Lately the Mises Daily may have given the impression that we just bash Paul Krugman. In the interest of balance, today I will cast aspersions on another Nobel laureate, the Chicago School economist Robert Lucas. As is typical among many “promarket” economists, the undeniably sharp Lucas inexplicably sees no problem with government price fixing when it comes to interest rates. FULL ARTICLE
Source link: http://archive.mises.org/9312/robert-lucass-strange-faith-in-bernanke/
Robert Lucas’s Strange Faith in Bernanke
Previous post: “Dead End Street Blues,” by Frank van Dun (Libertarian Papers)
Next post: The Future of Gold
{ 18 comments }
I’d call them Nobel Memorial Laureates.
Another Nobel Memorial Laureate, Dr. Finn E. Kydland, reportedly made some interesting comments in Norway last week.
He might not be completely sound, and he certainly is no Friedrich August von Hayek, but he apparently denounced the short-termism of the “stimulus” packages.
More can be found here.
It’s unfortunate that a guy as clever as Lucas has fallen prone ot this garbage.
Milton Friedman’s history of the depression appears to be one of his most dangerous legacies. He wrote that the crash and depression might have been avoided if the current head of the FED (I forget, was it Ben Strong?) had not died and left weaker men in charge.
The Fed had told Friedman in the 90′s that they buy his story completely (not printing up enough money because of timid Fed men) and that they promised never to do that again.
This seems to be their position, and pointing to Friedman’s ideas (another Nobel laureate) for their economic policy, they sure are trying to keep that promise, no matter how much money they create. And it was Friedman who first taught me that price inflation would be the result. I guess he just couldn’t make up his mind which is worse, inflation or depression.
Too bad it looks like we’ll again get both.
Good article from Mr. Murphy.
But while offering a critique of government interventionists in the Free Market affairs, such as Robert Lucas, the author does not offer any remedies of his own in the face of imminent depression that the US economy is currently headed towards.
I agree that government bail-outs and infusion of excessive liquidity is NOT a solution to the deflation and the problem of contraction of real economy, but then what is?!
If the lowering of income taxes on businesses and individuals is implied as the alternative, then I would have to disagree with the author:
The lowering of taxes by itself cannot stop the job outsourcing. The unrestrained mergers, and buy-outs will not stop even if you reduce the taxes…
I am not saying that government reducing the income tax on businesses will not have a positive long-term effect; it will, eventually. But how this would stop the mergers, buy-outs and outsourcing when there are more profits to be made by employing cheap foreign labor and assets? How would this stop the physical damage being done to the real economy by the destruction of manufacturing base at home (whatever is left of it), by mergers driven by the desire of the private corporations to eliminate competition or to ever increase their profits?! How would this stop the ultimate migration of most of the jobs to the cheaper third-world labor markets?!
In order to come up with right cure, it is essential to put a right diagnosis on the patient’s malady:
The whole economic mayhem is created by the globalization of the US economy, which renders the local workforce as less viable due to its unwillingness to compromise in terms of benefits and cost of labor. The local population simply is not willing (and rightfully so, unless forced to) to lower their living standard expectations, while the corporations are not willing to put aside their very raison d’être – to generate ever growing profits… This vicious cycle of chaise for ever-increasing profits creates a deflatory situation in the US markets, since the local population is increasingly loosing its purchasing power, and is no longer capable of consuming even the relatively cheaper imported godds and services, which in its turn drives the corporations to find more ways to decrease the production costs even further…
We are in the vicious downward spiral created by the lack of restrictive macro-economic policies, which will inevitably culminate in the implosion of the economy…
To conclude, I believe that offering a critique of certain theory or action almost always mandates presenting of the more viable alternatives together with the proof of them being as such…
You need to read Bastiat’s “Economic Sophistries”.
Consider this, just as a thought. Should those who make candles be protected from the cheap, foreign competition from the sun? Of course not.
If automobiles should we (after donning large protective headgear) throw them into the sea to avoid putting automakers out of work? Of course not. We should drive them. The time and effort which will no longer be devoted to manufacturing automobiles will be devoted to creating something else we value.
That problem is not those dirty, nasty foreigners who have the gall to have a low standard of living, and be willing to work for little. The problem is that our economy is crippled by government. If we get the government out of the way, people will be able to create, and to consume, as they wish. And that *is* the alternative to the Corporatism espoused by both the Obama and the Bush administrations.
Don’t know how I did it, but I dropped a phrase above. It should read “If automobiles should begin falling from the sky, should we”
RE: Rich Paul
Rich,
I perfectly understand your point. I am not advocating protectionist policies. It’s the old “Internet versus libraries”, or as you put it, “candles versus sun” argument…
My point is different – it is to ensure reasonable marginal (minimal) values and “fair” competition.
Let us use your “sun and candles” analogy:
Now, as anyone would agree, it would be futile and wrong to require everyone to cover their windows in order to allow candle-makers to stay in business…
No one disputes that – it is common sense; one should not impede what is better, what is more practical, and what would be in the best interest of the consumers, as they would determine it to be, given the freedom of choice.
My point is this:
Let us say there are candle makers in a certain village (i.e. in a certain geo-political locale) that make candles that cost some amount to produce. Now let us say there are some merchants from the exotic lands that try to import exotic varieties of candles by the camel loads into the village… Would the candle makers be justified if they lobbied their village leadership to ban the imports? Of course NOT! This goes against Free Market principles and open competition.
But let us say, this exotic candle imports cost cheaper by a factor say 10 times or more, and they are ruining the candle business in the village not because they are of much superior quality, but rather because they are so cheap…
Would the candle makers’ pleas to their village leadership to enforce some import tariffs or some minimal nominal price on candle be a violation of Free Market principles, or would it serve the best interests of the villagers, in a sense that they are not flooded by the much cheaper supply of candles, thus driving to bankruptcy their local candle makers, which ultimately leave them at the mercy of the foreign importers? Is it not reasonable to enforce some minimum quality standards and require some minimum import tariffs in order to protect the quality of the goods? In other words, would it not be more fair if the businesses were competing on the basis of quality rather than on enormous price differential?
Look what is happening with Wal-Mart-imported products – they are low quality, and they are killing the locals who are willing to produce better, but cannot compete since the foreign markets have much cheaper labor costs…
Is it not fair to ask to level the plane a bit rather than jeopardize the goods and services quality in the name of cheaper price? Note, that in my example NOT any tariff would have been justified. If the village elders are wise, they would have imposed such tariffs, that would not eliminate the competition from foreigners, but at the same time would eliminate enormous price differential from the equation…
What is more fair to the ultimate candle consumers in that hypothetical village: much cheaper imported candles or slightly more expensive ones that would also give the ability to the villagers to chose from the local brands and foreign, and would allow the local economy to stay afloat, and them – employed?
I do not pretend to know the absolute right answer to this question. It is a matter of political economy and philosophy in general. I personally would lean towards imposing some kind of minimum import tariffs to allow the local businesses to compete or require some kind of minimum wage laws on the importing companies (so that they cannot exploit the foreign workers resulting in much cheaper labor costs…)
I am trying to learn economics! This is perhaps a naive question. I ask forgiveness or patience. Deflation … is it or is it not the antidote to the inflation that has had the effect of making what was worth 100 pennies in 1953 worth only 3 pennies today!
If demand is reduced because of unemployment or any of several other factors, will not prices be reduced? Isn’t that, tantamount to, deflation!
What would happen if our leadership did nothing to bolster credit/liquidity and did nothing to prevent deflation. Wouldn’t prices adjust downward? Wouldn’t prices then reach an inherent level of real value. Wouldn’t stability then be reached in the supply and demand equation.
Seems to me that concerns about jobs being sent off shore where labor is ostensibly cheaper are misplaced concerns. Products are cheaper. Hence our standard of living is not compromised.
Maybe our standard of living should be compromised. We’ve enjoyed at least fifty years of artificial wealth because of the Fed’s inflationary monetary mis-management.
With deflation along with standard of living adjustments, and price/wage reductions could it be that domestic manufacturing could once again become competitive? Motivation for the outsourcing of jobs to low waged economies would decline wouldn’t it? Is that a reasonable argument to present to those who blame our economic woes on higher unemployment?
I have an answer for you my friend.
@ pbergn
But let us say, this exotic candle imports cost cheaper by a factor say 10 times or more, and they are ruining the candle business in the village not because they are of much superior quality, but rather because they are so cheap…
It would benefit the local candle makers the most if they stopped making candle’s all together. Or made a type of candle which was competitive. Consumers can make their own judgemnt on quality. If consumers don’t want quality don’t force it on them.
Bottom line is. If the local candle shops close up in your theoretical world this free’s up Capital and Labor to be applied to new industriess, products, jobs, ect…
The local community can then focus on creating a new product that may be desired. The end result is increased wealth. Readily availability of cheap candles + whatever the new product is that the town decides to produce.
Is it not reasonable to enforce some minimum quality standards and require some minimum import tariffs in order to protect the quality of the goods? In other words, would it not be more fair if the businesses were competing on the basis of quality rather than on enormous price differential?
No it wouldn’t be reasonable at all. And you pervert the idea of free market when you do this. You previously state this in the name of free-market but it’s an anti-freemarket concept. You pre-suppose that consumers will choose quality of price. You shouldn’t be so niave to assume such things. Consumers will decide for themselves. Not to mention you now must introduce a government mandate or some other form of manipulation to regulate this which increases government control, cost, and further degrades the free-market situation.
Now take my previous example about the candle makers closing shop and starting something new. The end result is high amounts of imported cheap candles, and a new additional product newly created by the community. The net sum is an aggregate growth in general wealth as the consumer now has more things.
In your example you tarrif the candles and drive up prices. You make the candles more scarce due to quality laws. The end result in your example is perpetuation of a bad candle industry which cannot create candles effeciently. You take away options from the consumer consumer and lower their purchasing power because candles continue to cost more then they would otherwise.
You also eliminate the possibility of other industry’s who need available Labor and capital because men are getting subsidized from the government to continue their candle shops.
I highly recommend the following book for you.
Read it here
http://jim.com/econ/
Or go buy it on amazon.
RE: crosson
Cosson,
Thanks for your response. I understand your point.
You are right, if the villagers can in fact come up with something else to be employed with… But what would happen to those local candle makers that got laid off due to their company closing?
What if they do not know anything else to do? They have to go back to school and try to learn something new…
Now, since there is no candle industry in the village, that means the village does not have any revenue from taxation of the income from the candle manufacturing. That means that even though now the villagers have large supply of cheap candles, only a few of them, who are still employed in other industries, can afford to buy this super-cheap candles, whereas before, many of them could, in fact by them, even though the candles’ cost was much higher… This is a direct result of the loss of purchasing power of the population…
Look, if you ask the grumpy laid-off villagers what would they had preferred – a more expensive candle or not being able to buy it at all, I think the answer would be obvious…
I understand that I am pushing the line with this example, but this demonstrates the essential dynamics of the price-differential driven trade…
Who is the winner in the end? If you were to ask me, I would say the foreign importers are the ultimate winners, and not the villagers, since now they are collectively poorer than they were when they had local candle manufacturing industry…
Again, I am confused here… Don’t get me wrong. I almost buy your point as a strong case for Free Markets… Intuitively I am almost ready to agree with you. But something is holding me back, when I start thinking about those laid-off workers, and the daunting task of re-education facing them…
RE: pbergn
But what would happen to those local candle makers that got laid off due to their company closing?
Let me answer your question with a question.
What has happened to the horseshoe makers and horse/buggy technician’s? Should we have taxed the automobile industry so as not to drive the horse/buggy out of existence? So that those individuals would not lose their job? Ultimately your argument only leads to this point, less wealth and technological stagnation.
One part of your argument which I think is a view point or prespective that I would challenge you to consider is this. Youe line of thought isto assume that the END is getting laid off or losing your job. That the end of the story is job loss. That is a very pessimistic but normal way of looking at things.
I am not an objectivist but I do agree in many of the philosophical ideals of Ayn Rand. I would say that the BEGINNING is when you lose your job, because your opportunity’s are endless. You must chose to consider job loss the end of your story or the start of a new one. I believe that if a man wants to eat he will make it the start of a new story and a new chapter in his life. I encourage you to consider my perspective and see how it may alter the way you look at some of these issues.
What if they do not know anything else to do?
This is an awfully silly assumption don’t you think?
They have to go back to school and try to learn something new…
Maybe but not necessarily. We shouldn’t assume that any one needs schooling. This whole concept that you need “schooling” to be successful is only a recent modern concept and is largely untrue. Man is intelligent and will manifest progress from his own intuitive mind. Schooling isn’t always necessary.
To add,
Un-employment is only temporary. Dwelling on this point is counterproductive and does not address issues as a whole. Instead it addresses 1 focal point of an issue. We cannot assume that man will remain un-employed indefinitely. If we believed this perhaps the government should subsidize the living of horse/buggy technician’s.
An economy is dynamic. Industries just like individual business’s have to fight for two primary sources of scarce resources. Labor and Capital. As one industry soaks up a large amount of labor and capital it competes in size with neighboring industry’s equally competing for the same capital and available labor. As some industry’s shrink or die other industry’s grow or new industry’s are created.
I highly recommend Hazlitt’s “Economics in One Lesson”. It’s short, easy to read making it quiet a pleasure. Plus it’s free online and only like 7 bucks on amazon. I’m confident you will enjoy it.
Connie: “What would happen if our leadership did nothing to bolster credit/liquidity and did nothing to prevent deflation.â€
You have a better grasp of essentials of economics than most mainstream economists. History teaches us that until the Great Depression the state stayed out of trying to “rescue†the economy and as a result we never had a disaster like the Great D. The economy has built in recovery mechanisms, mainly the price reductions that you mention. The economy never falls and can’t get up.
Connie: “Seems to me that concerns about jobs being sent off shore where labor is ostensibly cheaper are misplaced concerns. Products are cheaper. Hence our standard of living is not compromised.â€
Offshoring of manufacturing never works unless total labor productivity is greater than that in the US in the same industry. That is rarely the case except in consumer goods. Labor is cheaper overseas because productivity is so bad. Probably a greater cause of offshoring is not cheap labor but high taxes and regulation.
Connie: “With deflation along with standard of living adjustments, and price/wage reductions could it be that domestic manufacturing could once again become competitive?â€
The main things that domestic manufacturing needs are 1) tax reductions 2) less regulation and 3) greater investment in new equipment. Inflation, taxes and high government debt retard #3.
Pbergn: “Would the candle makers’ pleas to their village leadership to enforce some import tariffs or some minimal nominal price on candle be a violation of Free Market principles, or would it serve the best interests of the villagers, in a sense that they are not flooded by the much cheaper supply of candles, thus driving to bankruptcy their local candle makers…â€
Remember that the test of a good economist is whether or not he can see the long run and the effects of policy on everyone, not just a small group. If the imported candles are a better value (not cheaper and of inferior quality), then the island’s consumers are better off buying the imported candles. The cheaper imported candles free up wealth for the purchase of other goods and services. The islanders will have the candles they used to buy plus something else for the same amount of money, so they will be wealthier. The island candle makers will suffer temporarily as they switch to producing other goods. Maybe there is a pent up demand for fly swatters, but no one could afford them. So the former candle makers start making fly swatters and make even more money. Now the islanders have candles and fly swatters whereas before they only could afford candles.
TO: crosson/fundamentalist
Crosson and Fundamentalist,
Thanks guys for your respective inputs on my little story here…
I essentially agree with both of you that in the end better products will and have to supplant the inferior ones in terms of quality, desired quantity or price…
I am not disputing the fact that the progress cannot be stopped, or should NOT be stopped or impeded…
My point is the speed of transition!
You see, under the normal circumstances, the competition between the foreign candle importers and the locals would take some time with the better ones gradually winning. The longer spread in transition would have cushioned the economic transition, and would have made this critical points in the economic conditions of a certain locale less painful and more smooth… With the gradual decline of the candle industry in the, by now well-known, village, the opportunities will be presented to the villagers to gradually move away from the industry, or start improving their candle-manufacturing technologies to stay competitive…
But with rapid influx of much cheaper candles, the villagers stand no chance – it happens too quickly for them… The system is flooded.
To summarize my not-so-intuitive idea:
1. The market is a system;
2. Introduction of new players or goods in the system always changes the state of the system – its internal balance; The change can be positive or negative in respect to the long-term stability of the system;
3. The speed of the change or transition in the market system is essential, and if exceeding certain nominal value can result in the total break-down of the system.
Much like the surge of electric current can destroy an electronic device… That is why all the modern electronics has surge-protectors based on a condenser, which serves as a cushion… My proposal to introduce some import tariffs was akin to introducing some surge-protecting device, where the tariff serves as a condenser, in the sense that it cushions the transition, and allows the device or the system to survive the critical points, and to transition itself to the new mode of operation…
The speed of the change or transition in the market system is essential, and if exceeding certain nominal value can result in the total break-down of the system.
However your assuming that the natural market works like molasses and is slower then government intervention. This is just factually wrong and historically proven wrong. The Great depression was the longest depress on record primarily due to governments trying to do what your talking about. The Market is highly efficient and fast at allocating resources. If you pre-suppose without any evidence of empirical data that the market itself is slow then there is no argument I can give you to change your mind. However conventional research will lead us to believe that the free-market is intact the most efficient, fastest, fair way of distributing resources on the fly.
Much like the surge of electric current can destroy an electronic device… That is why all the modern electronics has surge-protectors based on a condenser, which serves as a cushion… My proposal to introduce some import tariffs was akin to introducing some surge-protecting device, where the tariff serves as a condenser, in the sense that it cushions the transition, and allows the device or the system to survive the critical points, and to transition itself to the new mode of operation…
In your example the cushion becomes government. However this never happens so. Instead the government becomes the electric shock by hyper-inflating currency or price fixing commodity’s via tarrif’s/taxes/ect…
Fortunately the free-market is not an electrical system and it is quiet capable of contusing on its own without any protective system other then respect for private property. The cushion you speak of only creates larger government, effects natural prices of goods, and causes individual overhead to pay for their government.
We need to remember that for every dollar spend by your government thats 1 dollar NOT spend in the free market. Essentially you can make your government big enough to eliminate the market all together. In other words any unnecessary government growth is only a leach from individual’s trying to live their life in a fair, balanced and free business world.
Something bugged. The previous post was by me in retort to pbergn. Not pbergn himself. Not sure if a moderator of this page can look at that.
pbergn: “The speed of the change or transition in the market system is essential…”
I understand your concern and sympathize with the plight of people stuck in industries selling old technology. People have used a similar argument for protecting start-ups, or infant industry protection. The problem is human nature, not economics. For example, Latin America protected its infant industries for a generation after WWII. The plan was to remove the protection when those industries matured. But that never happened. Businessmen always had excuses why the protection shouldn’t be lifted. In the end, any kind of state intervention to help industry ends up being pure mercantilism. It always has.
If the state must intervene, the most efficient way to do so is through subsidies, not protection. There is far less wealth destruction. Businesses don’t like subsidies because it seems like welfare, which it is. But the best strategy for dealing with foreign competition is to have the domestic industry reduce prices and improve quality, innovate, diversify, even buy into the competition. There are many defenses moves domestic industry can make to blunt the force of severe foreign competition.
when you get on the wrong train and realize the error, the sooner you alight, the better.
same with economic restructuring in the down-cycle. prolunging the agony keeps alive futile hope, and gives time for political lobbies to organize and save their turf at others’ expense.
“what about all the little-d depressions that occurred in US history before the Fed was founded in 1913? Was the Fed even more passive in the 1930s than during its nonexistence the previous century?”
The Fed may not have existed in its current state before 1913, but Lincolns National Bank Act created a quasi-Federal Reserve system that was absolutely able to manipulate the currency system in the years before 1913…
Comments on this entry are closed.