The Filter^

Mises: 125

It's Mises' 125th anniversary today, and the Mises Institute share some obituaries. This one caught my eye:

Daily Telegraph. U.K. "Ludwig von Mises." (October 11, 1973). "With the death of Prof Ludwig von Mises yesterday, aged 92, the world's liberal economists lose their most prolific pen, and Austria loses the last lingering reminder of the intellectual pre-eminence of Vienna at the turn of the century…. As an authoritative exponent of liberal economics he has enjoyed a popularity, never foreseen, in the Asian liberal economies of Japan, Hongkong and Formosa, and a respect, never foreseen, in the Communist countries, for his exposition of the impossibility of calculation in a full socialist society…. The gentle, witty but tenaciously logical teaching of von Mises in Europe and America earned him a loyal army of auxiliary writers and pamphleteers." [My emphasis]

It's thrilling to be one of those "auxiliary writers", and I guess The Filter^ makes me a "pampleteer" to boot. But how should one celebrate such an occasion? Go buy a Mises thong...

Credit Issues

The BBC highlights that:

People in the UK are borrowing on average almost twice that of citizens in other western European countries, a report has found.

I'd like to make three points:

the "problem" in context
Times were the Left critiqued capitalism because it couldn't produce enough. Now the criticism is down to it producing too much. Whether the issue is obesity or credit we should see it in context: we're suffering from plenty, and in many parts of the world they need more. We should rejoice that we've solved the technological problem, and seek the methods (i.e.  trade) that can spread the benefits. One of the recent success stories of development economics is Microfinance - it's ironic when such marvels exist in our own countries we treat them as problems!

how the "problem" has come about
But what's the root cause of the credit "problem"? Why is there so much lending? According to The Economist:

Real interest rates in the past few years have remained lower for longer than at any other time during the past half-century.

What's their insight?

A more relevant model might be one based on the Austrian school of economics, developed in the late 19th century, when economic conditions were more akin to today's. In Austrian models the main result of excessively low interest rates is not inflation but overborrowing, an imbalance between saving and investment and a consequent misallocation of resources. That sounds like America today.

As I say, ABC is in the news. Check out Jesus Heurto De Soto's "Money, Bank Credit and Economic Cycles" for a recent treatment of the Austrian theory (buy from Amazon, download from Mises Institute.pdf) 

The bottom line is that interest rates have been kept artificially low to maintain an inflation target of about 2%. According to Austrian theory this target is bunk: mild deflation can be perfectly benign, and we're simply imflating a bubble.

question whether it's really a "problem" at all
Although there are geniune imbalances in the global economy, it's worth providing some balance to the typical response to this news.  We hear all about those who've raked up massive debt, but lets not forget the silent majority who benefit from borrowing - people like myself. Without credit card debt I wouldn't have been able do my PhD, but it goes further than funding middle-class folly - credit cards are the most widely used financing tool for SMEs (see this FT article for more) facilitating the livelihoods that underpin a nations prosperity. When talking about debt problems let's be clear: it's a minority of people misusing a vastly important and useful service.

It's obvious that banks don't have an incentive to fund bad debts, albeit ultimately it's those of us who do pay our statements that take on the burden. What are the solutions: certainly increased personal responsibility (and the use of the endless companies that wish to help - though start off at your bank); but also the technological advances that target marketing: such as price discrimination.

The central banks need to do their bit (and learn a little Rothbard) but we can - and do - mitigate their folly.

Burn the Math!

Greg Mankiw sounds surprised:

In quickly looking through the copy [of Alfred Marshall's Principles] I have on my shelf, I found supply-and-demand graphs in footnotes, but none in the main text.

It's well-known (isn't it?) that in the History of Economic Thought, the movement from classicism to neoclassicism - from Marshall to Samuelson - that narrative (words) and graphs/equations (math) "swapped". Marshall used footnotes to provide representations of the theory; Samuelson used footnotes to provide explanations for the math.

See also Art Diamond:

Take everything nonessential, and move it into footnotes.  Then collect all the footnotes into an appendix.  Finally, delete the appendix.

But...

It was typical of Schumpeter's love for theory that he rejected Marshall's view that the reader could skip the footnotes and appendixes.  If time were short, Schumpeter advised, read them and skip the text!  (p. 7; italics in original.)

Romania & Bulgaria Join the EU

As expected, The European Commission has confirmed that Romania and Bulgaria will be joining the EU in January 2007 (report here, Bloomberg here).

Clearly this is good news for these countries - and for the EU as a whole - but I'm somewhat saddened by the inevitable budgetry pressures that will result. As a common market, the EU can effortless incorporate new members. As an extended social welfare state, it can't. The biggest pressures (reform of the CAP, structural funds and migration) will be heightened by the incorporation of such large, agricultural, poor countries with a mobile labour market. Sadly Britain seems unlikely to repeat our principled and commendable response to the rest of Western Europe's renege on opening labour markets, as John Reid threatens to close our borders. I sometimes get petrol at the "Gateway to London" services off the M1, and see line after line of coaches with Polish number plates. I'd welcome Romanian and Bulgarian coaches as well, but it's a mute point given the actual plans of migrants.

Perhaps we won't be "flooded" by Romanians (as the racist tabloids make out) because perhaps we're not such a good deal after all?

When I was in Romania last summer, EU assession was understandebly a hot topic and I was surprised how many people expressed doubts about the potential gains from membership. There was a realisation that the EU represented a fantastic mirage: the preconditions were good ones, ensuring fiscal discipline, consensus for needed reforms, and an opportunistic attitude. Consequently the economy has developed (a flat tax was introduced), inward investment has increased, prosperity is increasing. The benefits of EU membership, therefore, are being accrued prior to membership.

The journey toward accession has therefore been a positive one, and further steps are needed, but at long last policy is going in the right direction. What will really change in January 2007?

If you're already a member of NATO, why not form a few regional free trade zones and turn your back on the EU club? Afterall we need them more than they need us! The only way to provide the cheap labour required for the standards of living demanded by the man on the street are through

1. Immigrants
2. Expanded borders

We can actually view these concepts not as being one-and-the-same; but alternatives. By expanding the frontiers of the common market outward investment can increase, capital can flow across borders, and external trade can compensate for domestic inflexibility. Not for all sectors, perhaps, but certainly for some.

There's a fear that the troubles with the EU - inflexible labour markets, efforts to harmonise taxation, common voices in international affairs, unsustainable social welfare commitments (etc) - will now undermine the good work done to get here. Might the EU be just a mirage? The journey is what matters, and the ultimate prize simply a curse?

Perhaps, especially when we consider the tangible benefits from membership: the subsidies, the payments, the hard cash from Brussels. Think of Liverpool, and think of Chinatown and the actual consequences of injections of funding. As is sometimes heard across Merseyside "Get off that European wall"! For those of you unsympathetic to such an unsympathetic view of how public investment can be syphoned off, here's a nice reminder of the power of interest groups: Greg Mankiw reckons it'd save the US economy $1billion to get rid of pennies: a no-brainer, right? Wrong! Alex Tabarrok points out the battle lines:

The main lobbying group if favor of the penny... is funded by the zinc industry (zinc being the main ingredient in pennies)

On the opposite side ... it's no accident that Kolbe is from Arizona the dominant producer of copper the main ingredient in... you guessed it... the nickel.

The EU project is perplexing and a frustration for us all. Sometimes moo-ving in the right direction isn't enough. Sometimes incremental steps lead us up the garden path. The BBC use a photograph (right) from Bucharest's "Cow Parade": at least now they'll be well fed.

oooh aaah...

• Regional effects of New Labour
• The Miniture Earth
• The World Economy 1820-2001
• Industry at various stages of development
• World Income Distribution (.pdf, see page 42)

7% More Pay for Drinkers

Remember The Drinker's Bonus? Yahoo! News reports a Journal of Labor Research paper by Ed Stringham and Bethany Peters which:

concluded that drinkers earn 10 to 14 percent more than teetotalers, and that men who drink socially bring home an additional seven percent in pay.

Why's that? Well according to Ed

Social drinkers are out networking, building relationships, and adding contacts to their BlackBerries that result in bigger paychecks.

The article has been mentioned on CNN, Fox, dozens of radio stations, and in more than 100 newspapers including 8 of the top 15 highest circulating newspapers in the US (LA Times, Washington Post, Chicago Tribune, and more) as well as newspapers in Australia, Canada, England, India, Italy, Germany, Netherlands, South Africa, Spain, and Turkey. On Friday it was Yahoo News third most emailed article. Today I was even on Morning Call on CNBC! Check it out: http://www.youtube.com/watch?v=rDBwom174TA

Also, see Tyler Cowen on this topic, and Tony Vallencort for a critique.

The Golden Vision

                 

The 1968 BBC drama, depicting how central Everton FC  was, in the lives of a group of Evertonians.  The play getting its title, in honour of the great Alex Young.  What's our name?  EVERTON!

Common Unknowledge in Hungary

One of the chief inputs from the use of Game Theory in economics is the concept of "common knowledge" - when all players know what the other players know. It is an important mechanism to create an equilibrium (i.e. coordination), but does it matter whether the initial premise - i.e. what the players know, is true?

Common unknowledge - a term created by Nick Schandler - refers to a case where coordination occurs but is based on a lie. Think of The Emporor's New Clothes: the villagers knew that the Emporor was naked, but acted as if he wasn't - and this still produced coordination. Think also of Timur Kuran's Public Truths, Private Lies - countervaling social pressure makes people "go along" with the status quo, whilst privately harbouring alternative beliefs. Whilst common knowledge and common unknowledge are analytically equivalent (both produce an equilibrium), it's obvious that the former is far more stable. It only takes a small child to say

He has nothing on

and the equilibrium is broken (although quickly restored to a new one, based on truth). People are currently rioting on the streets of Budapest, because the Prime Minister has admitted that his party lied to the electorate at the last election:

"We obviously lied through the past year and a half. It was perfectly clear that what we were saying was not true."

Well no shit! People tend to realise that poltiicians lie to us, but the myth that makes it a coordination point is that they pretend they don't. Everyone accepts this bargain, until BOOM a Prime Minister actually admits to it, accepting their nakedness, and we take to the streets to protest.

Aborigines Given Ownership of Perth

Tuesday's historic Federal Court granting of native title over Perth to the Noongar people of southwest Western Australia has stunned all levels of government and caused confusion and uncertainty across the country (The Nation)

I don't know enough about this case, but on the issue of forgiveness more generally, it's fitting to quote a Bruce:

"the demand for justice, if given full play, can undermine the fragile political conditions for the powerful development of a liberal constitution. The better part of wisdom is to keep the demand for corrective justice under control while channelling energy toward the construction of an enduring constitutional order"
Ackerman (1992:4)

Vote for Richard Gillespie!

Before I moved to Merseyside I supported my local non-league team - Bashley FC - following them home and away for several seasons. Pete Millard and I edited the matchday program, launched the offical website, and Pete's now club secretary. (That's me on the right larking about...happy days...)

Bashley won 5-0 in the FA Cup last weekend, and striker Richard Gillespie has been nominated for the FA's "player of the round":

The Times' Walter Gammie has nominated Bashley's 21 year old striker Richard Gillespie, allegedly known to his teammates as 'Mr Goals', after their 5-0 win over Kent League side VCD.

Gillespie scored four of the five goals for the Southern League Division One South/West side in a great demonstration of marksmanship. Gillespie has finished the last three seasons as top scorer for his club, and his four goals on Saturday takes his tally for the New Forest club to 99 goals

So please go to www.thefa.com, look for the poll on the bottom right of the page, and vote for Gillespie!