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Who, among economists, are arguing that the higher gas prices are a sign of the market *working*? Pete, are you and I the only ones?

Also, I am now hearing politicians speak of the need to create incentives for people to use public transportation. The higher gas prices of course create such incentives: the incentives to further consider one's options (incl. public transportation) *and* the incentives for public officials to argue that there is a need for political authorities to design incentives for people to use public transportation, to carpool, to produce and purchase more fuel-efficient autos, etc.

Just a little more. My brother-in-law asked me just the other day, "Dave, what do economists think of the price of gasoline?"

My reply: "It's high."

Our story is really quite boring to non-economists. It doesn't seem to say anything to them. "Supply and demand." Big deal, they think. If you bother to get into scarcity-indicating prices, coordination issues, and so on, you've lost their interest.

I saw Sachs promoting his latest book on C-SPAN a few weeks ago, to an audience packed in a bookstore. Young ladies were sitting on the floor, up-front, at his knee, starry eyed and full of smiles. He understands how to play the game. They don't need a new Thurow or Heilbroner, they have Sachs. We don't need a new Friedman or Hayek, Pete.

We need a Sachs.

And a final thing (I promise). Pete, your hope for a new Friedman (etc) is almost like someone, in the age of George Carlin, asking with sweat on his brow, "Where's the next Alan King?"

If I am right about needing a Jeff Sachs of our own, I'm afraid our traditional practices won't work. He can't be hand-picked from the powers that be. It can't be left to fifty and sixty-somethings to directly cultivate (and I don't buy this claim that 50 is the new 30!) because that kind of approach is disconnected from the "tacit and local knowledge" of the younger listeners -- such as those young ladies at Sachs's knee. The bet would have to be placed on someone who can generate the respect and attention and excitement among the twenty-somethings from across the political spectrum, and that person will not be selected based on his or her delivery of seminar papers and research reports and participatory remarks around a colloquium table with forty through seventy-something intellectuals and funders.

The traditional networking selection process is out-dated. It just ain't going to come from your approach, Pete, asking for the next Alan King!

At the risk of coming across as a nut, and also clearly breaking my promise, let me further my conjecture. An intellectual who might very well excite a Pete Boettke or a Steve Horwitz, let alone a funder, may very well not excite, or may be a total turn-off to the non-graduate-school-bound-in-economics yet impressionable and bright Katrina Hurri-Kane or Don Trepreneur.

Let me propose a radical if not crazy selection process: receive input from a randomly-selected group of, say, ten people in the 18-24 year old range. Run your Alan Kings and Shecky Greens and whoever in front of them, and receive their ratings. Yes, the same kind of process that is used for movie endings, tv commercials, and so on. Which "free market" intellectual holds *their* interest, challenges them, and so on?

The process that solicits the input of IHS or FEE students, by the way, shouldn't count -- they're not a random sample! I'm talking instead about channeling your political-strategic concerns into a marketing game... and a successful marketing game at that.

That's my two cent conjecture. Maybe it's not even worth refuting. Anyway, back to fiddling and splitting (not chopping) wood....

How about Robert Lucas?

Or Bryan Caplan?

"we should not expect politicians in a democratic system to adopt good economic policies because the costs of doing so may very well be their inability to get elected."

"we will never get out of this current economic downturn until the government gets out of the way"

"there is a need for someone to make the case for the market economy"


There seem to be inconsistencies with the logic in these three quotes above. If the system is set up so that politicians only get elected if they propose bad economic policies (that is, more government), then getting someone to make the case for the market economy will clearly not be sufficient. We need someone who can also argue for a change in the democratic system itself.

Hayek tackled the question in the third volume of his Law, Legislation and Liberty, proposing a system he sometimes called "demarchy", and went to lengths describing a "model constitution". If implemented, this proposal would slowly undermine the whole warped incentive structure politicians are forced to work under. But it seems to me few economists have taken the proposal seriously. I wrote to a few and could not find any who could give me references on a discussion of the subject. Perhaps because it seems so farfetched that it doesn't seem at all feasable. This fact should not be daunting to men who battle with ideas, though. It might take generations to see some kind of practical result, but someone should restart the debate.

Here is a quote from the book (p. 135) which seems pertinent to the discussion:

"So long as the present form of democracy persists, decent government cannot exist, even if the politicians are angels or profoundly convinced of the supreme value of personal freedom. We have no right to blame them for what they do, because it is we who, by maintaining the present instituitions, place them in a position in which they can obtain power to do any good only if they commit themselves to secure special benefits for various groups."

What's wrong with Bill Easterly? Rugged West-Virginian, taking on the vested interests to save the world. Should be a role model and inspiration for those starry-eyed girls.

Unfortunately, the truth isn't very inspiring to most people. They prefer "change" and they want it Now. Careful saving and investing of money and a dismal view regarding the prospects of the Hobbesian world outside our borders doesn't satisfy their powerlessness in the face of terrible suffering.

A boor like Sachs can impress them with fancy statistics that function as a softening veil of magic between their false hopes and brutal reality. As long as the books look complicated but the op-ed supports their view, they'll devour it.

Same with the domestic situation. People don't like to hear that the housing crisis is the fault of human stupidity, and oil prices are high because Muslims are sitting on all the oil and 1.3 Billion Chinese are buying more of it. Nor for that matter, the fact that their whole existence is basically outside of their control. Hence James Buchanan's ambivalence of participating in the market process. It makes you rich, but you relinquish control to forces beyond your reach. People think they have control, and when reality hits them and they find out they don't, they Demand Someone do Something.

Lots of ruin in a nation..

Paleo: I think we should be optimistic about the future -- and the present. Steve Horwitz has a nice webpage defending such optimism: http://myslu.stlawu.edu/~shorwitz/Good/index.htm
Oh, and I think monetary policy has more to do with oil prices than "muslims." Gheez, I remember how many Americans blamed "Arabs" for the oil crisis of the seventies. In fact, it traces back to dear old Nixon's wage a price controls. They were mostly abolished pretty quickly. But if something I read recently is correct, caps on domestic prices continued, but not on imported oil. This policy blunder increased our "dependence on foreign oil" and contributed to the oil crisis of the 70s. Can anyone confirm that interpretation? (Are you there Rob Bradley?)

Pete: In spite of your title, I didn't see much on equality in your post except the point that wealth creation is generally more important the income distribution. I certainly agree, but I'd like to make two points about equality. First, you can have a pretty good flow of transfer payments without pretending to plan the income distribution. Okun had the wonderful analogy of the leaky bucket. Transfer payments are like moving water with a leaky bucket. The leak is lost output. There is a tradeoff and I don't think there is anything in Hayek or Mises suggesting otherwise, is there? Personally, I like the welfare state, I just want better design features for transfer programs. I think that's pretty much in line with Milton Friedman, who proposed a negative income tax.

More importantly, however, we lack equality under the law in this country. The criminal justice system does not provide its protections equally to the rich and the poor. And there is good evidence of a separate racial component to this inequality as well. I'd like to see more Austrians looking at the criminal justice system from an Austrian-epistemic perspective *and* from a mechanism-design perspective. The criminal justice system is where the state-power rubber meets the civil-liberty road. We should pay attention to that. (Dan D'Amico should come in for a mention here.)


Excellent post. But then again, you're preaching the choir on this one.

But IMO, what separates Friedman from people like you at the most fundamental level was his willingness to jump into an imperfect world and offer ideas...even ideas he didn't really like compared to ones he would propose in a more aimiable world...even at the risk being merely used mainly for piece-meal rhetorical purposes (like Reagan, Thatcher) or being blamed for atrocities from practices he didn't support or prescribe (like Pinochet).

I don't mean this as an insult at all. I have a great deal of respect for your POV. But it seems to me that this proverbial stance of "arms crossed, nose in the air, eyes closed, head shaking", which is held by many economists like you, while self-preserving and safe, does not help.

Friedman spoke up and acted in a context that was far from ideal or friendly. He knew that what he said was, sadly, greatly influenced by what he had to work with and that the dynamic of "what he had to work with" could sabotage his goals before they even started. But he did it anyway.

Friedamn didn't run his toe through the water and say: "it's too cold, I'm waiting for it to warm up a bit". No, he jumped right in knowing the frigid water would hamper and distort the very ideas wanted to develop. But, he did it anyway.

Sometimes, there's no glory in being above the fray. It may make you feel better but it doesn't help anything outside of yourself.

Just my 2 cents...

With all due respect,

John

Roger Koppl: The threat of all-out war in the middle east isn't factored into the future market for oil? Norwegia vs. Saudia Arabia makes a very big difference for risk assessment. America's Faustian pact with the devil (Wahhabis) to guarantee oil supplies has fueled radical Islam. Besides, what caused what you think is the culprit, bad monetary policy? 9/11. On top of that their oil money funds radicalism world-wide. Not to mention that they try to operate as a cartel.

And oil prices somehow have very little to do with the fact that most oil is located in the Muslim world? Not to mention the backlash against the free-market this situation has created. Capitalism is equated with imperialism and western self-interest (which might actually be a correct assessment, because historically speaking capitalists protect their property from nationalization in foreign countries. Whether it's a bad thing or not is another question.)

And since when does printing money alter relative prices? Or are we living in the short-run? I guess we do need another Friedman.

Hi Paleo,

I think Congressional testimony of 20 May 2008 by Benn Steil gives support to my point of view. Check out the charts on page 4 of this:
http://hsgac.senate.gov/public/_files/052008Steil.pdf

It shows that the gold price of oil and wheat have no trend from Jan. 2000 through sometime past Jan. 2008. He says:

It is therefore reasonable to conclude not that we are a experiencing a commodities bubble, but
rather the end of what might usefully be termed a “currency bubble.”


Seems right to me. Of course I don't deny that country risk exists, but to my eyes it doesn't seem like the driver of the recent run up in crude prices. You ask "since when does printing money alter relative prices?" But Steil's graph show that the price of oil has been steady relative to wheat and gold. So it doesn't look like factors specific to oil are at work. Personally, I think we're looking at something pretty close to a classic Austrian-style business cycle and the housing crisis seems to be support for that conjecture.
Roger

Yes, OAPEC had less to do with the 1970 oil price shock than it's usually credited because: 1) the increase in US oil prices was well under way before the Arab embargo, as demand outstepped supply due to lack of investments in new extraction capacities; 2) the embargo was never fully observed, some OAPEC members cheated and exported considerable quantities of oil in the US; 3) the price of oil continued to go up even after OAPEC dropped the embargo in the beginning of 1975. Naturally, the price controls didn't help.

Thanks, Bogdan. I should have asked Paleo how 9/11 might have caused bad monetary policy. I sure don't see how that would work. Of course I wouldn't hold someone to an offhand remark made as a blog comment, so perhaps I shouldn't be raising the issue.

Picking up the ball thrown by DPrychitko to develop an idea that occurred when I was associated with a small and shortlived libertarian think tank in Sydney a couple of decades ago. The perceived problem was that most of our energy seemed to be devoted to (a) preaching and disseminating great ideas to the choir and (b) writing critiques or polemics that (1)would only impress the choir and (2) did not immediately and clearly relate to the legitimate concerns other people. For example "The Virtue of Selfishness" goes down like a lead balloon with people who really care about the poor and the weak but have never discovered how a truly free market helps the able bodied poor to get ahead.

The idea was to develop different packages of ideas to get to different types of people, stratified on various sociological criteria like age, sex, working mothers, non-working mothers, young conservatives, young radicals, etc etc. This never got past the conceptual stage but the connection with Dave's ideas is to talk to the young people and find out what they actually hear when we talk and then find out something about the assumptions and prejudices that need to be addressed (in their own terms) to get a shift in their thinking.

This needs to be done in a non-confrontational manner without trying to score debating points, impress people with our scholarship or beat people over the head with our ideas. Some of our allies are so strong in their beliefs that they often don't generate the kind of ambience where people who think differently can be persuaded to play around with ideas which at first are counter-intuitive or repulsive to them.

Incidentally our own ideas may change more or less radically in the course of this kind of discussion, so it is not a process to undertake lightly.

This is a terribly labour intensive activity so there is no way to do very much of it but you can start with the children of your friends and relations. Of course it is the kind of process that should be happening in every college tutorial class in the nation.

Rafe,

I agree. Many of the topics libertarians engage in have the wrong focus. I find it often more useful...not to mention SINCERE...on part to discuss matters and issues on economics with a modern liberal sensibility...as Nicholas Kristof does here on sweatshops:

(The link is in my blog entry)

http://theforvm.org/diary/john/a-much-belated-thank-you-nicholas-kristof-sweatshops

THAT is what resonates. This is also why I think the work of the Mercatus Center and IHS is so much more powerful than calls for individualism when human welfare is the issue.

John V,

I just want to point out that (a) I am the Director of Research at the Mercatus Center, and (b) the proud recipient of the IHS Outstanding Alumni Award. If you take those facts into account, I am not sure what you mean when you state that my approach is ineffective, yet you hold up Mercatus and IHS as ideal models. Just would like to know what you see as so different in our approaches. For example, if you read my Why Perestroika Failed (Routledge 1993) or my Collapse of Development Planning (NYU, 1994), what would you argue separates those works from what Mercatus and IHS is all about.

Also, I really do think your understanding of Milton Friendman is not quite right either. Friedman did not accept political appointment with either Nixon or even Reagan, he held his ground. When he visited the White House with George Schultz during the Nixon era of wage and price controls, President Nixon supposedly told Friedman, "Dr. Friedman, don't blame George for our current policies of wage and price controls." To which Friedman supposedly replied, "I don't Mr. President, I put that blame completely on you."

Capitalism and Freedom, and Free to Choose, are books that do not pull punches, and they just speak plainly and forcefully the truth of economic policy to those in power. Again remember Friedman's stand against the draft and his role in overturning the draft.

Friedman, as far as I know, did not compromise to make his message more palatable to those in power. He was a practical man of affairs, but he never really watered down his message to a way that would be unrecognizable to an advocate of the market economy. Yes, he argued for vouchers to fix public schooling, not the abolition of public schooling. But a classical liberal could reasonably hold that position, even if we radical libertarians disagree with them.

Pete

Sorry, Dr. Boettke,

I didn't mean to sound like I was contradicting myself. I guess in the first response, I was driven by an impression that "Austrians" don't generally involve themselves as much as I would like in the day to day economic discussions I read on the internet. I have a google reader that tracks a variety of economic blogs. And it seems that the modern liberal economists are on top of almost everything and driving the discussions while Austrian blogs seem to be removed from the day to day realities and issues and only commenting on a large general topics. It's not an iron clad and verifiable impression but it's just the sense I get that they are not as "involved".

I see constant streams of info on the weak dollar, food prices, energy prices, free trade, stagnant wages, calls for protectionism and so on and so on from liberal economists yet I see very little from the Austrian side. Yes, I understand that you and Dr. Horwitz would probably sum up those problems in a few concise and accurate sentences and principles that justly apply and leave it be but that doesn't stick in day to day discussions.

You've often said that Austrian economics needs to work on its applied side in the modern age of day to day issues (or something like that) and that this is the challenge for young Austrians. Well, I think good practice at this would come from addressing the issues and points made every day in the daily economics debates on the web and in newspapers and magazines. There are few clear and consistent voices on that front. Just a suggestion.

Yes, Cowen, Cafe Hayek and EconLog pick up some of that slack but it's not quite the same nor enough.

Now, I know that econ-blogging and editorials does not pass for strong or constructive economics discussion in your eyes and you're probably right. But at the same time, this day to day discussion is where a lot of people get their info and challenge their views.

As for Mercatus and IHS, that's policy work and generally taken in greater detail that doesn't make for light reading.

Again, I was just thinking as I went along.

BTW, I get the points on Friedman but I don't really think I was saying anything to contradict those points. I admire Friedman for rolling up his sleeves and trying to influence policy and debate the Keynesians and such of his day.

Thanks for responses,

John

John: The AEA has about 18,000 members. I think about 60% or so would consider themselves "liberal." That's something like 10,800 liberal economists vs. 100 Austrian economists. That gives a more than 100:1 ratio. Considering that ratio, I think we're doing pretty good on all fronts including the blogosphere and the newspapers. Your impression is an interesting datum for us and I think we might well consider whether we could do even more in that way.

I forgot to say the 100 Austrians is from the membership of the SDAE which hovers around 100 according to the website.

Thanks, Roger.

Again, it is just an impression....but that may say something.

I get deluged in my google reader with posts about what Krugman says on XYZ, what Thoma says, what DeLong says and so on and so on. It's topical and on the issues. It's what people read. Cowen does seem to get into the discussion sometimes but it seems like majority of the hubub is on the Center-Left dealing with the Fed and inflation and prices and all the topical issues that are directly on people's minds.

I'm no economist. I've read some "layman accessible books" on economic thought from Friedman, Hazlitt, Hayek, Robert Murphy and other libertarians. But it's hardly technical. But it does leave me with a perspective and grasp of knowledge that leaves me wondering what it's all for when the salient economic discussions on the net are almost void of any consideration for these fundamentals.

I sometimes feel like I'm walking into calculus class armed only with basic arthimetic or as if what I understand doesn't matter anymore...like we're beyond those simple concepts..but at the same time, I do see holes and leaps of faith or macro-laden opinion junk disguised as real economics . I do see that I'm not crazy or at least not as underinformed as I thought.

But especially, Roger, when I see economists advocating things and talking about the need for things that totally fly in the face of basic market economics, I do ask myself where they get all this from....or what justifies these positions beyond highly suspect theories that MAY be being misapplied. I also ask myself that when I see them speaking about social ends that involve means that are not based in sound economics.

Is it that their political biases take over and guide them or is there more to sound economics that I'm not aware of?

I wonder sometimes....

FOR EXAMPLE:

http://economistsview.typepad.com/economistsview/2008/06/fed-watch-this.html

I say to myself:

"well of course this is not good! It's so obvious as to WHY."...

but that obviousness is nowhere to be found.

and that obviousness concerns the fundamental role of the Fed, its misguided mandate, littany of human errors that can't help but HAPPEN and cause massive distortions by addressing and worrying about the wrong things at the expense of what it should be doing. And that Bernanke, no matter how he justifies his actions or explains away the pending consequences of actions, is simply playing the wrong game.

Am I just a lucky fool who's right about this for the wrong reasons...like a clock that's right twice a day?

Rafe,

I met some people from the Centre for Independent Studies a few years ago, which is based in Sydney (your city?). I got the impression that they were quite influential in changing mainstream attitudes to markets, both in Australia and New Zealand. Were they bragging?

David A

John, your comments on Fed policy seem about right to me. They are in line with Pete B.'s comments on "low hanging fruit." Lots of issues in political economy turn on the fundamentals and not on refined points of theory.

David, on the role of the Centre for Independent Studies, started over 30 years ago by Greg Lindsay who is currently President of the Mont Pelerin Society. http://www.cis.org.au/

CIS was one of the key players in the policy debate however there have been steps backwards as well as forwards during that time so it is vey hard to tell how much the mainstream has changed that could not be rapidly reversed by a charismatic populist or the bogey of climate change.

One of the stalwart campaigners was John Hyde, one of the "backbench dries" in the Liberal (conservative) party. He wrote a book on the campaign for dereguation. This is a profile of him with a link to the on line version of the book. http://www.the-rathouse.com/JohnHyde.html

The "backbench dries", economic rationalists, New Right (or whatever) did not make great progress in their own party and the greatest advancement of their aims ironically came during the early years of the Labor administration which began in 1983. With Hawke and Keating in economic reform mode (though not in the labour market) the nation had a government of national unity on economic policy for a short but invaluable period. We are still reaping the benefits of that time, though they may be frittered away by the vandalism of the small parties and the resurgence of Big Government aspirations in the major parties.

The link to the book may not be working, there is a network problem here at present and I can't check.

100 to 1 sounds about right although the odds improve when you count the fellow travellers in policy who disagree on theoretical fundamentals. And people used to wonder why the Austrians did so little field research compared with everyone else. (Can someone calcualate the ratio circa 1970?)

Research output has increased dramatically because the Austrians have more discretionary time (time available on top of finishing doctoral studies, teaching, scholarship, establishing families and committee work). It is like the increase in discretionary spending when you have to spend nine dollars a week on essentials and your salary increases from ten to eleven dollars a week. Income up by by 10%, discretionary spending up 100%.

There are also more Austrians with synergies from teamwork. And they get better with age, like good wine, while the other lot deteriorate from repeating the same refuted arguments over and over. The dead forest of the left! Cut off at the base but still upright due to weight of numbers and intertwined branches.

Rafe,

I did actually attend one of Lindsay's speeches in 1999. It was a good speech, but I think that we have to admit that he is not very "charismatic."

Actually, climate change may be for real (I don't know enough to have an informed opinion), so the way forward might be market-compatible reforms rather than denying what could be a real problem.

As I see it, the problem with conservative parties is that they're inherently pro-business and anti-change rather than pro-market and pro-change. The problem with liberals/social democrats is that they are pro-labor and anti-change (although less anti-change than conservatives). My hope is that cosmopolitnism, which is on the rise among younger and more educated voters in the West, can be grafted onto a message that is also pro-market. Sort of: say no to both parts of national (right) socialism (left).

I continue to find this blog really interesting and educational as to your perspectives. One thing that strikes me in this discussion is that one governmental policy that maybe should be criticized as setting up the current economic mess is the construction of the interstate highway system. Often used -- even by myself in the past -- as an example of how government can do things to help the economy that aren't likely to be done by the free market, it now appears that this has set us up to be on the verge of economic collapse as oil production stops growing just as world demand increases. I doubt oil prices are high for any reason other than supply and demand. So my question to libertarians: if it is true that society may face a major economic downturn or collapse due to high oil prices, and if we need to find an alternative source of energy to maintain the economy, is there no place for government to aid in that venture? I recognize that one answer could be removing regulations on oil exploration and production, as well as nuclear and other energy sources, in the US, but that itself won't solve the problem.

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