The Austrian Economists

The Paris School of Economics: Will it be Say or Walras?

The world doesn’t know it yet, but a new place where economics is taught has just opened in Paris (see here). It is aiming at competing against the “hegemony” of the English-speaking world in economics; both at the academic level and at the policy level. The reasoning is simple: the best places to study economics are in the UK (e.g. LSE, Ox-Bridge) and in the US (e.g. Harvard, Chicago, GMU). With a few exceptions (e.g. the Max Plank Institute), Europe doesn’t have much to offer in this field; the best research is often done outside of Europe.

In reaction to this state of affairs, the French government decided to open the Paris School of Economics (PSE). Should we have reasons to rejoice about this new school? Well, while it is hard to foretell the future (and a happy surprise is always possible), there are good reasons to believe that PSE is going to be another big French failure in education.

• The main reason why graduate education in economics is a disaster in France is because of the state control of universities (see here an article on the subject in The Economist). Exceptions to this rule include the University of Dauphine with Pascal Salin and a few other pockets with good people (e.g., the Universities of Toulouse and Aix-en-Provence, Science Po Paris) but by and large the teaching of economics is terrible, which explains why France is the only place where economists are more to the left than the general population.
• In order to avoid the problem of state control, PSE was established as a private foundation with a public-private arrangement where funds are drawn from various sources. Initially at least, the government will be providing most of the funding. This set-up might make it difficult for anyone to be ultimately responsible for the way things are being done. Interestingly, the Paris local government is listed as a private partner (see here).
• PSE is partnering with a bunch of “grandes écoles” many of which (e.g. l’Ecole Polytechnique) are engineering schools. They are places where economics is often done in the worst possible way. An instance of this is Nobel laureate Maurice Allais who taught at l’Ecole des Mines in Paris. He was such an engineer that even after 60 years of work in economics, he still couldn’t understand that trade creates value for all the parties involved. Let’s not forget that Léon Walras was a student at l’Ecole des Mines in Paris. (For an interesting discussion of the influence of engineering in the field of social science in France, see Friedrich Hayek’s The Counter-Revolution of Science.)
• The director of the school is Thomas Piketty who studied at l’Ecole Normale Supérieure and at LSE. He is now famous for his work on income distribution and taxation (along with Emmanuel Saez who now teaches at Berkeley). While a genius of sort (he started teaching at MIT at the age of 23), his work on the effect of marginal income taxation on the supply of labor is strange to say the least, and it has led to very bad policy propositions that basically amount to stifling entrepreneurial incentives. No wonder why he is a darling of the French Socialist Party.
• Last but not least, among PSE’s fairy godmothers are Joseph Stiglitz, Olivier Blanchard, François Bourguignon, and Jim Mirrlees. I believe Gary Becker, James Buchanan, Vernon Smith, and William Easterly have not been contacted.

So it is hard to see how this new school could be turning out anything interesting. It is unlikely that good economics will come out of PSE, let alone good policy proposals. In all likelihood PSE will fuel the statist mentality common among engineers that have attended top engineering schools in France. Those who long for the revival of the French classical school of economics and the new Jean-Baptiste Say will have to wait. For now, it is more likely that the ghost of Léon Walras will be parading in the streets of Paris, an honor that he couldn’t even receive when he was alive. (Although to be fair to Walras, his economics was worse than his policy views.)

Why do actors think it is ok to be so publically political?

I am watching the Oscar's on TV.  Al Gore was featured for his "great" work on fighting global warming.  And the Oscar's proudly announced that all of their planning was "green".  What????

I thought this was about honoring movies and the craft of acting.  But it is amazing how freely actors and directors share with us their political views in settings such as the Oscar's.  As far as I know, reading lines from a script, or even writing a script, doesn't instill any special knowledge on issues of public policy.  So why do they feel so comfortable telling us their political opinions?  The truth content of those opinions is not what I am concerned about, it is the comfort level that they feel in expressing views of public policy without any obvious background understanding on the issue at hand.

Publish or Perish?

As someone who has published a lot of articles from the time I was in graduate school I have a perverse fascination with the business of publishing in economic journals, citation patterns of articles, and critiques of the entire process.  See I was fortunate to teach at NYU from 1990-1998 and during that time I won the College of Arts & Sciences Teaching Award and also published 2 books, edited 4 books, and published over 50 articles in journals and books.  I absolutely loved teaching at NYU and working with Israel Kirzner and Mario Rizzo.  The students were great, the city was great, and the discussions over Austrian economics with Kirzner, Rizzo, Salerno, Butos, Koppl, Ikeda, Choi, Sautet and later David Harper were phenomenal.  But I proved the old academic saying of publish or perish wrong because I published and perished at the tenure and promotion stage.

The reason was straightforward.  I might have published, but none in the top tier journals that mattered for the T&P committee at NYU.  My best papers at the time were in journals like Public Choice, Journal of Economic Perspectives and Eastern Economic Journal.  Even if my papers received citations and some professional awards, the papers were not published in the  AER or JPE and I couldn't argue with that observation.  NYU made clear the T&P standards on the day I received the keys to my office in 1990, and that in 1997 there would be a high probability that I would need to turn in those office keys.  So I have no animosity toward NYU, nor to the high standards the department holds for its junior faculty (during my 8 years only 1 junior faculty member received tenure).*

But I have always looked for arguments and evidence which might raise some doubts on the standard that says that only publication in top tier journals can be interpreted as contributions to scientific knowledge.  We all know of cases where the top journals passed on major papers, e.g., Tullock's original paper on rent-seeking, and we know too well of the number of papers that appear in the AER that don't add to our knowledge in the least bit.  So I was thrilled when Mario Rizzo sent me this paper  (Download Prestigeous_Scholarly_Journals.pdf) today by Andrew Oswald  from Economica  (February 2007).  Oswald concludes that  it is dangerous to look at the prestige of the journal rather than the content of the article when making scholarly assessments of articles.  The publication process he discovers routinely pushes high quality articles (as measured by life-time citations) into lower tier journals, and lower quality articles into higher ranked journals.

So I will continue to publish articles and books (my rate of output has actually increased on articles since coming to GMU and my book output has declined slightly -- this is my 9th year at GMU and I have published 2 books, edited 3 multi-volume book collections, and published 75 articles, and my placement is in higher tier outlets) because I enjoy the learning process associated with research and writing, and I hope to track truth and communicate that truth to my peers.  The publishing process of peer review has its quirks, but it is for the most part helpful.   But what it doesn't do, is guarantee that one can look at the prestige of the journal as an accurate proxy of the quality of the article you are about to read.  That you have to do yourself --- and so should T&P committees.

* I tell my students that there are two interpretations of standards which young scholars within the Austrian tradition have to get used to --- (1) the senior faculty tell you that the standard of publication is a standard that they themselves could never live up to, and (2) since they don't measure up to the top tier journal standard they publish in the same journals as you do, but since they are trying to be in the top tier journals their articles look like the articles in the top journals and are on similar topics than what would be in the top journals, so they discount your articles in the same journals as their articles because your articles don't look like the articles in the mainstream top journals and they don't address the same topics as in the mainstream top journals.  The second bias is the more difficult one to deal with, but you just have to keep at it and publishing.  If you are in JEBO and they are in JEBO, it is a JEBO hit even if your paper is of a philosophical nature.

The Purity and Emotion of HS sports

Robert Frank has been arguing for many years that relative competition can be as excited to the fan as absolute levels of competitive skill.  When I first heard this argument in the 1980s, I thought it was not quite right.  Overtime, however, I have become more satisfied with Frank's argument as reflected in my own assessment of entertainment value.

Over the past 2 weeks I have been watching the HS playoffs in Northern VA.  I have seen 3 games all decided by last second plays.  At some objective level of talent, the NBA and NCAA would provide a high level of game.  But during these last weeks of the HS season many of the players are playing organized basketball potentially for the last time and the passions run deep.  These games provide great drama and the skill level is sufficiently high enough that the games reflect the beauty of the sport (its athleticism, its geometry, and its strategies).

There is a limit to Frank's argument.  You wouldn't find a tennis match played by two novice players fun to watch no matter how evenly matched they were.  In that case, none of the beauty of the sport would be conveyed.  On the other hand, certain NBA games are dreadful to watch (I'd actually list the NBA All-Star game among these).  The athleticism is there, but the passion is often absent.  So there must be some trade-off that must be balanced between the competence of play, and the passion of play that makes Frank's thesis come to life.  Passionless competence does not work and neither does incompetent but passion performance.

BTW, the HS where I work as an assistant coach (at the Freshman level) won 2 of the last second games, but lost 1 on a shot at the buzzer.  The team advanced tonight with a 1 points win and will player tomorrow night for the opportunity to play in the Regional semi-finals which will actually be played at GMU's Patriot Center.  Go RAMS!

Congratulations to Bryan Caplan and Ed Stringham

For winning the 2006 Templeton Enterprise Award, First Prize ($25k), for their paper “Mises, Bastiat, Public Opinion, and Public Choice: What's Wrong With Democracy?” (see some comments from Bryan here). Ed is a former student of Bryan Caplan and Peter Boettke. He’s a fast rising star in the world of economics. It is great to see GMU people winning the top spots. Congratulations to both of them from Pete, Pete, Chris, and I. (And please note the words of Bryan in his post: “I love Mises”... :)

When Global Cooling Was Upon Us…

While I don’t think Austrian economics has much to say about climate change as such (although it may help us find policy responses), I’ve always wondered to what extent people discussed global cooling in the 1970s. A friend of mine recently sent me a copy of a Newsweek article published more than 30 years ago on April 28, 1975. It’s an interesting read (click on the image).

Then, as now, there was more and more evidence of a clear trend: “The evidence in support of these predictions [of global cooling] has now begun to accumulate so massively that meteorologists are hard-pressed to keep up with it.”

Among the evidence were severe weather patterns: “Last April, in the most devastating outbreaks of tornadoes ever recorded, 148 twisters killed more than 300 people and caused half a billion dollars worth of damage in thirteen US states… To scientists, these seemingly disparate incidents represent the advance signs of fundamental changes in the world’s weather.”

All this indicated to some that the cooling was “a reversion to ‘the little ice age’ conditions that brought bitter winters in much of Europe and northern American between 1600 and 1900.” In other words, the risk of global cooling was becoming real…

The main difference between now and then is to be found in the causes of climate change. In the 1970s, no one seemed to think that human beings were responsible for global cooling. Thus “melting the artic ice cap by covering it with black soot” didn’t seem to be a good idea that political leaders would embrace. Nowadays more and more people think that humans are responsible for climate change. Therefore it is hard to find a politician who doesn’t want to do something about it, and this includes for instance banning “unnecessary” air travel, street lighting for some part of the night, and of course… cars.

MUST READ!

Brian Doherty's Radicals for Capitalism: A Freewheeling History of the Modern Libertarian Movement (New York: Public Affairs, 2007).  Doherty is able to tell a story that is both honest and inspiring.  Best book on the libertarian movement since It Usually Begins with Ayn Rand, but Doherty has produced a much more comprehensive, subtle and intellectually sophicated treatment of the issues, ideas, institutions and personalities while capturing the humor, irony, tragedy, passion, and hope of the story of the modern libertarian movement.  It is not every book that can make you laugh, cry, and dream of possibilities at the same time. Get your copy today and spend the weekend reading.

Congratulations to Brian -- this was a labor of love for a decade and the outcome is brilliant.

Changing Institutions and Changing Culture

2006 Nobel Prize winner in Economics Ned Phelps continues to publish insightful essays for a wide audience on entrepreneurial dynamism and economic growth.

Montenegro and the Birth of the First Mediterranean Tiger

Maja Drakic, Kyle McKenzie and I have just published “Montenegro: The Challenges of a Newborn State” in the Mercatus Policy Series. This is the second Country Brief published by the Mercatus Center.

Montenegro is one of the most interesting countries in the world at the moment. It is a very exciting place, full of promises, and it’s fast changing. After its independence in May 2006, the country is now at a crossroads. It could show the world that good policy and good politics can cohabit together by continuing to reform its institutional environment to become a successful economy. It could also stifle the reform process that was started in the late 1990s and let internal quarrels dominate the political scene.

But Montenegro is full of young people who are motivated to move on, put communism behind them, and start businesses and all sorts of ventures. Our co-author, Maja Drakic, is one of these young, super talented, and energetic people. She is a gifted economist who is willing to put her life on the line to get things going, and she understands deeply what needs to be done in her country to help it succeed. It was such a great opportunity to work with her.

Montenegro can learn from other countries’ experiences. Estonia shows that following liberal reforms can have a significant positive impact on economic growth; and the New Zealand case provides an instructive example of governmental discipline for a small and transitioning country.

Also, whether Montenegro chooses to join the EU will be crucial for its future and the future of the Balkan region. While the EU can be an attractive option, it is not clear to us that it is the best route to follow. In any case, keep your eyes open on little Montenegro, as we may see in the next decade the rise of the first Mediterranean tiger.

Currency Competition in Germany

If you think the Euro has an absolute monopoly everywhere in the EU where it is legal tender, think twice. As an article in The Telegraph recently reported, parallel currencies have sprung up all over Germany (and perhaps in other countries in the EU—does any one know?). The Chiemgauer, which is used in Bavaria, is one of these currencies. It has an exchange rate of 1:1 against the Euro but a rate of 2 pc per quarter is charged by the issuing body (which has already found a way to reap the seigneurage profits from its currency). I find two things puzzling:

• In spite of the cost of using the Chiemgauer instead of the Euro (which is freely available to everyone and of good quality), more and more people use the parallel currency. The Chiemgauer didn’t emerge, as Hayek would have liked to see it in the 1970s, because of the bad quality of the money in circulation (see for instance here and here).
• What’s more is that article 35 of the Bundesbank's founding law forbids the circulation of “quasi-currencies,” but “the experiments are being treated as a harmless eccentricity” says the article. So some currency competition, while illegal in Germany, is tolerated.

An explanation is that these currencies reflect a strong sense of nationalism, or even regionalism. The Chiemgauer is named after its region in Bavaria: Chiemgau. Accepting the Chiemgauer is an act of defiance vis-à-vis the European authorities (and perhaps vis-à-vis ideas such as global capitalism). Moreover, because losing the mighty D-Mark was not a pleasant experience for the Germans (and for good reasons), the central bank itself is willing to tolerate what could appear as a threat to the Euro (see the report from the Bundesbank on the subject).

At the end of the day, all this fuels the idea that currency competition is a viable alternative to currency monopoly (note the quasi-entrepreneurial origin of the Chiemgauer). What would be the next step for the Chiemgauer to become a real threat to the Euro? Paying local taxes in Chiemgauers perhaps…