Paul Krugman's op-ed in yesterday's NY Times is an interesting mix of ideology and philosophy fallacies. He is writing about the jobs report from Friday, noting that we finally have a good report. Maybe we have recovery at last. It still isn't great and the stimulus package from early in the Obama Administration was not enough, as he repeatedly argued, but finally we get good news. Also the report refutes critics who said that the slow economic recovery was due to regulations and new programs like Obamacare. Since Obamacare is in place and we now get the good news, clearly it didn't have a negative effect. Here is the fallacy where because one thing precedes another there is a relationship among them.
More than this, Krugman never considers the possibility that the economy's self-correcting tendency eventually would generate recovery. The last recession was particularly difficult and the buffers people have were depleted in some cases. The drop in housing prices impacted many households. Further, we had over built residential construction in the run up to the recession, so time would have to pass before a real recovery in housing could take place. The improving economy has little to do with government activist policies and much to do with the natural tendencies in a market economy.
One more related note. I saw a clip of Pres. Obama this morning talking about all the jobs he has created over the last 50+ months. I don't care whether a Republican or Democratic president uses such language--it is wrong. Presidents don't create jobs. What a president along with Congress can do is create an environment in which people and businesses can flourish. But the only jobs they create are government jobs.
Showing posts with label market economy. Show all posts
Showing posts with label market economy. Show all posts
Tuesday, December 9, 2014
Saturday, December 26, 2009
On Floyd Norris' Book Selections
In the business section of the New York Times on Christmas Day, Floyd Norris offered a short list of the best books in 2009. The list contains six books:
--Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World.
--Robert J. Barbera, The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our Economic Future.
--Johan Cassidy, How Markets Fail: The Logic of Economic Calamities
--Justin Fox, The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street.
--Frank Portnoy, The Match King: Ivan Krueger, The Financial Genius Behind a Century of Wall Street Scandals.
--T.J. Stiles, The First Tycoon: The Epic Life of Cornelius Vanderbilt.
(Note that all six titles of colons and subtitles.)
I have not read the last two books and am not interested in them as far as the recent recession and financial crisis is concerned. Ahamed's book is fascinating, describing the relationahsips among the key central bankers in the years leading up to the Great Depression. I recently finished reading The Myth of the Rational Market and am ready to read How Markets Fail. The book by Fox focuses on the idea of efficient markets in finance. It is good in that it describes the theory relatively well, and presents some interesting anecdotes about the famous economists and finance professors who developed and tested the theories. But, Fox rejects efficient markets, and is much more favorable to behavioral finance. For all the labors he goes through, his bottom line solution is, "It leaves us with a need to find ways to temper speculative excess while acknowledging that we won't necessariyl be able to distinguish speculative excess from an entirely sustainable boom." (p. 319). Very helpful. With that we should be able to have a bright and riskless future.
In skimming through the introduction to the book, How Markets Fail, the topic is broader than the stock market, but looks at people like Hayek, Friedman, and others who advocated free marekts as the best way to organize economic activity. Cassidy also discusses behavior economics, but seeks to offer a broader critique that he calls reality-based economics. He criticizes the Fed for not trying to pop bubbles earlier.
This last point is interesting because it is a topic the members of the Open Market Committee had discussed. It is also a topic in Lords of Finance. Benjamin Strong, who was President of the New York Federal Reserve Bank until is death shortly before the stock market crash, believed there was a bubble but that the means that would be used to pop it could cause a big crash and a depression. After his death, the key decision makers in the Fed tried to pop the bubble, and we had a big crash and a severe recession. No one knows what a concerted effort to pop the housing or stock market bubbles in 2005 or 2006 would have brought about. Perhaps a less severe recession, and perhaps just as severe a recession only sooner.
I also have not read The Cost of Capitalism, but Norris describes it as an attempt to exlain the importance of Hyman Minsky and to demolish neoclassical economics. I have recently read Minsky's, Stabilizing an Unstable Economy (no subtitle). I found Minsky to be difficult to read--not because the ideas or writing was difficult but because I found so much of it to be nonsense. He described the period from 1946 to 1966 as one in which the U.S. had a stable economic and financial system, and that it has become more unstable since then. The reason for the increasing instability is financial innovation. In the end, he calls for a much larger role for government to keep the system more stable. I suspect that Minsky would have argued that he paid more attention to historical realities than traditional economists. I am not sure that is true though.
Many people around my age (baby boomers) recall the time Minsky said was stable in nostagic terms. The U.S. economy was strong and American firms dominated the world's economy. This was the time period when things were normal. But this is false; it was a time of abnormality. World War II left Europe and Japan in shambles. It took time for these economies to recover and rebuild. It took time before they could compete with American business. The world economy became more normal in the sixties.
There is another historical dimension glossed over by Minsky--the actions the government was taking. Lyndon Johnson won the presidency with a huge mandate and a Democratic Congress. He pushed for more government involvement in the economy through things like Medicare and the war on poverty. Meanwhile, we also had an actual war in Vietnam than picked up steam. The resulting pressure on prices led to the Fed mostly accommodating the fiscal policy, but sometimes trying to reduce inflation. The end result was often a stop-start monetary policy that saw inflation and unemployment increasing. The continued conflicts in the Middle East and the new-found power of OPEC led to large increases in oil prices. U.S. labor markets experienced a huge influx of young workers as baby-boomers entered in large numbers, and as women began seeking long-term careers rather than jobs until marriage and children. Minsky makes no reference to any of these changes in the U.S. that surely had repurcussions on the stability of the economy.
So, I must disagree about the greatness of several of the books selected by Norris. (I'll offer my own list in a later post). But I would like to finish the lengthy post with one other observation. The Federal Reserve was created in 1914 after the turmoil of the Panic of 1907. The Fed was supposed to make such panics a thing of the past. Yet, twenty-five years later we were in the worst depression the country ever experienced. Many economists blame the Fed for the severity and length of the depression. If people followed the pattern of many books today--the recession we just had shows the bankruptcy of economics and of markets. One could have concluded with better justification for the argument in 1930 that the Fed failed so miserably that it should have been disbanded.
--Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World.
--Robert J. Barbera, The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our Economic Future.
--Johan Cassidy, How Markets Fail: The Logic of Economic Calamities
--Justin Fox, The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street.
--Frank Portnoy, The Match King: Ivan Krueger, The Financial Genius Behind a Century of Wall Street Scandals.
--T.J. Stiles, The First Tycoon: The Epic Life of Cornelius Vanderbilt.
(Note that all six titles of colons and subtitles.)
I have not read the last two books and am not interested in them as far as the recent recession and financial crisis is concerned. Ahamed's book is fascinating, describing the relationahsips among the key central bankers in the years leading up to the Great Depression. I recently finished reading The Myth of the Rational Market and am ready to read How Markets Fail. The book by Fox focuses on the idea of efficient markets in finance. It is good in that it describes the theory relatively well, and presents some interesting anecdotes about the famous economists and finance professors who developed and tested the theories. But, Fox rejects efficient markets, and is much more favorable to behavioral finance. For all the labors he goes through, his bottom line solution is, "It leaves us with a need to find ways to temper speculative excess while acknowledging that we won't necessariyl be able to distinguish speculative excess from an entirely sustainable boom." (p. 319). Very helpful. With that we should be able to have a bright and riskless future.
In skimming through the introduction to the book, How Markets Fail, the topic is broader than the stock market, but looks at people like Hayek, Friedman, and others who advocated free marekts as the best way to organize economic activity. Cassidy also discusses behavior economics, but seeks to offer a broader critique that he calls reality-based economics. He criticizes the Fed for not trying to pop bubbles earlier.
This last point is interesting because it is a topic the members of the Open Market Committee had discussed. It is also a topic in Lords of Finance. Benjamin Strong, who was President of the New York Federal Reserve Bank until is death shortly before the stock market crash, believed there was a bubble but that the means that would be used to pop it could cause a big crash and a depression. After his death, the key decision makers in the Fed tried to pop the bubble, and we had a big crash and a severe recession. No one knows what a concerted effort to pop the housing or stock market bubbles in 2005 or 2006 would have brought about. Perhaps a less severe recession, and perhaps just as severe a recession only sooner.
I also have not read The Cost of Capitalism, but Norris describes it as an attempt to exlain the importance of Hyman Minsky and to demolish neoclassical economics. I have recently read Minsky's, Stabilizing an Unstable Economy (no subtitle). I found Minsky to be difficult to read--not because the ideas or writing was difficult but because I found so much of it to be nonsense. He described the period from 1946 to 1966 as one in which the U.S. had a stable economic and financial system, and that it has become more unstable since then. The reason for the increasing instability is financial innovation. In the end, he calls for a much larger role for government to keep the system more stable. I suspect that Minsky would have argued that he paid more attention to historical realities than traditional economists. I am not sure that is true though.
Many people around my age (baby boomers) recall the time Minsky said was stable in nostagic terms. The U.S. economy was strong and American firms dominated the world's economy. This was the time period when things were normal. But this is false; it was a time of abnormality. World War II left Europe and Japan in shambles. It took time for these economies to recover and rebuild. It took time before they could compete with American business. The world economy became more normal in the sixties.
There is another historical dimension glossed over by Minsky--the actions the government was taking. Lyndon Johnson won the presidency with a huge mandate and a Democratic Congress. He pushed for more government involvement in the economy through things like Medicare and the war on poverty. Meanwhile, we also had an actual war in Vietnam than picked up steam. The resulting pressure on prices led to the Fed mostly accommodating the fiscal policy, but sometimes trying to reduce inflation. The end result was often a stop-start monetary policy that saw inflation and unemployment increasing. The continued conflicts in the Middle East and the new-found power of OPEC led to large increases in oil prices. U.S. labor markets experienced a huge influx of young workers as baby-boomers entered in large numbers, and as women began seeking long-term careers rather than jobs until marriage and children. Minsky makes no reference to any of these changes in the U.S. that surely had repurcussions on the stability of the economy.
So, I must disagree about the greatness of several of the books selected by Norris. (I'll offer my own list in a later post). But I would like to finish the lengthy post with one other observation. The Federal Reserve was created in 1914 after the turmoil of the Panic of 1907. The Fed was supposed to make such panics a thing of the past. Yet, twenty-five years later we were in the worst depression the country ever experienced. Many economists blame the Fed for the severity and length of the depression. If people followed the pattern of many books today--the recession we just had shows the bankruptcy of economics and of markets. One could have concluded with better justification for the argument in 1930 that the Fed failed so miserably that it should have been disbanded.
Tuesday, April 21, 2009
Thoughts on the Economic Crisis, II
In my previous post, I concluded that given the complexity of the problem associated with the high degree of specialization of labor that prevails today, one might expect chaos to rule. Yet, it does not. In fact, when the economic environment becomes relatively more uncertain and chaotic, it is called a crisis.
Anyone who has had a basic economics course can recognize that we do not have persistent chaos because the market system functions well most of the time. The prices of goods reflect relative scarcities of goods and services. If people want more pencils than they had previously, the price of pencils increases indicating that pencils are now relatively more scarce. The higher price is a signal to pencil producers to find additional resources and produce more pencils. By doing so, their profits increase. The higher profits, if large enough and sustained enough, may even induce an entrepreneur to enter the industry and begin production of pencils. A natural disaster such as a hurricane that destroys homes and businesses creates a need for resources to be reallocated so that the area that was destroyed can be rebuilt. Again, price changes can provide the signals needed to induce people in other parts of the country to reduce consumption of materials and to induce building supply companies to increase production of lumber, shingles, and so on.
The term "invisible hand" is used to represent the process by which markets operate in an orderly manner. Another term sometimes used to describe markets and some other systems is spontaneous order. That is, order is arrived at spontaneously and not as the result of deliberate and planned actions of a group of people. The order achieved evolves over time through the development and evolution of institutions such as contracts, firms, non-profit organizations, co-ops, courts, government agencies, and so on.
But what about times of economic crisis? The market system would seem to take care of equilibrating quantities of demand and supply in most markets for goods and services. Price changes that signal changes in relative scarcity provide the correct information and signal. A natural disaster--hurricane, drought--can cause a problem for awhile, but the system should adjust over time. So, crises can be related to supply shocks to the economy. The bigger the shock the bigger the problem. Yet, if we just look at the real economy, the markets should correct themselves given some time. So, what else is needed to have a serious economic crisis?
Money is a complicating factor. The price signals mentioned above refer to "real prices" or to "relative prices." If the price of lumber increases, we mean to say that the price of lumber increases relative to the prices of other goods. But if there is money in the economy, then it is possible to have price inflation or deflation. If the inflation is anticiapted and if all prices go up by the same percentage, inflation should not add to the problem. However, that is not the way inflation works. Instead, some prices go up by more than others and the price changes come at different times and with different frequencies. Now if the nominal price of lumber increases 5 percent, it could be associated with a real price increase of 5 percent, or more than 5 percent or less than 5 percent. In fact, it could actually be a price decrease in real terms if all other prices are going up by more than 5 percent. The signal used in a market economy to indicate changes in relative scarcities is less informative in the case of inflation. People are more likely to make incorrect decisions because they interpret a 5 percent increase in the price of lumber as indicating that lumber is now relatively more scarce and should be economized more, when in actual fact it may be relatively less scarce. The more variable the inflation rate the more difficult it is for people to know what is going on in the marketplace.
We see then that an economic crisis can be related to incorrect monetary policy. This is not the end of the story though. We still need to consider the effect of time on the stability of a market economy, and this will be the topic of my next post.
Anyone who has had a basic economics course can recognize that we do not have persistent chaos because the market system functions well most of the time. The prices of goods reflect relative scarcities of goods and services. If people want more pencils than they had previously, the price of pencils increases indicating that pencils are now relatively more scarce. The higher price is a signal to pencil producers to find additional resources and produce more pencils. By doing so, their profits increase. The higher profits, if large enough and sustained enough, may even induce an entrepreneur to enter the industry and begin production of pencils. A natural disaster such as a hurricane that destroys homes and businesses creates a need for resources to be reallocated so that the area that was destroyed can be rebuilt. Again, price changes can provide the signals needed to induce people in other parts of the country to reduce consumption of materials and to induce building supply companies to increase production of lumber, shingles, and so on.
The term "invisible hand" is used to represent the process by which markets operate in an orderly manner. Another term sometimes used to describe markets and some other systems is spontaneous order. That is, order is arrived at spontaneously and not as the result of deliberate and planned actions of a group of people. The order achieved evolves over time through the development and evolution of institutions such as contracts, firms, non-profit organizations, co-ops, courts, government agencies, and so on.
But what about times of economic crisis? The market system would seem to take care of equilibrating quantities of demand and supply in most markets for goods and services. Price changes that signal changes in relative scarcity provide the correct information and signal. A natural disaster--hurricane, drought--can cause a problem for awhile, but the system should adjust over time. So, crises can be related to supply shocks to the economy. The bigger the shock the bigger the problem. Yet, if we just look at the real economy, the markets should correct themselves given some time. So, what else is needed to have a serious economic crisis?
Money is a complicating factor. The price signals mentioned above refer to "real prices" or to "relative prices." If the price of lumber increases, we mean to say that the price of lumber increases relative to the prices of other goods. But if there is money in the economy, then it is possible to have price inflation or deflation. If the inflation is anticiapted and if all prices go up by the same percentage, inflation should not add to the problem. However, that is not the way inflation works. Instead, some prices go up by more than others and the price changes come at different times and with different frequencies. Now if the nominal price of lumber increases 5 percent, it could be associated with a real price increase of 5 percent, or more than 5 percent or less than 5 percent. In fact, it could actually be a price decrease in real terms if all other prices are going up by more than 5 percent. The signal used in a market economy to indicate changes in relative scarcities is less informative in the case of inflation. People are more likely to make incorrect decisions because they interpret a 5 percent increase in the price of lumber as indicating that lumber is now relatively more scarce and should be economized more, when in actual fact it may be relatively less scarce. The more variable the inflation rate the more difficult it is for people to know what is going on in the marketplace.
We see then that an economic crisis can be related to incorrect monetary policy. This is not the end of the story though. We still need to consider the effect of time on the stability of a market economy, and this will be the topic of my next post.
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