Tu Ne Cede Malis

theeconomist:

The third great wave: The first two industrial revolutions inflicted plenty of pain but ultimately benefited everyone. The digital one may prove far more divisive

theeconomist:

The third great wave: The first two industrial revolutions inflicted plenty of pain but ultimately benefited everyone. The digital one may prove far more divisive

This post was reblogged from The Economist.

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hipsterlibertarian:

The rest of the world is increasingly uninterested in joining America for war in Iraq.

hipsterlibertarian:

The rest of the world is increasingly uninterested in joining America for war in Iraq.

This post was reblogged from The Hipster Libertarian.

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I wish there were a law you could punish them with…

RFK, Jr, referring to climate change skeptics and those skeptical of his policy “solutions” to climate change.

Good to see that left liberals support removing freedom of speech via legislation if someone says or thinks something they don’t approve of. Thankfully, even people on the left are starting to see the problems of climate change activism sans policy nuance or analysis. This is primarily the equivocation of climate change denial with disagreement of the efficacy of policies to remedy it.

Dr. Steven Koonin, former Undersecretary for Science in the Energy Department for President Obama, argues clearly that the disagreement isn’t over whether climate change is happening (it is) or whether humans are primary drivers of it (they are), but “the crucial, unsettled scientific question for policy is, “How will the climate change over the next century under both natural and human influences?” Answers to that question at the global and regional levels, as well as to equally complex questions of how ecosystems and human activities will be affected, should inform our choices about energy and infrastructure.”

The other questions after this are social science questions in economics and public policy, not climatology. 

The ending of Koonin’s article deserves to be cited in full:

"Individuals and countries can legitimately disagree about these matters, so the discussion should not be about "believing" or "denying" the science. Despite the statements of numerous scientific societies, the scientific community cannot claim any special expertise in addressing issues related to humanity’s deepest goals and values. The political and diplomatic spheres are best suited to debating and resolving such questions, and misrepresenting the current state of climate science does nothing to advance that effort.

Any serious discussion of the changing climate must begin by acknowledging not only the scientific certainties but also the uncertainties, especially in projecting the future. Recognizing those limits, rather than ignoring them, will lead to a more sober and ultimately more productive discussion of climate change and climate policies. To do otherwise is a great disservice to climate science itself.”

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Rules provide, as it were, safe bounds for behavior in a relatively unbounded world. Institutions are the social crystallization of rule-following behavior or, in other words, the overall pattern of many individuals following a similar rule.

— Gerald P. O’ Driscoll, Jr. and Mario J. Rizzo, The Economics of Time and Ignorance, pg. 6.

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This post was reblogged from Students For Liberty.

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Interestingly, left-of-center pundits are completely ignoring the near academic consensus among economists about the negative effects of bad tax policy on economic growth and production. 23 studies find a negative correlation, and 3 find no correlation.
Interestingly, the Tax Foundation argued that the recent controversial Congressional Revenue Service study finding no connection between tax rates and growth was was so flawed that the “CRS study [was] unpublishable in any peer-reviewed academic journal.” Source

Interestingly, left-of-center pundits are completely ignoring the near academic consensus among economists about the negative effects of bad tax policy on economic growth and production. 23 studies find a negative correlation, and 3 find no correlation.

Interestingly, the Tax Foundation argued that the recent controversial Congressional Revenue Service study finding no connection between tax rates and growth was was so flawed that the “CRS study [was] unpublishable in any peer-reviewed academic journal.” Source

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The Tools - Practical Success, Metaphysical Failure

[The Tools by Phil Stutz & Barry Michaels - Random House, 2012]

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While it may be atypical on this blog for a dissection of what many would consider a “self-help” book, this piece warrants an exception. Far from ‘merely’ being a motivational guide, this book is much broader in scope - in order to have a grasp of the psychological system Stutz and Michaels builds throughout the book, one must accept the philosophical and ultimately spiritual foundations they build alongside it.
While the authors attempt to form a far reaching pragmatic psychology with its own metaphysical and epistemological implications, their attempt to bridge the gap between pragmatic concerns and a greater metaphysical system ultimately falls short.

The journey begins with Barry Michaels, a troubled psychotherapist who is concerned about the profession’s lack of useful techniques to help their patients in improving their life problems. Instead of focusing on solutions to these problems, traditional psychotherapy - still deeply wedded to the Freudian vision - rather, focuses on their origins. Feeling that this was ineffective at actually improving the lives of his patients, Michaels eventually meets Stutz, who forcefully argues for pragmatic ‘tools’ that he argues generates fantastic improvements in his patients. This meeting eventually led to the two crafting the system expounded upon in the book.

Interestingly, much of the book is spent praising the effectiveness of the tools instead of actually elaborating on the tools themselves. Early on, my suspicion was that the authors were compensating for a deficiency in their psychological theory by doing so. This suspicion ended up being spot on - the tools themselves are interesting and probably even effective, but despite the book’s title, they are not what the book is actually about. Rather, it is the authors’ philosophical claims that are the most intriguing. Their central thesis is that the tools do not work in the sense most people would think they do, with the individual using them and yielding a better psychological state. Instead, the tools connect one to “higher forces” that once accessed, allow one to maximize their potential and solve their issues.

Little is said of the nature of these forces, except in the context of the tools themselves. For example, one tool is called “The Reversal of Desire”, which is used to improve people’s aversion to pain and tendency to maintain a Comfort Zone. The tool is quite simple - imagine a cloud in front of you that exemplifies all of the pain on is feeling, and yell out that you desire it. The tool is reversing the desire of comfort to a desire for pain. Whatever the merits of this tool are (which seem good to an extent), the important point for Stutz and Michaels is that this tool connects to a specific “higher force”, the force of Forward Motion. All things, according to our authors, “are evolving into the future with a sense of purpose” (34). We tap into said “higher force” by consistently using the tool. The other four tools are very similar - each have a specific higher force attached that one works through and gains strength from.

The justification of “higher forces” given by the authors is not an original one. These forces are “higher” because “they exist on the plane where the universe orders and creates, giving them mysterious powers. These powers are invisible, but their effects are all around you” (34). Here, Michaels and Stutz are arguing for a metaphysical spiritualism, which posits non-physical or material forces that guide all that happens in the universe. As the book progresses, they specific a “Source”, which is the generator of all that is good in the world (164).

Epistemically, the knowledge of these forces is gained by the phenomenological experience of its practitioners, which isn’t an uncommon way of justifying the plethora of (often conflicting) religious and spiritual beliefs by billions around the globe. While the authors maintain the pretense of openness by encouraging skepticism, the solution to such skepticism by essentially using the tools until one believes the forces are real. Michaels, who was a skeptic of the forces for years, admits to this - “I fought back in the only way I knew how - with pure, dogged persistence. I practiced the tool over and over again…I did this for months” (224). The experiences are eerily similar to religious conversions or attempts to convince oneself of religious belief. While the authors spend time doing multiple drive-by’s on the epistemology of science, they fail to improve upon the traditional religious epistemology and never answer common critiques of knowing by pure “feeling” alone. While it may be true that the tools sketched out by the authors work on a pragmatic level, attributing such success to metaphysical forces that have no backing for their existence outside of appeals to the spiritual or faith is quite a large leap indeed.

The book also crafts an implicit theodicy by answering why human beings face adversity in the world. Adversity exists in order to build the internal strength and virtue of the individual despite those obstacles, in a nut shell. While this explanation may work on a general level, it fails from the level of perspective. For example, while on could argue that the recent Sandy Hook shootings serve to improve the inner strength of the families, community, or nation, one cannot say the same about the victims themselves. Stutz and Michaels use the experience of Holocaust survivors as an example, but this deliberately obfuscates the problem - the survivors survived. What about those that didn’t? How were they internally improved?

While the metaphysical and epistemological foundations of the book are faulty, the authors should be commended for the scope and relative rigor of their work. Their approach to psychology as a spiritual problem-solving apparatus is not entirely novel - the authors themselves point to Carl Jung as their most notable inspiration. The Jungian notions of collective unconscious and archetypes are intimately wrapped up in their work; the tools themselves are inspired by similar techniques pioneered by Jung.

Continuing the call of moving clinical psychology in a more pragmatic direction is the legacy Michaels and Stutz leave us in the book, which is a noble goal and one that is successfully furthered despite the problems with the philosophy and spiritualism the two also endorse. While clinical psychology could do without the Post-Modern Spiritualism posed by the authors, an emphasis on practical solutions for problems in patient’s lives is one the discipline cannot survive without.

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Prudence, Moral Sentiment, and Economic Growth

            One of the most vital contributions Adam Smith brought to economic thought was his analysis of the aspects of civil society that were necessary for the proper functioning of a market economy. Originally a moral philosopher, Smith’s analysis of moral virtue in The Theory of Moral Sentiments generated the backdrop for his work on the inner workings of the market system. Apart from his postulation that the market exhibits equilibrating tendencies, his work on inherent moral sentiment is perhaps his most long-lasting contributions in economic science, despite its apparent disappearance in contemporary neoclassical economics. Perhaps one of his most important moral virtues in context of economic growth is that of prudence. In his analysis of what drives economic growth, Smith clearly grounds his investigation in frugality. In doing so, we see a clear example of his work on moral philosophy informing his work as a political economist.

            Adam Smith was greatly influenced by the Physiocratic economists that preceded him, especially Quesnay. In particular, Smith was interested in the Physiocratic notion of the net product, or produit net. In the Physiocratic system, the net product is the surplus generated by the production and sale of agricultural commodities; it was, in essence, a rent (Blaug 28). This was of particular importance for policy, as the Physiocrats recommended a “single tax” on the net product, as part of it was pure rent going to the land owners, generating no impact on the rest of the system. It would not harm agricultural production, which was of particular importance to the Physiocrats as it was the productive sector. Commerce and trade were considered ‘sterile’ – no net product is generated from these sectors (28). Smith would take this insight and expand the productive sectors to include manufacturing and trade (Eltis xxxiii). While the Physiocrats posited the agricultural sector and a growing net product as the source of economic growth, or the “progressive state”, Smith (as well as nearly all of the Classical economists) argued that capital accumulation was the driving force behind economic progress.

            Smith argues in the Wealth of Nations that the agricultural sector has constant returns, while manufacturing exhibits increasing returns (Eltis xxxii). As each worker increases their productivity and their capital requirements grow (leading to an increase in wages and rent), the constant returns in agriculture drive down profits, with a mature economy making capital per worker even higher (xxxii). This inevitably leads to a slowdown in the rate of growth, eventually leading to the ‘stationary state’ (xxxiv). Wages will then be driven back down to their natural, sustenance levels (xxxiv).  This process begins anew when capital accumulation begins to increase once more.  Smith equates savings with investment in his model; he by implication denies that a speculative or precautionary demand for money could lead to a wedge between savings and investment (Blaug 55). What is particularly interesting about this position is that Smith never poses a mechanism for savings and investment to be coordinated – they are set equal exogenously. Later economists would develop a loanable funds market that hypothetically coordinates the two via the interest rate – instead, we must analyze Smith’s moral work to see where the propensity to save is generated (55).

            Smith primarily relies on a Protestant work ethic in order to explain why and how inclined people are to save (55). In book I, chapter 4 of The Wealth of Nations, Smith argues that “the principle which prompts us to save, is the desire of bettering our condition….[which overcomes] the principle which prompts to expense, the passion for present enjoyment” (Smith WN I.IV). This person would in all likelihood be a manufacturer, as they have the ability to reinvest earnings into fixed capital (Blaug 55).

            Smith’s views the propensity to save as ultimately rooted in the virtue of prudence. Smith defines prudence as “the care of the health, of the fortune, of the rank and reputation of the individual, the objects upon which his comfort and happiness in this life are supposed principally to depend” (Smith TMS VI.i.4). Smith goes on to describe people’s natural inclination toward loss aversion: we naturally wish preserve what we already have over attaining greater advantages at a risk (TMS VI.i.4). By engaging in saving, the prudent individual is caring for one’s resources while concurrently aiding in generating the Smithian progressive state. Smith, in his discussion on the accumulation of capital in The Wealth of Nations, argues that everyone has a natural inclination toward frugality; he goes as far to say that it predominates our actions greatly (WN II.iii.28). Frugality is a natural corollary to the moral virtue of prudence; if one is prudent, one would exhibit the principle of frugality in order to tend to one’s fortune and health in the most efficient manner possible.  This point can be compared to the more contemporary notion of time preference – individuals who are not short-sighted will tend to be more frugal, as their long-term outlook is the most prudent way to determine their best course of action. Naturally, these individuals would have a low time preference: they would abstain from consumption in the present to save for the future, increasing investment and capital accumulation. The alignment of the virtue of prudence and frugality with the progressive state of society is in stark contrast to the Malthusian (and later Keynesian) Paradox of Thrift: individual prudence leads to a net economic benefit to society, not a net harm.

            The underpinning of economic growth in individual prudence and frugality is just one example of Smith’s moral philosophy making a large impact on his economic analysis. Smith heavily emphasizes an individual’s feeling of sympathy and reflection in crafting his theory of moral sentiments. An individual feels sympathy via the usage of their imagination; they are able to place themselves in the shoes of the individual they are sympathizing with using this capacity (TMS I.II.21). People also develop a tendency to view their actions from the view of the ‘ideal spectator’ or an objective account of the dilemma they face (TMS III.1.71). In the words of Smith, “The view of the impartial spectator becomes so perfectly habitual to him, that, without any effort, without any exertion, he never thinks of surveying his misfortune in any other view” (TMS III.1.71). These virtues become especially important in Smith’s generation of the market system – the institutions of bartering and exchange (which Smith argues we have a natural propensity to engage in) are predicated on a mature civil society in which people see the benefits of engaging with other people in a peaceful manner. The Hobbesian state of nature would be absent of the virtues that compel individuals to feel sympathy for others. Smith’s moral philosophy is not a disconnected theory without any implication on the actions of economic man; on the contrary, his moral philosophy is vital and necessarily precedes any attempt to fully understand the actions of any individual in human society.

          Smith’s work on moral philosophy is required reading for any economist attempting to fully understand the foundations of Classical political economy, particularly from a Smithian perspective. By looking at Smith’s rooting of economic growth in the moral virtue of prudence and frugality, we see an excellent example of how Smith relies on the moral underpinnings of civil society and of the individual in generating an economic system that benefits all people - one that can be analyzed as a set of predictable, equilibrating tendencies. In other words, the invisible hand is itself attached to a civil society grounded in the moral sentiments of sympathy, prudence, and human reason.

References

Blaug, Mark. Economic Theory in Retrospect. 4th ed. Cambridge: Cambridge University Press, 1985. Print.

Eltis, Walter. The Classical Theory of Economic Growth. New York: St. Martin’s Press, 1984. Print.

Smith, Adam, Edwin Cannan, and Max Lerner. An Inquiry into the Nature and Causes of The Wealth of Nations. Canaan ed. New York: The Modern library, 1937. Print.

Smith, Adam. The Theory of Moral Sentiments. Oxford [Oxfordshire: Clarendon Press ;, 1976. Print.

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Market Monetarism and The Liquidity Effect

One of the hallmarks of the Market Monetarist school of thought when compared to traditional monetarism is the affirmation that market participants have rational expectations regarding monetary policy and future growth of nominal GDP (Christensen 5). Markets are efficient, and contain information regarding these expectations that are useful in determining whether monetary policy is too tight, too loose, or on target (6).

The traditional means of determining the status of monetary policy is inflation targeting via the indirect manipulation of the Fed Funds rate in Open Market Operations. Prior to the original Monetarist counter-revolution, the consensus was that monetary policy was considered ineffective, as any increase (decrease) in the supply of money would decrease (increase) short-term interest rates via the liquidity effect, spurring an endogenous fall (rise) in money velocity. In other words, the equation of exchange (MV=PY) was used in a Keynesian fashion, with changes in M being offset by a corresponding opposite change in V (Thornton 66). On top of this, an interest-rate inelasticity of investment meant that the liquidity effect yields small increases in growth: “money can’t push on a string” (67).

Friedman, among others, attacked the velocity instability hypothesis, and returned the Quantity Theory to mainstream recognition during the Monetarist counter-revolution. Monetarists favored using a money growth rule to stabilize the price level or inflation (Christensen 24). The 1970s saw a push toward inflation targeting as the effect of the Lucas Critique rippled through macroeconomics - a permanent Phillip’s Curve tradeoff was illusory,  and a credible inflation target had to be set to disinflate due to the implications of rational expectations (71). The resulting instability of money velocity also had some question the validity of monetarist conclusions.

Market Monetarists, on the other hand, are critical of the usage of monetary aggregates in determining monetary policy, and agree on the instability of money velocity. Markets expectations make money supply changes affect current demand with a “long and variable leads” instead of lags. As Market Monetarist Scott Sumner eloquently argues,

Monetary aggregates are neither good indicators of the stance of monetary policy, nor good policy targets. Rather than assume current changes in (the money supply) affect future (aggregate demand) with long and variable lags, I assume current changes in the expected future path of (the money supply) affect current (aggregate demand), with almost no lag at all” (Sumner).

Interest rates are also bad indicators of a monetary policy stance, something Market Monetarists and traditional Monetarists are in agreement on. Friedman, among others, references rising interest rates in the 1970s and falling interest rates in the 1980s as evidence that the liquidity effect is more than offset by corresponding price level and income effects. In the Market Monetarist framework, this is a direct implication of its emphasis on market expectations: a rise in the supply of money (with a given velocity) will make actors expect an increase in NGDP, yielding rising nominal interest rates, a rise in the yield curve, and rising commodity prices (Christensen 6). However, work by current Fed Chairman Ben Bernanke asserts that the liquidity effect merely diminished, but did not disappear, in the 1980s by using a Value at Risk (VAR) model (Bernanke 36).

The 2007-2009 Financial Crisis supports the Market Monetarist view, as the Treasury yield curve inverted (signalling market expectations of a fall in NGDP), falling commodity prices, and a collapse in the stock market. While it remains a source of controversy that the liquidity effect may be more than offset by income and price level effects, it still stands that interest rates remain at best a shaky indicator of monetary policy.

Market Monetarism provides an alternative targeting approach in focusing on nominal Gross Domestic Product. This would essentially be a focus on PY in the equation of exchange by growing M in ways other than mere targeting of the Fed Funds rate. While this may be a superior method relative to naive Keynesian presumptions about the liquidity effect, it begs the question as to where interest rates play a role. This is precisely where Wicksell’s distinction between natural and market rates of interest should be integrated into the analysis - indeed, some Market Monetarists such as Woosley and Beckworth are open to this idea (Christensen 9).

Further improvements in the Market Monetarist apparatus include a full integration of Wicksell’s interest rate distinction, and a fruitful dialogue between Market Monetarism and the Free Banking school (whose roots are in Wicksell’s distinction and Monetary Disequilibrium Theory more generally).  The fundamental tenants of Market Monetarism, that monetary disturbances matter and that market expectations are the most effective way of generating effective monetary policy, are robust propositions that will, if defended thoroughly and integrated effectively,  quite possibly pave the way to Christensen’s “Second Monetarist Counter-Revolution”.

References

Bernanke, Benjamin S and Mihov, Llian, June 1998, “The Liquidity Effect and Long-Run Neutrality”, NBER Working Paper No. 6608, pp. 1-36.


Christensen, Lars, September 2011, “Market Monetarism – the Second Monetarist Counter-Revolution”. Market Monetarism 13092011

Sumner, Scott, February 2011, “Monetarism is Dead, Long Live (Quasi) Monetarism”, http://www.themoneyillusion.com


Thornton, Daniel L. “How Did We Get to Inflation Targeting and Where Do We Need to Go to Now? A Perspective from the U.S Experience”.  Federal Reserve Bank of St. Louis Review, January/February 2012, 94(1), pp. 65-81.

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Founded by two college students interested in economics and philosophy, Tu Ne Cede Malis is dedicated to spreading ideas about liberty and the ideals of human freedom, prosperity, and peace.

"Do not give in to evil but proceed ever more boldly against it." - Virgil

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