative insignificance, if for no other reason than that the market gives wealth to those who can hold it, while politicians give it to their constituents who, as a rule, cannot.

This process of redistribution of wealth is not prompted by a concatenation of hazards. Those who participate in it are not playing a game of chance, but a game of skill. This process, like all real dynamic processes, reflects the transmission of knowledge from mind to mind. It is possible only because some people have knowledge that others have not yet acquired, because knowledge of change and its implications spread gradually and unevenly throughout society.

In this process he is successful who understands earlier than any one else that a certain resource which today can be produced when it is new, or bought, when it is an existing resources, at a certain price A, will tomorrow form part of a productive combination as a result of which it will be worth A'. Such capital gains or losses prompted by the chance of, or need for, turning resources from one use to another, superior or inferior to the first, form the economic substance of what wealth means in a changing world, and are the chief vehicle of the process of redistribution.

In this process it is most unlikely that the same man will continue to be right in his guesses about possible new uses for existing or potential resources time after time, unless he is really superior. And in the latter case his heirs are unlikely to show similar success—unless they are superior, too. In a world of unexpected change, capital losses are ultimately as inevitable as are capital gains. Competition between capital owners and the specific nature of durable resources, even though it be “multiple specificity,” entail that gains are followed by losses as losses are followed by gains.

These economic facts have certain social consequences. As the critics of the market economy nowadays prefer to take their stand on “social” grounds, it may be not inappropriate here to elucidate the true social results of the market process. We have already spoken of it as a leveling process. More aptly, we may now describe these results as an instance of what Pareto called “the circulation of elites.” Wealth is unlikely to stay for long in the same hands. It passes from hand to hand as unforeseen change confers value, now on this, now on that specific resource, engendering capital gains and losses. The owners of wealth, we might say with Schumpeter, are like the guests at a hotel or the passengers in a train: They are always there but are never for long the same people.

It may be objected that our argument applies in any case only to a small segment of society and that the circulation of elites does not eliminate social injustice. There may be such circulation among wealth owners, but what about the rest of society? What chance have those without wealth of even participating, let alone winning, in the game? This objection, however, would ignore the part played by managers and entrepreneurs in the market process, a part to which we shall soon have to return.

In a market economy, we have seen, all wealth is of a problematical nature. The more durable assets are and the more specific, the more restricted the range of uses to which they may be turned, the more clearly the problem becomes visible. But in a society with little fixed capital in which most accumulated wealth took the form of stocks of commodities, mainly agricultural and perishable, carried for periods of various lengths, a society in which durable consumer goods, except perhaps for houses and furniture, hardly existed, the problem was not so clearly visible. Such was, by and large, the society in which the classical economists were living and from which they naturally borrowed many traits. In the conditions of their time, therefore, the classical economics were justified, up to a point, in regarding all capital as virtually homogeneous and perfectly versatile, contrasting it with land, the only specific and irreproducible resource. But in our time there is little or no justification for such dichotomy. The more fixed capital there is, and the more durable it is, the greater the probability that such capital resources will, before they wear out, have to be used for purposes other than those for which they were originally designed. This means practically that in a modern market economy there can be no such thing as a source of permanent income. Durability and limited versatility make it impossible.

It may be asked whether in presenting our argument we have not confused the capital owner with the entrepreneur, ascribing to the former functions which properly belong to the latter. Is not the decision about the use of existing resources as well as the decision which specifies the concrete form of new capital resources, viz. the investment decision, a typical entrepreneurial task? Is it not for the entrepreneur to regroup and redeploy combinations of capital goods? Are we not claiming for capital owners the economic functions of the entrepreneur?

We are not primarily concerned with claiming functions for anybody. We are concerned with the effects of unexpected change on asset values and on the distribution of wealth. The effects of such change will fall upon the owners of wealth irrespective of where the change originates. If the distinction between capitalist and entrepreneur could always easily be made, it might be claimed that the continuous redistribution of wealth is the result of entrepreneurial action, a process in which capital owners play a merely passive part. But that the process really occurs, that wealth is being redistributed by the market, cannot be doubted, nor that the process is prompted by the transmission of knowledge from one center of entrepreneurial action to another. Where capital owners and entrepreneurs can be clearly distinguished, it is true that the owners of wealth take no active part in the process themselves, but passively have to accept its results.

Yet there are many cases in which such a clear-cut distinction cannot be made. In the modern world wealth typically takes the form of securities. The owner of wealth is typically a shareholder. Is the shareholder an entrepreneur? Professor Knight asserts that he is, but a succession of authors from Walter Rathenau2 to Mr.Burnham have denied him that status. The answer depends, of course, on our definition of the entrepreneur. If we define him as an uncertainty-bearer, it is clear that the shareholder is an entrepreneur. But in recent yeats there seems to be a growng tendency to define the entrepreneur as the planner and decision-maker. If so, directors and managers are entrepreneurs, but shareholders, it seems, are not.

Yet we have to be careful in drawing our conclusions. One of the most important tasks of the entrepreneur is to specify the concrete form of capital resources, to say what buildings are to be erected, what stocks to be kept, etc. If we are clearly to distinguish between capitalist and entrepreneur we must assume that a “pure” entrepreneur, with no wealth of his own, borrows capital in money form, i.e., in a non-specific form, from “pure” capital owners.3

But do the directors and managers at the top of the organizational ladder really make all the specifying decisions? Are not many such decisions made “lower down” by works managers, supervisors, etc.? Is it really at all possible to indicate “the entrepreneur” in a world in which managerial functions are so widely spread?

On the other hand, the decision of a capital owner to buy new shares in company A rather than in company B is also a specifying decision. In fact this is the primary decision on which all the managerial decisions within the firm ultimately depend, since without capital there would be nothing for them to specify. We have to realize, it seems, that the specifying decisions of shareholders, directors, managers, etc., are in the end all mutually dependent upon each other, are but links in a chain. All are specifying decisions distinguished only by the degree of concreteness which increases as we are moving down the organizational ladder. Buying shares in company A is a decision which gives capital a form less concrete than does the decision of the workshop manager as to which tools are to be made, but it is a specifying decision all the same, and one which provides the material basis for the workshop manager's action. In this sense we may say that the capital owner makes the “highest” specifying decision.

The distinction between capital owner and entrepreneur is thus not always easily made. To this extent, then, the contrast between the active entrepreneurs, forming and redeploying combinations of capital resources, and the passive asset owners, who have to accept the verdict of the market forces on the success of “their” entrepreneurs, is much overdrawn. Shareholders, after all, are not quite defenseless in these matters. If they cannot persuade their directors to refrain from a certain step, there is one thing they can do: They can sell!

But what about bondholders? Shareholders may make capital gains and losses; their wealth is visibly affected by market forces. But bondholders seem to be in an altogether different position. Are they not owners of wealth who can claim immunity from the market forces we have described, and thus from the process of redistribution?

In the first place, of course, the difference is merely a matter of degree. Cases are not unknown in which, owing to failure of plans, inefficiency of management, or to external circumstances which had not been foreseen, bondholders had to take over an enterprise and thus became involuntary shareholders. It is true, however, that most bondholders are wealth owners who stand, as it were, at one remove from the scene we have endeavored to describe, from the source of changes which are bound to affect most asset values, though it is not true of all of them. Most of the repercussions radiating from this source will have been, as it were, intercepted by others before they reach the bondholders. The higher the “gear” of a company's capital, the thinner the protective layer of the equity, the more repercussions will reach the bondholders, and the more strongly they will be affected. It is thus quite wrong to cite the case of the bondholder in order to show that there are wealth owners exempt from the operation of the market forces we have described. Wealth owners as a class can never be so exempt, though some may be relatively more affected than others.

Furthermore, there are two cases of economic forces engendering capital gains and losses from which, in the nature of these cases, the bondholder cannot protect himself, however thick the protective armor of the equity may happen to be: the rate of interest and inflation. A rise in long-term rates of interest will depress bond values where equity holders may still hope to recoup themselves by higher profits, while a fall will have the opposite effect. Inflation transfers wealth from creditors to debtors, whereas deflation has the opposite effect. In both cases we have, of course, instances of that redistribution of wealth with which we have become acquainted. We may say that with a constant long-term rate of interest and with no change in the value of money, the susceptibility of bond holders' wealth to unexpected change will depend on their relative position as against equity holders, their “economic distance” from the center of disturbances; while interest changes and changes in the value of money will modify that relative position.

The holders of government bonds, of course, are exempt from many of the repercussions of unexpected change, but by no means from all of them. To be sure, they do not need the protective armor of the equity to shield them against the market forces which modify prices and costs. But interest changes and inflation are as much of a threat to them as to other bondholders. In the world of permanent inflation in which we are now living, to regard wealth in the form of government securities as not liable to erosion by the forces of change would be ludicrous. But in any case the existence of a government debt is not a result of the operation of market forces. It is the result of the operation of politicians eager to save their constituents from the task of having to pay taxes they would otherwise have had to pay.

The main fact we have stressed in this paper, the redistribution of wealth caused by the forces of the market in a world of unexpected change, is a fact of common observation. Why, then, is it constantly being ignored? We could understand why the politicians choose to ignore it: After all, the large majority of their constituents are unlikely to be directly affected by it, and, as is amply shown in the case of inflation, would scarcely be able to understand it if they were. But why should economists choose to ignore it? That the mode of the distribution of wealth is a result of the operation of economic forces is the kind of proposition which, one would think, would appeal to them. Why, then, do so many economists continue to regard the distribution of wealth as a “datum” in the second sense mentioned above? We submit that the reason has to be sought in an excessive preoccupation with equilibrium problems.

We saw before that the successive modes of the distribution of wealth belong to the world of disequilibrium. Capital gains and losses arise in the main because durable resources have to be used in ways for which they were not planned, and because some men understand better and earlier than other men what the changing needs and resources of a world in motion imply. Equilibrium means consistency of plans, but the redistribution of wealth by the market is typically a result of inconsistent action. To those trained to think in equilibrium terms it is perhaps only natural that such processes as we have described should appear to be not quite “respectable.” For them the “real” economic forces are those which tend to establish and maintain equilibrium. Forces only operating in disequilibrium are thus regarded as not really very interesting and are therefore all too often ignored. There may be two reasons for such neglect. No doubt a belief that a tendency towards equilibrium does exist in reality and that, in any conceivable situation, the forces tending towards equilibrium will always be stronger than the forces of resistance, plays a part in it.

But an equally strong reason, we may suspect, is the inability of economists preoccupied with equilibria to cope at all with the forces of disequilibrium. All theory has to make use of coherent models. If one has only one such model at one's disposal a good many phenomena that do not seem to fit into one's scheme are likely to remain unaccounted for. The neglect of the process of redistribution is thus not merely of far-reaching practical importance in political economy since it prevents us from understanding certain features of the world in which we are living. It is also of crucial methodological significance to the central area of economic thought.

We are not saying, of course, that the modern economist, so learned in the grammar of equilibrium, so ignorant of the facts of the facts of the market, is unable or unready to cope with economic change; that would be absurd. We are saying that he is well-equipped only to deal with types of change that happen to conform to a fairly rigid pattern. In most of the literature currently in fashion change is conceived as a transition from one equilibrium to another, i.e., in terms of comparative statics. There are even some economists who, having thoroughly misunderstood Cassel's idea of a “uniformly progressive economy,” cannot conceive of economic progress in any other way!4 Such smooth transition from one equilibrium (long-run or short-run) to another virtually bars not only discussion of the process in which we are interested here, but of all true economic processes. For such smooth transition will only take place where the new equilibrium position is already generally known and anticipated before it is reached. Where this is not so, a process of trial and error (Walras' “t√Ętonnements“) will start which in the end may or may not lead to a new equilibrium position. But even where it does, the new equilibrium finally reached will not be that which would have been reached immediately had everybody anticipated it at the beginning, since it will be the cumulative result of the events which took place on the “path” leading to it. Among these events changes in the distribution of wealth occupy a prominent place.

Professor Lindahl5 has recently shown to what extent Keynes's analytical model is vitiated by his apparent determination to squeeze a variety of economic forces into the Procrustean bed of short-period equilibrium analysis. Keynes, while he wished to describe the modus operandi of a number of dynamic forces, cast his model in the mold of a system of simultaneous equations, though the various forces studied by him clearly belonged to periods of different length. The lesson to be learned here is that once we allow ourselves to ignore fundamental facts about the market, such as differential knowledge, some people understanding the meaning of an event before others, and in general, the temporal pattern of events, we shall be tempted to express “immediate” effects in shor-period equilibrium terms. And all too soon we shall also allow ourselves to forget that what is of real economic interest are not the equilibria, even if they exist, which is in any case doubtful, but what happens between them. “An auxiliary makeshift employed by the logical economists as a limiting notion”6 can produce rather disastrous results when it is misemployed.

The preoccupation with equilibrium ultimately stems from a confusion between subject and object, between the mind of the observer and the minds of the actors observed. There can, of course, be no systematic science without a coherent frame of reference, but we can hardly expect to find such coherence as our frame of reference requires ready-made for us in the situations we observe. It is, on the contrary, our task to produce it by analytical effort. There are, in the social sciences, many situations which are interesting to us precisely because the human actions in them are inconsistent with each other, and in which coherence, if at all, is ultimately produced by the interplay of mind on mind. The present paper is devoted to the study of one such situation. We have endeavored to show that a social phenomenon of some importance can be understood if presented in terms of a process reflecting the interplay of mind on mind, but not otherwise. The model-builders, econometric and otherwise, naturally have to avoid such themes.

It is very much to be hoped that economists in the future will show themselves less inclined than they have been in the past to look for ready-made, but spurious, coherence, and that they will take a greater interest in the variety of ways in which the human mind in action produces coherence out of an initially incoherent situation.


[[1]]The argument presented in what follows owes a good deal to ideas first set forth by Professor Mises in “Das festangelegte Kapital,” in Grundprobleme der National√∂konomie, pp. 201–14. [English trans. in Epistemological Problems of Economics (New York: D. Van Nostrand, 1960), pp. 217–31.]

[[2]]Vom Aktienwesen, 1917.

[[3]]This definition has, of course, certain social implications. Those who accept it can hardly continue to regard entrepreneurs as a class access to which is impossible for those with no wealth of their own. Whatever degree of the “imperfection of the capital market” we choose to assume will not give us this result.

[[4]]For a most effective criticism of this kind of model building see Joan Robinson, “The Model of an Expanding Economy,” Economic Journal 62 (March 1952):42–53.

[[5]]Erik Lindahl “On Keynes' Economic System,” Economic Record 30 (May 1954): 19–32; 30 (November 1954):159–71.

[[6]]Ludwig von Mises, Human Action (New Haven: Yale University Press, 1949), p. 352.

Thursday, January 10, 2013

James Buchanan

matched in the past century. Unlike the typical mainstream economist, Jim was never just fooling around, toying with a tweaked model or a trivial, throw-away idea. To a rare degree, he kept his eyes focused on the prize of true economic understanding.

He gave me a deeper understanding of the market process than anyone else had given me. He raised many worthwhile questions that I continue to ponder. He offered me a shining example of the economist as a serious thinker, not simply an idiot savant fooling with models.

The NYTimes quotes Tyler:

Over the years since Dr. Buchanan won the Nobel, much of what he predicted has played out. Government is bigger than ever. Tax revenue has fallen far short of public programs’ needs. Public and private borrowing has become a way of life. Politicians still act in their own interests while espousing the public good, and national deficits have soared into the trillions.

…In a commentary in The New York Times in March 2011, Tyler Cowen, an economics professor at George Mason, said his colleague Dr. Buchanan had accurately forecast that deficit spending for short-term gains would evolve into “a permanent disconnect” between government outlays and revenue.

“We end up institutionalizing irresponsibility in the federal government, the largest and most central institution in our society,” Dr. Cowen wrote. “As we fail to make progress on entitlement reform with each passing year, Professor Buchanan’s essentially moral critique of deficit spending looks more prophetic.”

Writing in the Wall Street Journal our colleague Don Boudreaux also points to Jim’s work on the true burden of the debt–stop the we owe it to ourselves madness! Lars Christensen looks at one of Buchanan’s many interesting ideas, the brick standard for monetary policy. Randall Holcombe remembers his teacher. The Washington Post and Bloomberg offer useful commentaries as does political scientist Tim Groseclose.

Of course you should not ignore Buchanan’s own writings which spans more than 20 volumes, 10 of which are available online. Buchanan’s classic Politics without Romance offers a short introduction as does his Nobel lecture.

Buchanan’s Nobel lecture illustrates why, even today, many other economists don’t get Buchanan. While other economists are looking for “efficiency” and “optimality” in models Buchanan had a very different concept of welfare economics.

[Buchanan]…sought to bring all available scientific analysis to bear in helping to resolve the continuing question of social order: How can we live together in peace, prosperity, and harmony, while retaining our liberties as autonomous individuals who can, and must, create our own values?

On a personal note, I was fortunate to have Buchanan both as a teacher and as a colleague. He founded the Center for Study of Public Choice that today I direct.

Buchanan wrote not for the hour or the day but for the age and his influence will continue far into the long run.

Tuesday, January 8, 2013

The Cost Disease

The exploding cost of health care in the United States is a source of widespread alarm. Similarly, the upward spiral of college tuition fees is cause for serious concern. In this concise and illuminating book, the well-known economist William J. Baumol explores the causes of these seemingly intractable problems and offers a surprisingly simple explanation. Baumol identifies the "cost disease" as a major source of rapidly rising costs in service sectors of the economy. Once we understand that disease, he explains, effective responses become apparent.

Baumol presents his analysis with characteristic clarity, tracing the fast-rising prices of health care and education in the United States and other major industrial nations, then examining the underlying causes, which have to do with the nature of providing labor-intensive services. The news is good, Baumol reassures us, because the nature of the disease is such that society will be able to afford the rising costs.

This may be an ASET book club selection later this year. Baumol devotes some time to the issue of education in this work.

Monday, January 7, 2013

Competition in Higher Education

Competition in Higher Education:
William Deresiewicz’s long Nation article on “The Crisis In Higher Education” is kind of a mixture of smart points and bad ones, but this here at the end about compensation of top-level academic administration seems to me to be a very interesting kind of bad point: Just as we need to wrestle with the $700
Next month Arnold Kling will present an honors lecture on this topic - I wonder to what extent public education (or education in general) reflects the Cost Disease Thesis (see tomorrow's post)

Sunday, January 6, 2013

Arnold Kling

Arnold Kling will be the February 2013 Honors Speaker for the Maricopa Community College District. Here he writes:

My conclusion is not that libertarians should give up our idea of what constitutes good social philosophy. I am not saying that we should repent and henceforth worship at the altar of the state.

What I am saying is that we should not become wedded to the view that the world we want is one in which irrational group attachments have been completely eradicated from the human psyche. Yes, this capacity for group attachment is manifest in state-worship that we find troubling. But group norms are a fundamental component of human nature. We probably owe a debt of gratitude to the part of human behavior that becomes irrationally attached to groups and to group norm enforcement.

It may be that the role of libertarians is to point out that political demagogues are exploiting the tribal loyalty instincts of citizens against their better interests, as is typically the case. But it may be neither realistic nor desirable to "educate" people in order that they should lose all sense of group attachment, including attachment to the state.

Saturday, January 5, 2013

Arnold Kling - speaks Feb. 20, 2013

Arnold Kling

Competition in Education: Is it a Solution or it is a Problem?

Feb 20 2013

Arnold Kling received his Ph.D. in economics from the Massachusetts Institute of Technology in 1980. He was an economist on the staff of the Board of Governors of the Federal Reserve System from 1980-1986. He was a senior economist at Freddie Mac from 1986-1994. In 1994, he started, one of the first commercial sites on the World Wide Web. (Homefair was sold in 1999 to Kling is an adjunct scholar with the Cato Institute and a member of the Financial Markets Working Group at the Mercatus Center at George Mason University. He teaches statistics and economics at the Berman Hebrew Academy in Rockville, Maryland.

Kling is the author of five books:

Unchecked and Unbalanced: How the Discrepancy between Knowledge and Power Caused the Financial Crisis and Threatens Democracy (Rowman and Littlefield, 2010).

From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and the Lasting Triumph over Scarcity [FP2P] (with Nick Schulz, Encounter Books, 2009);

Crisis of Abundance: Rethinking How We Pay for Health Care (Cato, 2006);

Learning Economics (Xlibris, 2004);

Under the Radar: Starting Your Internet Business without Venture Capital (Perseus, 2001);

He was a contributing editor to His web site at has been cited by The New York Times and in the Journal of Economic Perspectives as being entertaining and educational on the subjects of economics and technology.

Arnold Kling blogs on EconLog along with Bryan Caplan and David Henderson.

Location: Phoenix College, Bulpitt Auditorium 1202 W Thomas Rd Phoenix, AZ See map: Google Maps

Thursday, January 3, 2013

From the Coordination Problem . . .

It is man's predicament as a fallible yet capable human chooser making decisions within an uncertain though not unimaginable world of economic possibilities that brings forth the entrepreneurial market process that leads to economic growth and development, results in the dynamic instability of governmental interventionism, and also the ideological excesses of political power brokers that resulted in death and destruction. We live in a world of imperfect human actors, interacting in the world with imperfect knowledge and within imperfect institutions. One of our primary tasks as political economists is to explore what institutions enable us to cope with those imperfections, curb delusions, and channel behavior toward peaceful and productive social cooperation; and also to identify those institutions that leave us plagued with imperfections, vulnerable to the whims of others, and unable to navigate the world without conflict and coercion.

Wednesday, January 2, 2013

FiveBooks - New Capitalism

I have written before about Five Books - an excellent source of book titles that one might never encounter.

A recent post reviewed 5 books, one of which I have read and found very useful. Paul Seabright's book is accessible and cogent and, while I am not certain it fits in the category with the other 4 books, I have bookmarked the recommendations in this post.

Anatole Kaletsky is one of the UK's leading commentators on economics. Until March 2012 he was Editor at Large at The Times, where he has written a weekly column on economics and government since joining as economics editor in 1990. In June 2012 he joins Reuters as a columnist. Kaletsky is also a co-founder of economic consulting firm GaveKal. His book Capitalism 4.0 was published in 2010

Tuesday, January 1, 2013

Top 10 Economics Charts of 2012

All 10 are enlightening, in particular:

Perpetual Motion

A snapshot of people moving in and out of the U.S. labor force. Original article.