LK on the Hill/Horwitz Debate

Austrians might claim that a lower interest rate – or a lower price of credit – will induce greater investment when interest rates fall, but this does not necessarily follow in a world where business faces uncertainty, where expectations are subjective, and where demand for investment credit can collapse or be stagnant.  – Lord Keynes

Lord Keynes talks about the Greg Hill/ Steve Horwitz debate and specifically about the coordination of saving and investment and the loanable funds theory. As some may note, I consider this debate important because I think it would benefit Austrian theory if it took out loanable funds theory out of its overall framework.

Yes, A Thought That Would Make Neither Group Happy

Daniel Kuehn draws on a similarity between Austrian Business Cycle Theory (ABCT) and Minsky’s Financial Instability Hypothesis (FIH) theory. What is funny is that he is implying that neither group would be happy of the similarity which Daniel raised, and the two direct blog responses of Daniel’s post have the title of  “X vs Y”.

Jon Catalan’s post, “Minsky v. Mises–Hayek“, tries to make the case that ABCT is superior to Minsky’s theory and ends up concluding that Minsky’s theory “just doesn’t seem necessary”.  Lord Keynes responds in his post,” Minsky versus ABCT“, and defends Minsky’s theory and attacks ABCT on three points: 1) that it is hard (possibly impossible) to classify capital goods into higher and lower orders and capital can have “a significant degree of durability and substitutability” and 2) that ABCT is dependent on equilibrium theory, and 3) “the ABCT has little concern with financial crises or asset bubbles, the real world economic phenomena associated with credit booms in poorly regulated financial systems”. I want to concentrate on the third criticism.

Jon does have a response to this over at his comments section, saying, “I agree that early literature on Austrian business cycle theory doesn’t focus on the financial aspect of bubbles, and instead focuses on malinvestment. But, in my opinion, it’s just a problem of extension and application. I’ve certainly applied it myself, and I think quite successfully.”

Both are right, to a certain extent. Jon is basically saying that over the years, Austrians have focused on the financial sector aspect of the economy using ABCT over time. This is fair to say, but I do not think it adequately answers the criticism raised by Lord Keynes.

For example, Post Keynesians have stressed the flaws of the loanable funds theory, especially when putting subjective expectations into the picture. In essence, the introduction of subjective expectations ruins the nice pretty picture of loanable funds theory.

Thus, to Post Keynesian, this is a huge problem with ABCT when trying to explain the financial sector of capitalistic economies because ABCT wholly needs loanable funds theory to be valid in order for ABCT to be valid. As Greg Hill tried to point out in his debate with Steve Horwitz, you must first prove loanable funds theory as correctly explaining real world economies before trying to say anything else of the financial sector. For a quick summary on this part of the debate, see here.

Thus, putting the last two paragraphs into consideration, Jon’s response doesn’t dent Lord Keynes’ third criticism.

Heroes of Uncertainty

The desire to be more like the hard sciences has distorted economics, education, political science, psychiatry and other behavioral fields. It’s led practitioners to claim more knowledge than they can possibly have. It’s devalued a certain sort of hybrid mentality that is better suited to these realms, the mentality that has one foot in the world of science and one in the liberal arts, that involves bringing multiple vantage points to human behavior.

David Brooks has a decent op-ed out entitled “Heroes of Uncertainty”. The main point of the article is about the flaw of trying to assume that Psychology is a hard science like biology or physics. Though, this article can also apply to other behavioral fields like economics. For example take this passage:

The field of psychiatry is better in practice than it is in theory. The best psychiatrists are not austerely technical, like the official handbook’s approach; they combine technical expertise with personal knowledge. They are daring adapters, perpetually adjusting in ways more imaginative than scientific rigor.

The best psychiatrists are not coming up with abstract rules that homogenize treatments. They are combining an awareness of common patterns with an acute attention to the specific circumstances of a unique human being. They certainly are not inventing new diseases in order to medicalize the moderate ailments of the worried well.

Apply this to the economics field. The best economists are not the purely theoretical ones, they are the ones that deal with the real world. They do not go by the “official handbook” sort of speak, in other words, those nice neat college textbooks. They “are not coming up with abstract rules that homogenize treatments”, they are those that combine “an awareness of common patterns with an acute attention to the specific circumstances of a unique human being”.

Good economists take into consideration real world institutions, political factors, laws, etc. and try to see how the actions of humans respond to these factors. This might be common sense but just think about how many economists aren’t doing this and are instead stuck in their world of abstract principles (economic laws) and concepts and pay little attention to the actual world around them.

But I am a Strict Constitutionalist

I got asked in the comments section in the previous post (Chambless on Hamilton: Round 2):

In defense of libertarian scholars, you dont see a problem in having a liberal interpretation of the Constitution? These are strict rules put in place on the central government, how can you just have a liberal interpretation and ignore some of the most fundamental rules that limits the government to protect individual rights?

I am being criticized for advocating the “liberal interpretation” of the Constitution, as to say, I advocate the position that the Constitution does not have this “end all, be all” mentality on the structures of government. Yes, I support this position, but it is the position advocated by the defenders of the Constitution in The Federalist Papers. Sure there are certain general rules that the government cannot just change, but the details of government, of course they can. As I said in the previous post, the Founding Fathers did not know of problems that America would face in the future, nor did they pretend to know, which is why the Constitution is so vague and short, especially compared to other constitutions.

The way I derive this position though is not from arm chair logic though, i derive it straight from the Constitution and I also use The Federalist Papers help out with what specific things imply, since these were the main set of papers that defended the Constitution and advocated for its ratification. So I am being a “strict constitutionalist”. This was how the Constitution is supposed to be viewed.

We have Tea Partyers and other right wingers claiming this label, but without evidence to back up their views. They think they are the actual strict constitutionalists for advocating the position of “if it does not say it directly, it does not go!” They protest wearing those American colonist costumes assuming this is how the Constitution, and its Founding Fathers that influenced its passing, was supposed to be interpreted.

Though, little do they know that it is the “liberal interpretation” that is the strict constitutionalist view


Epstein on the Role of the Constitution

So Richard Epstein got interviewed by Russ Roberts over at EconTalk about the Constitution. Yes, more libertarians talking about the Constitution, my favorite. I might comment on the whole interview later but I want to discuss the first question and answer to this interview.

Roberts asked Epstein, “How has the role of the Constitution changed in the United States since the founding? How has our understanding of it evolved, good and bad? And that, of course, we could spend 7 or 8 hours on, but why don’t you open us up with a general overview of the biggest trends.”

Epstein response is reasonable I guess, though it is very general, so it is hard to point out what he means on certain points.  Of course one major thing I disagree with him on his his view that Alexander Hamilton championed protection tariffs. Not only is there not evidence to support that Hamilton ever supported protection tariffs, but Hamilton also directly refuted protection tariff policies (look at “Would Hamilton Advocate Protectionism?” for more info).

Epstein is also right that the Constitution was drafted as a way to deal with the disadvantages produced in the Articles of Confederation. But then here is where he puts his libertarian spin. Starting at 4:20ish he states:

The Constitution was drafted as a way to get rid of the defects in the Articles of Confederation, rather than to create the modern welfare and New Deal State.

In a way, this is true but misleading. We get the implication that this so called welfare state was against Constitutional principles, for it was not drafted for that reason. And this is how Epstein concludes his summary:

Its a huge difference.. a classical liberal state, small government, strong property rights to a large state with heavy administration law, concurrent jurisdiction and lots of discretion thats being given to agents of all levels of government. Its a really very very big change that took place.**

Over at Cafe Hayek, Roberts copied and pasted the first question he asked Epstein and told his readers what they thought Epstein answer was. Roberts said, “I was prepared for him to say that over time, we’ve increasingly ignored the Constitution and done whatever we want. That wasn’t his answer.”

But that was exactly Epstein’s answer to Roberts’ question. Epstein is basically saying, “The Constitiuion was drafted for classical liberal purposes, but over time the American government has turned into this welfare New Deal state! Its a really very very big change.” In essence, Epstein is trying to get the readers to note that this “welfare New Deal state” was not the reason why the Constitution was drafted, so therefore this “welfare New Deal” state goes against Constitutional principles that the American Founding Fathers envisioned. In other words, Epstein is saying that over time, we have lost sight on what the implications of the Constitution were.

I obviously disagree with this answer too. Even back then, people did not know how big the size of government should be. There was always constant debate about that, let alone what constituted the size of government as big or small. For example, the Anti-Federalists thought that the more centralized Constitutional government was too big, even comparing it to the monarchial British system.

I would have answered Roberts’ question differently. I would have said something like, “The Constitution was drafted (and authors of The Federalist Papers defended its ratification) because many were concerned that under the Articles of Confederation, America was going to crumble somehow, at worst, it would have a civil war with the different ‘confederacies’ fighting because the structure of the central government was too loose. It was drafted, in other words, to preserve the Union at all costs. In modern times, many peoples’ understanding of the Constitution is that of viewing the Constitution as a document of representing a “classical liberal” or a limited government view, and that there is no room in the Constitution giving the government the power to adapt to unexpected change as time goes on. This is to say, granting the government power to adapt to the problems of the time in the attempt to solve them.”

I only had time to listen to the first 6 minutes or so, so I can’t comment on the rest of the interview, though I will finish hearing it sometime soon.

** I like Epstein’s “really very very” emphasis

You Can’t Have Your Cake and Eat It Too

In todays Mises Daily article, David Howden talks how banks should be regulated “the Austrian way.” Its basically making quick jabs at fractional reserve banking, bringing up that all too common full reservist objection of how banks could lend out a fraction of your deposits, when it should just be kept in their vaults in full because its your money! This objection just shows that full reservists aren’t interested in continuing an intellectual debate because this objection has been answered so many times that most serious scholars on banks basically laugh at this objection now.

Though, the real point of the post isn’t meant to critique this full reservist position. The point of this post has to do with these two statements by Howden:

The first group correctly notes that there are two specific drawbacks of increasing regulation. On the one hand, “one size fits all” regulatory policies (such as is commonly the case on the Federal level) are rarely capable of handling the intricacies and dynamics of business.


By ending this legal privilege, we eliminate the ability for banks to grow to such inordinate sizes. By abiding by the same legal principles (or “regulations,” if you will) as any other deposit-taking firm, banks are not unduly advantaged.

These two statements are in a sense contradictory, I think anyway. Howden in the first statement makes the claim that regulatory policies (like those at the Federal level) create this “one size fits all” spectrum for which makes these policies “rarely capable of handling the intricacies ad dynamics of business.”

Then in the second statement, he calls for a direct “one size fits all” policy so that banks could be “abiding by the same legal principles” or regulations as other deposit-taking firms.

Doesn’t Howden even consider that this “one size fits all” policy on banks leaves aside the  intricacies and dynamics of how modern banking works? Well maybe he doesn’t, for he doesn’t even grasp why his earlier objection on fractional reserves is just plain faulty and misunderstands fractional reserve banking at its very elementary level. Gotta love those Rothbardians…

Legal Tender Laws 101

I don’t know how I missed this post from March, but I did. Here is Joe Salerno talking how the IRS “violates” legal tender laws. 

 … the last time I checked, the Federal Reserve Notes in my wallet all still bore the notice, “This note is legal tender for all debts public and private” This means that they cannot be refused by the creditor for repayment of a debt previously incurred–especially not for payment of taxes, which are the pre-eminent “public debt.” While the IRS may not be strictly in violation of legal tender laws, because one can still use cash to pay at some IRS offices, its anti-cash policy is just another tactic in the Federal government’s relentless war to stamp out cash payments.

Two points should be made here to clear up confusions of legal tender laws.

  1. The notice on the dollar bills of legal tender does not necessarily mean that the creditor cannot refuse repayment of a debt previously incurred. If this were true, then it would be illegal for private businesses in the United States to set up their own payment policies. The misunderstanding here is that Salerno thinks that because of legal tender laws, everyone MUST accept cash, but this is a big misunderstanding of what the law means. *
  2. Salerno also states: “While the IRS may not be strictly in violation of legal tender laws, because one can still use cash to pay at some IRS offices,” Salerno is again misunderstood. Again, think of a private business. Legal tender laws don’t prevent a business to accept payment purely in gold, for example. This is not a violation. Its not like we can go up to this business show them a dollar bill and the “This note is legal tender for all debts public and private” notice and demand that they accept cash instead of their policy of accepting gold for they are in violation of the law. Doesn’t this sound silly when applying this to private business, but Salerno is doing exactly this in criticizing the IRS payment methods.

Of course it should be stressed that this is just looking at the Federal law, and not the State law, which can add to the Federal Law. So there may be some states where payment in gold only is illegal, but that has to do with State not Federal law.

And even the Treasury Department’s website addresses this issue that Salerno brought up. In the FAQs, one of the questions is:

I thought that United States currency was legal tender for all debts. Some businesses or governmental agencies say that they will only accept checks, money orders or credit cards as payment, and others will only accept currency notes in denominations of $20 or smaller. Isn’t this illegal?

The answer in short:

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise.

So no, I don’t think this is an example of the Federal government’s “relentless war on cash payments” as Salerno claims, if anything this is just an example of “how , starting with a mistake, a remorseless logician can end up in bedlam”