Book Review: Economic Calculation in the Socialist Commonwealth

<a href="https://www.goodreads.com/book/show/28234031-economic-calculation-in-the-socialist-commonwealth" style="float: left; padding-right: 20px"><img border="0" alt="Economic Calculation in the Socialist Commonwealth" src="https://i.gr-assets.com/images/S/compressed.photo.goodreads.com/books/1450381039l/28234031._SX98_.jpg" /></a><a href="https://www.goodreads.com/book/show/28234031-economic-calculation-in-the-socialist-commonwealth">Economic Calculation in the Socialist Commonwealth</a> by <a href="https://www.goodreads.com/author/show/46766.Ludwig_von_Mises">Ludwig von Mises</a><br/>
My rating: <a href="https://www.goodreads.com/review/show/4208120208">5 of 5 stars</a><br /><br />

This extended essay is a brilliant refutation of the "logic and practises" of socialist economics. It is especially valuable not only because there is a new fad in new socialism (my phrase) but because one sees very poorly uninformed critiques of economic freedom and capitalism even in countries with decently run economies. I don't intend to write a summary of the main arguments but my view is that this is an excellent piece for students of political economy and other people with opinions about the failures of existing systems of economic and social organization. <br /><br />But the reason it merits a five-star rating in my world is that the arguments are cogent and the author was prescient. he boldly predicted the internal contradictions of socialist organization and he was borne right, fifty years later. <br /><br />

It requires patience to read because this is a translation from the German language and the sentence structure requires keenness. That stated, this isn't a fine piece of literature because of the facility with language but mostly for its plain logic and rigour in reasoning.
 

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Quoting Bart Wilson

"The positive facts about how we became the most prosperous species in the history of the planet are unappreciated in the humanities, often because the facts and logic of wealth creation are regrettably unknown". Bart Wilson in, Economics as a Branch of Literature. 

Renewing The Social Sciences

Few students of the social sciences would dispute the broad argument made in this NYT article by Nicholas Christakis. The tenor of the piece is that unlike the natural sciences, the pantheon of social sciences have hardly changed and are still stand alone disciplines that allow for little mixing and integration with other to create newer and more useful areas of study.

This assertion is demonstrably true because the major social sciences including economics, sociology and anthropology are taught and learned in the traditional ways that they have been for at least a century. While this has provided for stability and expanded the body of literature, it is not clear that the disciplines have made meaningful progress in asking new questions and using modern tools. One would add that this conservatism is seen in the fact that fact that in spite of the proximity of subject, these departments still have different foundational courses and traditional structures at the academies.

However, I am less convinced that the desired shake-up of the social sciences would provide for a definitive theory or closure of long-standing areas of enquiry. This is possible in the natural sciences because foundational ideas such as gravity and calculus remain the same but social phenomena changes with observation and with social structures. For instance, the causes and drivers of crime varies by the age profile of society and this has changed substantially over the last century. For that reason alone, it is not possible to have a definitive theory of crime for more than a generation.

What the article states eloquently is that the traditional silos of the social sciences do not make much sense and that knowledge creation is stifled by the singular lenses by which professors in the social sciences approach their subject. In sum, disciplines such a s sociological economics and behavioural economics point to the future.    

The Real Lesson of the Excel Error

As reiterated by this NYT article by Robert Pollin and Michael Ash, the main debate that animates commentators is the relationship between national debt and GDP growth. This discourse has arisen from an error that on an Excel sheet during the publication of the paper under reference in the article. My view is that the paper looked a bit too neat in determining the threshold at which debt begins to constrain further growth and provided ammunition to ideologues to justify sharp reductions in debt and to counter-punch against those economists who considered a Keynesian approach as a solution.

To my mind, this state of affairs reflects the state of affairs in academia today and more particularly in economics. To be clear, the discipline of economics integrates quantitative tools impressively and provides meaning to phenomenon that would not be tractable. However, that supremely capable economists made this error and that the paper was then taken as a holy grail in the effect of the nexus between debt and economic growth is cause to pause and contemplate. This is because while the quantitative tools are sufficiently developed, it is worrying that it took a couple of years for the error to be discovered and for an explanation to issue. This merely highlights my concern that too much of economic reasoning is suspended whenever a paper is issued that claims to find a connection that answers a topical policy issue.

To my mind, the lesson is that all professionals economists must be as suspicious as they are impressed with the tools that they deploy. The whole profession suffers when errors are that easily missed and that verification is not performed before the studies are given prominence.  

When Entrepreneurship Results in No Jobs

There are few countries that can claim to have a real answer to the creation of employment and this question continues to animate the world's largest economy today. And yet a number of popular approaches and policy stances to the need to expand employment are often based on belief and strong sentiment than on empirical evidence. The common claims are that the provision of loans on preferential terms are sufficient to create new business through new enterprises. A related claim that is quite common is that self-employment is one sure way out of the unemployment problem in both low and high income countries.

Employment is rightly considered one of the major issues in the ongoing presidential campaigns in the United States. Catherine Rampell of the NYT, writes about the difficult employment problem generally but more particularly about the fragmented and small nature of most start-ups in the United States. The nature of the new corporations is that they are creating a smaller number of employees on average and therefore essentially unable to drive strong employment growth. As the piece states, this phenomenon has startling policy implications for those who believe that small firms will be the creators of jobs as they have been.

Whether this change in the structure of the labour markets is permanent or not is subject to confirmation in the future. What is mot certain is that the quest to expand employment cannot be found in the purported silver bullet of entrepreneurship.economies are complex and this works in a way that precludes the ability to push buttons on one end and generate jobs on another.      

How Real Capitalists See the World

While a disproportionate number of people are occupied with the Occupy Wall Street protests, it is amazing that the numerous good things that come from principled capitalism are altogether ignored. Leaving aside the predictable views of some of those supporting and opposed to the Occupy Wall Street protests in New York and the rest of the world, I came across this short but really good NYT story about what real capitalists can and often do to benefit society.

Worthy of reading for oneself, I find it profound for the reason that it highlights the exceptional degree of generosity from Robert and Dorothy King. Having built their own enterprise and made substantial sums, they have opted to make a donation of US$ 150 million to Stanford University to establish the Stanford Institute for Innovation in Developing Economies. Its purpose is to study the creation of programmes and businesses through which a large difference could be made.

To my mind, this gift is profound for a couple of reasons, including the fact that it is an expression of generosity at a particularly difficult moment when many people may be anxious about the possibility of a second recession and its possible effects on further erosion of their wealth. Equally important is the fact that as the political hacks are looking for people to blame and make some political mileage from the ongoing controversy, this family has demonstrated that real capitalists go ahead with their work, support what hey can and leave everyone to judge the result. there's no better way to defend capitalism. As I said in an earlier post, this couple makes me shout, "Capitalism Rocks".    


  

Bucksbaum Bequest Credits Couple and Capitalism

I am an unqualified admirer of capitalism and freedom not only because there is no better alternative but mostly because such an alternative would hardly emerge.  A very substantial and well-considered bequest by Carolyn and Mathew Bucksbaum to the University of Chicago's medical school well demonstrates the immense social and moral value of capitalism. As stated by Dirk Johnson in this NYT story,  the bequest of US$ 42 million of money earned is to be dedicated to research and teaching medical practitioners to treat patients with empathy. This idea behind the bequest  Bucksbaum Institute for Clinical Excellence is informed by the experience of Mrs. Bucksbaum at the hands of a less-empathetic doctor.

No doubt the couple are worthy of a national award from the President but the main lesson for me is how effective real capitalism is in channeling funds towards causes that nobody pays for. And it is quite laudable that the couple did not throw a small portion of that money into a lobby group to ensure that government pays for that need. A story like this becomes useful for demonstrating the fact that while markets may be amoral, high-minded philanthropy such as this is only possible with capitalism. Capitalism rocks!

Economists Too Have Apples Fall on Their Heads

It is fairly accurate to state that the formation of ideas about the profession to pursue is a very subjective process. And yet one of the most interesting things to read s how an individual navigated the various choices available and settled to being a lawyer, accountant or yes, a professional economist. I remember that every time I encounter a narrative by an economist about how they came to pursue the subject, it is often very well written and altogether authentic.

Among the descriptions that I have read about how a youthful and very intelligent person came to decide what area of academia to pursue are memorable accounts by Paul Krugman, Dani Rodrik, Gregory Mankiw, Avinash Dixit and Amartya K. Sen. A definitive feature of the very different individuals is that most of them came to study economics through various routes and motivating factors. I am unable to create links to all their musings save for the one by Avinash and Mankiw respectively which are readily available to me now.

In this short feature in the Harvard Gazette, Gita Gopinath describes how she settled for economics generally and to the subject of international macroeconomics and currencies. In her case, the subject was chosen because of the coincidence that she was considering her career choice at the time when a financial crisis occurred. This appears to have motivated her to seek explanations for an observed phenomenon. So in this case, the metaphorical apple that fell on her head was that of an international crisis. I suspect that Isaac Newton would add, "Isn't that familiar?"

Thomas Sowell on Scarcity

" The first lesson of economics is scarcity: There never is enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics." Thomas Sowell

Ethics and Economic Progress

I make no resolutions upon the turn of a calendar year partly because time change is a very arbitrary factor but I resolve every now and again to read some more of a type of literature or improve on a set of skills that I consider important. Among the resolutions that I made is to read at least one book per month written by a scholar who won the Nobel Prize in Economic Sciences. 

In the last week, I started and read an extremely perceptive book that provides the title for this blog post. Its author is James Buchanan, to whom the Nobel prize in Economic Sciences was deservedly awarded in 1986, "..for his development of the contractual and constitutional bases for the theory of economic and political decision-making."

Needless to state, the book is very well written and reads well notwithstanding the fact that its author avoided complicated notations in the text. Without spoiling it for readers of this blog, he provides a justification based on Adam Smith's thinking for the reason to encourage saving and work. He correlates these easily by starting with the observed truth that division of labour and exchange are significant factors for raising productivity. Growth in division of labour in turn affects the extent of the markets with the result that more labour and saving affect this increase.  Taking these two together, it is clear that the value to society is increased by the choice of an individual to work some more or save some more. On the other hand, idleness exerts a cost on the rest of society because it constrains its growth. 

Essays in the second portion of the book connect these three thoughts by addressing the effects of these ethical considerations on tax responses, idleness and "unproductive" labour. In all, the essays clarify many issues and are written in a very lucid and engaging manner. This is indeed a five start book written by a colossus of the discipline and leader in the Public Choice School of economics.

Avinash Dixit: Fitting Profile

The year is about to come to a close and I have reviewed the number of blog posts that I made and it occurred to me that I have highlighted very few professional economists on the blog. It is suitable then to highlight a giant of the economics profession, Avinash Dixit. Jeremy Clift has written a very educative profile of Avinash in the current issue of Finance and Development magazine.

In it, he speaks to this professional economist and professor whose contributions to theory run from game theory, models of monopolistic competition to economic development. the interesting discussion reveals that he is not only alert but that his work is truly seminal to the extent that it has applications beyond what the initial papers could reveal. In all, the most interesting portion of the piece is the defense of economic theory and practice regarding the recent recession in the United states and other parts of the world. "Economic theory and economic analysis based on pretty standard theories told everybody that the situation was unsustainable, that there was going to be a house or price bust sometime. The timing is always unpredictable, but pretty much everybody knew that things were going to go bad."

Is Austrian School of Economics Back?

While I would not say that Austrian economics is mainstream again, this story in the Wall Street Journal profiles one of its main high priests and dedicated thinkers. I noted the resurgence of Austrian School theorists a while back when von Hayek's The Road to Serfdom was top of the Amazon bestseller list. And while I have read a much smaller number of Peter Boettke's works, than I would like, I readily concede that the austrian School is a powerful approach to explaining the limits of central planning on one side and the lottery nature of industrial policy.

My introduction to the Austrian School was an encounter with Von Hayek's Road to Serfdom which I found quite impressive in its rendition of the inherent weaknesses of statism especially in the area of economic management. I have since then considered it as one of the most ideal ways to introduce students of economics to the Austrian School generally and to an appreciation of the limits of state action on the other.  It is also a gentler way of introducing students to the subject political economy by avoiding the large models driven by mathematics. As most of the Austrian School theorists believe, understanding the first principles of economics is important in itself and the mathematics should aid understanding and not undermine it.

As the article concludes, the major problems for Austrian School economists is that while they are able to identify why state action may be harmful, they are not often able to generate much policy advise to fix problems. And that explains why Keynesians fall from favor but always arise again. the Austrian School is one of the most important and ne to which I am most partial.

Fiscal Sins of America's Political Parties

Whenever I go through analytical pieces and summaries of the state of the US economy, I never fail to notice the stated assumption that main difference between its two political parties is that one party is a better economic manager given to prudence with public finances. And quite unfortunately the majority of blog seem to proceed on this premise and often add to that the view that president Obama's administration is a huge spender of public funds like other administrations led by Democratic Party presidents.

I always muse to myself that as a grown up, the sharp distinction between the two parties is one that only partisans of one side or the other want to believe. And that is why I see this very informative and well-argued piece by David Stockman about the contributions of the Republican party in the fiscal mess that the US finds itself in today. I am reluctant to summarize it because the piece is worthy of careful study but its main idea is that too much expenditure is an equal opportunity error by both parties. In addition, the main assumption of the Supply side arguments of the Reagan administration seem to be catching up with the US as the tax cut fetish alone does not pay for itself as is argued simplistically.   

Of the four points that he makes, I disagree with the assertion that the suspension of the Gold Standard made inflation and too much expenditure inevitable. This point requires some contesting because there's no evidence for it in his illuminating piece. 

A Portrait of Paul Krugman

Of the many brilliant economists that emerge from the singularly enviable training of the American academies for economics, I am most in awe of Paul Krugman. And my admiration preceded his elevation to Nobel laureate status so I have some justification in claiming that I could see the inevitability of that prize. In reading the common blogs by ideologues and other party apologists who appropriate libertarianism as necessary, one would think that Paul Krugman never went through a first principles course in economics. It is possibly because ideology and political biases often trump rational thought and makes people more interested in attacking the man and not bad ideas.

Writing in the New Yorker Magazine, Larissa MacFarquhar has painted a sharp and immensely entertaining portrait of Paul Krugman based on a visit to the professor's home in St. Croix. While the title suggests that it is about the formation of some of Prof. Krugman's strong political ideas in the United States, I think that it presents a clear picture of the household of two scholars with solid ideas and who are accomplished in every respect. Consider that they both have graduate degrees from distinguished schools of economics, have taught in such schools, been consultants to corporations, published a text book in their subject and one bears the rare distinction of a Nobel prize in Economic Sciences.

This portrait reveals that paul's political ideas and his articles in the NYT arose from a reflection of the circumstances of the country and the denial of some facts that were evident to him. This created the need to understand and comment on how the politically dominant ideas influence society and the economy.

Paul's strident attacks of the Republican Party and its dominant paradigm makes him a loathsome target for party operators and their intellectual foot soldiers. What often gets lost in the debate is the fact that Prof. Krugman has a set of very solid intellectual credentials and an unrivalled portfolio of ideas that changed the field. The article summarizes some of these contributions in diverse areas starting with his understanding of financial crises, international trade and geography and trade. Some of these findings are now so embedded in the subject that they are taken as having been a part of the theory all along.

As would be expected of an elaborate article like this, the author would eventually ask his subject whether there are other contributions of consequence that are expected to emerge from him. Paul Krugman goes back to the history of humanity where poverty has been almost a fixed feature. His question though is why with such stability in poverty among humans do some states suddenly begin a relentless growth path toward prosperity. My hope is that Paul Krugman rediscovers the obsession that is required to fully answer this profound question.

Bank Tax is Sensible Policy

In my thinking about regulatory policy, I have maintained that unless the purpose for regulation is consistent with the chosen instrument, then it may help not to regulate at all. With this fairly abstract factor in mind, I have wondered whether the recent intention to levy a special tax on the largest banking institutions in the US is sound policy or not. As is bound to happen increasingly, response to this initiative has been rather predictable. The bankers are arguing that imposition of a special tax would impair banking operations unnecessarily while a majority of the supporters of the special tax retort that the all-round economic pain should be shared with the banks since they have regained profitability. On the basis of what is argued in most opinion pieces, one cannot find insight except to see the ideological orientation and the prejudices rehashed.

While I avoid quoting blog pieces, I found Gregory Mankiw's explanation here for support of the piece as extremely well considered and justifiable. David Stockman, writing in the NYT also dissects the issue with a very clear idea of the dynamics of the credit markets and the failures in monetary policy that have not been fixed thus far. I am therefore persuaded by the concise arguments by both gentlemen.

Like Mankiw, I am uncomfortable with the populism that accompanies the arguments for this policy but it is clear that not all instances of financial creativity in Wall Street are useful for the economy. Instead, these are merely stunts that result in movement of money in circles but do not result in better allocation of capital. So prof. Mankiw argues correctly that it is a principle of economics that taxation of a good reduces the overall amount that is produced hence the levy will in probability cut off some of that activity. This tax also serves to restrain some banking activity that would cause further instability especially because the signalling has confirmed that very large banks will not be allowed to fail. And so having accepted the bail out, then bankers should take the full dose that goes with assurance of public support in the future. So the populist rhetoric aside and considering the subsidy that redistributed income from tax payers towards the industry, it is clear that this modest levy of 0.15% on the debts is modest even if it affects the more cautious firms that were not highly leveraged too.

Tribute to Paul Samuelson

I have just read the news that prof. Paul Samuelson died at his home in his home in Belmont yesterday. Which student of economics, or college student who interacts with the students of economics never got to see and perhaps go through a few paragraphs of textbooks written by prof. Samuelson. Awarded the Nobel prize in economic Sciences in 1970, he heralded the rise of US dominance in research and thinking for the discipline. His award reads that he receives the honor "for the scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science."

Cash for Clunkers Reassessed

Writing this blog post a while back, I stated that the Cash for Clunkers programme was a lesson in applied economics because it revealed that the subsidy itself revealed the preference for car models by Asian manufacturing firms in addition to the fact that the surrendered models were disproportionately those made by US car manufacturers. That blog post was incomplete to the extent that it makes the assumption that the overall programme was otherwise a successful one.

Well, I am now completely chastised, having read from no less than Steven Levitt here, that overall, the cash for clunkers programme was not an unqualified success. Referring to this data based analysis, it is clear the unquestioned attribution the entire set of sales to the programme is incorrect. As he states, there are a large number of acquisitions that would have occurred regardless of the programme. So what happened is that the subsidy merely led to a change in the moment of purchase for the individuals who already made plans to purchase new cars anyway. Taking account of this shift, the Cash for Clunkers programme ends up as a waste of resources.

Saltwater Versus Freshwater Economists

For a discipline that has ridden high in the last two decades, I think that the recent financial crisis and subsequent economic recession will leave economists of all kinds with lots of explanation to do. For one, the state of affairs makes it clear that the confidence that professional macro economists have had was largely undeserved. More pertinently, though, the state of affairs in the US and Europe have led to the need to re-examine the theories that have informed most economic explanations at the macro economy.

Coming back to one of its most lucid writers, Paul Krugman revisits the ideological arguments in the discipline generally and especially in macroeconomics. because the story is worth reading for itself and I am not as competent in explaining macroeconomics, I do not attempt to summarize it. However, it clearly states the fair point that the major assumptions of rationality by the discipline are not tenable any longer. It is clear now that the hasty dismissal of Keynesian understanding was premature and the resurgence of this alternative is almost guaranteed. With credit to Paul Krugman, he does not push the Keynesian alternative too far but has concentrated the essay in demonstrating that its; explanation of recessions and the prescriptions for going over them is more complete and demonstrably effective.

As he says, the search for a more complete theory of macroeconomics is on but I would wager that there are already careers invested in one approach. this means that irrespective of the merits or demerits of the Neoclassical approach, the success of the administration in restoring market activities will not be as easy to concede. It is also clear to me as a student of economics that the rigour of economics must require proper models but more importantly, the difficult math must yield sensible results. The absolute rationality of all financial market participants is not one of them and thankfully, markets do not demand rationality from all.

The Celtic Tiger Will Be Back

One of the effects of economic crises is that it leads people to even begin to question the principles that have contributed to success. It is therefore understandable that in spite of the rapid growth of Ireland, many people are questioning its ability to return to full growth and economic stability. To may people, it is as if Ireland's best days were behind it especially because of the serious problems with real estate crash, private debt ratios and now the large deficit in public finances.

Writing in the Irish Times, Peter Sutherland argues from first principles that Ireland will overcome the present crisis and resume its strong growth trend. I am in total agreement principally because Ireland's strengths have been in a very highly developed human resource base, an open economy and sound economic policy in many respects. the mere proportion of the budget deficit is not a perfect guide of the state of an economy's future.

An important lesson from the economic difficulties in Ireland is that even a country run on largely sound principles faces problems when an industry that is as large as real estate is run of debt and fails to reckon with common-sense principles. There's no reason why property prices should be assumed to run upwards in perpetuity. On the whole though, the calibre of the country's human resources and the export drive will keep Ireland as a leading light in Europe. In short, it has not lost its status and is still worthy of its name as the Celtic Tiger.

What's the Value of a National Currency?

In the last week, the statement reported here by the governor of China's Central Bank called for the establishment of an alternative currency for international transactions. Predictably, many have sen this call for the replacement of the dollar as necessarily portending a poor outlook of the prospects f the economy of the US. Frankly stated, I think that given its size, it would not only be difficult to replace the US$ as a major currency but that the world ought to be more careful about why.

To start with, students of economics are encouraged to view any currency as a commodity and this then leads to the realization that the there's nothing special about a national currency in and of itself. For an economy as large as that of the US, I surmise that the creation of an alternative could not easily be created without some measure of the expectation of US participation, China's enthusiasm for a new currency notwithstanding. Viewed as a commodity, the value of any currency would emerge from the demand for it in the international markets.

Secondly, as stated in an interview of Desmond Lachman in the American, governments can sustainably influence the value of currencies by maintaining good economic fundamentals and keeping an attractive investment field. In that sense therefore, what is called a strong currency is in itself the result and not the cause of a vibrant economy. Added to this would be a stable financial industry and low levels of inflation. To think that a strong currency is an end in itself is a political statement that has little basis in economic thinking. As reported by the statement in the daily Telegraph, Timothy Geithner should be more concerned with hastening the recovery of the US economy. The absence of clear alternative suggests that the willful creation of a strong alternative to the US$ is perhaps harder than is imagined.