For econophiles, you might be interested in Thinkmarkets. They specialize in Austrian Economics. I receive regular emails from them with their latest updates. I thought the following would be of [...]
Econ 201
Economics as taught and practiced these days has been severely removed from its original methodology. It is a social science that has been dominated by physical science methodologies. It suffers from what Friedrich Hayek termed “scientism.”
James M. Buchanan, Nobel Laureate, is ninety years old and one of the great economists of our time. His thoughts on the profession and its inability to respond meaningfully to the the 2008 crisis are worth reading. He is not one tainted by “scientism.” Like Hayek, he understands the limitations of the field and the arrogance of false knowledge.
His piece below is not technical. It is more philosophical, but goes a long ways to demonstrating the problems that result from assuming more knowledge than one is capable of knowing. The hubris (most) of the profession has come back to haunt and humble them.
Emboldening added by me.
Economists Have No Clothes
by James M. Buchanan
Abstract:
Why have economists had so little meaningful to say about the 2008 crises? Where and when did the ‘science’ get off the track? Can anything be done to restore respectability Continue reading »
Sep 272010
Richard McKenzie writes on Keynesian economics:
The country will learn anew an old lesson: Don’t count on the federal government to wave away the country’s economic troubles with some refurbished fiscal wand. The wand didn’t work in the 1960s and 1970s (it only contributed to “stagflation”). The wand is an illusion that should have died with Keynes long ago. We will also relearn the oft-repeated wisdom of Keynes when he wrote, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
To get McKenzie’s take, see: John Maynard Keynes Died Long Ago, Let Him Rest in Peace Once and for All
Sep 202010
Originally posted: Sep 11 2009 
The referenced article is a talk given at the Chicago Fed. It discusses the Monetarist vs. “Output-gappers” views on inflation and deflation.
Monetarists are probably represented best by the late Milton Friedman. Output-gappers are best represented by Keynesians such as Paul Krugman.I favor Friedman as opposed to the output-gap position.
Implied in the output-gap position is the “incorrect” definition of of inflation/deflation as rising or declining prices. The Friedman position tends to fail empirically in recent years because of technological improvements and financial innovations. That is, the very definitions of money are blurred and changing. Does one include the “shadow-banking” system or not? Does one adjust for sweep accounts that effectively reduce reserve requirements in the banking system? These are merely two of the examples that muddy the empirics and destroy what had been long- standing correlations.
Neither position has an adequate theory of the business cycle. Output-gappers tend to be entirely ad hoc, usually pointing to some external event such as a supply shock. Monetarists always blame recessions on a slowdown in the rate of money creation. The Fed’s dual mandates of sound money and high levels of employment have placed them in a role as a Central Planning Authority. These mandates, although not necessarily conflicting, become so in a politicized democracy.
Every “blip” in the data becomes important and pressures the Fed to do something. It is impossible for them to admit that they have limited control, don’t know when policy actions will affect the economy or how much of an effect they will have. Monetarists such as Friedman argued that these unknowns resulted in Fed remedial actions greatly exacerbating the conditions they intended to solve.
The same commentary can be offered regarding fiscal policy. It too is burdened with unknown lags and effectiveness. Because it is directly a part of the political process, it has enormous front-end lags while the program is endlessly debated, pork inserted, etc. The emergency stimulus bill is a good example. While it passed quickly, only a small amount of the money has been spent. It is estimated that it will not all be spent until the end of 2010 or beyond.
Regardless of which position one favors, the process of trying to manage the economy is akin to driving while only looking in the rear-view mirror. http://www.chicagofed.org/news_room/speeches/2009_09_09_CFRNY_speech.cfm
Sep 192010
Two outstanding articles for those who want to understand how economics slipped to its dismal state. Both illustrate the wisdom and prescience of President Eisenhower who said in his farewell address: “The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present – and is gravely to be regarded.”
Math jocks flying like crazed moths around the lamp post
by Greg RansomDavid Colander on how the National Science Foundation bankrolled the pseudo-scientific climate which made the Bush/Obama depression inevitable.
But let’s not also forget how the Federal Reserve has bought and paid for exactly the “scientific” community it wants.
 Currency DevaluationFor those wanting a primer on QE and its effect on the value of currency, I recommend that you read John Hussman’s article. As a teaser, Hussman had this to [...] |
 Keynes and His Influence by Gary NorthA rather interesting lecture as to Keynes’ influence. According to North, Samuelson was more responsible for the popularization of Keynes than Keynes himself. Starts slow, but becomes interesting and optimistic [...] |
 Economic Understanding as the Basis for Liberalism and Conservatism“The single most important proposition in economic theory, first stated by Adam Smith, is that competitive markets do a good job allocating resources. Vilfredo Pareto’s later formulation was more precise [...] |
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 Keynesian Economics ExplainedMark W. Hendrickson wrote a piece on Keynesian Economics in American Thinker today. It is an excellent read for fans or opponents of Keynes. Even better for those who want [...] |
 The Great Depression — Revisiting the PastPeriodically, I include older articles that are pertinent to what is happening now. Here is one that about the Great Depression and the New Deal. I believe it has historical [...] |
 Where Keynes Went WrongAnyone following this site knows that I believe that Keynesian economics, especially as practiced by the political class, is wrong. In effect, during the 1930s we jettisoned sound economics and [...] |
 The Anatomy of a MBS from Goldman SachsThis article appeared in Fortune. For those unfamiliar with mortgage-backed securities and the disgraceful behavior of the parties involved, it is a simple and sickening microcosm of what was happening [...] |
The Great Depression -- Revisiting the Past
Currency Devaluation
Econophiles from the Austrian Tribe
David Malpass: Economics Yes; Politics No
Econ 201: Edmund Phelps Comments
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