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.”
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.
This post was reblogged from Students For Liberty.
[The Tools by Phil Stutz & Barry Michaels - Random House, 2012]
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.
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.
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.
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”.
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.
by Garrett Watson, St. Lawrence University
This piece is also generously cross-posted on Lars Christensen’s blog The Market Monetarist.
Few ideas in the history of economic thought have achieved a level of perplexity and criticism than Say’s Law. Perhaps one of the most misunderstood and elusive concepts of the Classical economics, Say’s Law of Markets, first postulated by John Baptiste Say in 1803, underwent considerable support and eventual decline after its assault by John Maynard Keynes in The General Theory. Many of the fundamental disagreements we observe in historical debates surrounding macroeconomics can be traced to different conceptions of how Say’s Law operates in the market economy and the scope used in the analysis. By grasping a thicker idea of Say’s Law, one is able to pinpoint where disagreements in both macroeconomic theory lie and judge whether they necessarily must be dichotomized.
Say’s Law is best known in the form Keynes postulated it in The General Theory: “supply creates its own demand” (Horwitz 83). Despite the apparent eloquence and simplicity contained in this definition, it obscures the genuine meaning of the concept. For example, one may interpret this maxim as meaning that whenever one supplies a good or service, it must be demanded - this is clearly untrue (83). Instead, Say’s Law can be interpreted as saying that the ability to produce generates their ability to purchase other products (84). One can only fully grasp Say’s Law when analyzing the nature of the division of labor in a market economy. Individuals specialize in producing a limited range of goods or services, and in return receive income that they use to buy goods and services from others. The income one receives from production is their source of demand. In other words, “all purchasers must first be producers, as only production can generate the power to purchase” (84). This idea is intimately linked to the Smithian idea that the division of labor is limited by the extent of the market (89).
The result of this fascinating principle in the market economy is that (aggregate) supply will equal (aggregate) demand ex ante as demand is equally sourced by previous production (Sowell 40). Another important point made by Say’s Law is that there exists a trade-off between investment and consumption (40). In contrast to the later Keynesian idea of falling investment leading to a fall in consumption and therefore aggregate demand, an increase in investment means falling consumption, and vice versa. This idea can be analogized to Robinson Crusoe abstaining from consumption to build a fishing net, increasing his investment and his long-term consumption of fish (42). Therefore, a higher savings rate pushes up investment and capital accumulation, increasing growth and output (as Smith eloquently argues) (40). In another stark contrast to Keynesian analysis, there is only a transactions demand for money, not a speculative nor a precautionary demand (40). The implications of this are that money cannot affect real variables; it is a veil that facilitates transactions only - money is neutral (Blaug 148). Finally, Say’s Law also shows that there cannot exist a “general glut”; an economy cannot generally overproduce (Sowell 41). While relative over and under-production can occur, there is no limit to economic growth (41).
While it was uncontroversial among the Classical economists that there wasn’t a limit on economic growth, several economists took issue with the fundamental insights of Say’s Law (44). One of the most well-known criticisms was that of Thomas Malthus. Malthus was an early proponent of the “Paradox of Thrift” – an excessive amount of savings could generate an economy with less than full employment (43). One could describe the view of Malthus as fundamentally “under-consumptionist” (Anderson 7). Unlike his contemporaries, Malthus did not view money as inherently neutral (Sowell 41). Other classical economists, such as Smith, argue that money “will not be allowed to lie idle”, effectively dismissing a precautionary motive for holding money and therefore monetary disturbances (38). This is where we see the inherent difference in perspective in the analyses of Smith and Malthus. Smith is focused on long-run conditions of money (its neutrality and importance of real fundamentals) versus the short-run disturbances money can generate in output (39).
Money is half of every exchange; a change in money can therefore spill over into the other half of every exchange, real goods and services (Horwitz 92). In effect, “The Say’s Law transformation of production into demand is mediated by money” (92). This means that Say’s Law may not hold in conditions in which monetary disturbances occur. John Stuart Mill recognized this possibility and affirmed Walras’ Law: an excess of money demand translates to an excess supply of goods (Sowell 49). An excess money demand manifests itself by individuals attempting to increase their money balances by abstaining from consumption. This therefore generates an excess supply of goods, which some would argue can be self-correcting, given downward adjustment of prices (Blaug 149). Malthus (and later on, Keynes) argues that downward price and wage rigidities (which can be the result of game theoretic problems in firm competition, efficiency-wages, or fixed wage contracts) can short circuit this process, yielding a systematic disequilibrium below full employment (Sowell 65). In terms of the equation of exchange, instead of a fall in V (and therefore a rise in money demand) being matched by a fall in P, the fall in V generates a fall in Y. This point was taken into further consideration by later monetary equilibrium theorists, including Friedman, Yeager, and Hutt.The same analysis can be used to understand the effects of drastic changes in the money supply on short term output, as Milton Friedman and Anna Schwartz would demonstrate in the contraction of the money supply during the formative years of the Great Depression
When analyzing the large disagreements over Say’s Law, it becomes clear that they stem from a difference in scope: supporters of Say’s Law analyzed the macro economy in terms of long-run stability, while Malthus and others after him focused on short-run disequilibrium generated by monetary disturbances (Sowell 72). Smith and other classical economists, pushing back against mercantilist thought, emphasized that money was merely a ‘veil’ that does not affect economic fundamentals, and that quantities of money ultimately didn’t matter (72). The Malthusian grain of truth regarding disequilibrium caused by monetary disturbances in the short-run does not refute Say’s Law; it reveals the necessity of getting monetary fundamentals correct in order for Say’s Law to cohesively operate. It becomes increasingly clear that once we look at the disagreements through the lens of scope, the two conceptions of the role of money in a market economy need not necessarily be incompatible.
Anderson, William. “Say’s Law: Were (Are) the Critics Right?” Mises Institute 1 (2001): 1-27. Mises Institute. Web. 19 Oct. 2012.
Blaug, Mark. “Say’s Law and Classical Monetary Theory.” Economic Theory in Retrospect. 4th ed. Cambridge: Cambridge University Press, 1985. 143-160. Print.
Horwitz, Steven. “Say’s Law of Markets: An Austrian Appreciation,” In Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle, Steven Kates, ed. Northampton, MA: Edward Elgar, 2003. 82-98. Print.
Sowell, Thomas. On Classical Economics. New Haven [Conn.]: Yale University Press, 2006. Print.
This post was reblogged from Anarchei.