Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.
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John Quiggin 
I think that the discussion between Ernestine and Andrew has been interesting. However I don’t see the issue as hugely different to the classical discussion about the need for certain public goods (eg a military for defence, a criminal justice system for civil peace).
I have no problem in principle accepting the need for government intervention to avoid collective threats such as AGW. However I think that there is a legitamate debate to be had about the need for such intervention on a case by case basis and a legitamate debate about whether on aggregate we should have government intervention before threats are a clear and present danger.
For instance I think that the US government has a responsibility to protect its citizens against foreign governments and criminals. If Saddam had WMD and the will to use them against the USA then the invasion of Iraq was probably essential. However one can still debate about the accuracy of the intelligence that points to WMD or the general nature of the threat. In my view the war was not necessary but I think that the debate was certainly legitamate and appropriate.
Likewise with the threat of AGW I think that the debate is legitamate. I don’t personally think that Kyoto has much to offer and I don’t personally think that the extent of the threat is entirely clear, so I am inclined to drag my feet (a lot) on this issue. However I do think the debate is legitamate and I do reserve the right to endorse government action.
There is also the concern that people come to such debates with secondary agendas. Some people in the AGW debate want to see the rich developed nations transfer their wealth to the underdeveloped nations. Some want to see the coal industry remain prospereous and some want to see it ruined. Some want to see corporations that trade in energy futures (eg Enron) successful. These secondary agendas make empowering governments to take action problematic. The same is true on the war in Iraq where oil interests and the weapons industry all cause me a lot of pause.
Whilst I have no problem accepting the notion that markets are not complete I also take the view that governments are almost universally without a lot of benevolence or wisdom. As such the cure for some problems is worse than the original problem and in many instances we just need to accomodate imperfect outcomes.
Regards,
Terje.
P.S. For a good childrens book on the need to sometimes accomodating imperfect outcomes I recommend the following:-
http://www.amazon.com/King-Mice-Cheese-Beginner-Books/dp/0394800397
Ernestine,
Perhaps a little explanation about where I am coming from. As you know, I am not a professional economist. Have a look at my blog and you will see the field I work in – it is, and has to be, practical – but informed by theory. I have used my understanding of Hayek and some of the other Austrian economists to inform myself on the way that the markets that I work in operate. For this I find them very useful. I also see the effects of government interference in the markets every day and, where the interference is such that it imposes new requirements on the participants in the markets it is almost uniformly unhelpful to the ultimate consumers of the services provided (IMHO). Even where they are useful, again IMHO, there are better ways to provide them than through government imposed regulation.
What I do not have the time to do is to read through a large amount of theory to get to the point. I already have to do a mountain of reading (try reading the Basel Accords if you are interested) and then I have to advise my clients on them.
I am genuinely interested in what you have to say, apart from anything else because I believe it has a good chance of informing me on the way that markets work and, I hope, in some small way, improving your understanding of the sorts of areas I work in.
What I do find frustrating is the way you, to me at least, give the appearance of trying to win an argument through logic chopping. I am not trying to argue – I am trying to understand. If I am sometimes short and appear rude, I apologise – but I would appreciate it if you could try to answer my questions in a way that may be relevant to the question, rather than deciding it is unrelated.
Andrew, This is JQ’s blog-site. I like this blog-site because it is not a general chit-chat blog.
This site is a “commentary on australian and world events from a social democratic perspective”. I don’t think Andrews chit chat is out of context. But why bother engaging people when ivory is so nice and smooth and secure.
🙂
Fair enough, Ernestine, but I would have expected PrQ to opine on this if we had crossed any lines. Looks like I will have to give up without an answer.
Andrew,
Would you please direct me to v. Hayek’s work which is relevant for ‘risk management’, ‘financial stability’, ‘deposit insurance’, and the practical decision problem of a person who has to decide whether or not to entrust their few bobs with a bank?
I would very much appreciate learning from your practical experience.
Ernestine,
I thought you were the one lecturing on trying to keep this relevant. Perhaps you could indicate where Debreu spoke on these. Moving on – do you have any opinions on the questions I have already raised?
Andrew,
I understand that in your experience v. Hayek has nothing to offer regarding ‘risk management’, ‘financial stability’, ‘deposit insurance’ and the practical problem of an individual who decides whether or not to put his or her few bobs into a bank.
Mind you, I would not criticise v. Hayek for this – as said in one of my earlier posts, his work from the mid-1940s is still considered important in its historical context. My consternation arises from you promotion of v. Hayek without being apparently able to give even one concrete example of v. Hayek’s relevance in 2006, either in terms of economic theory or in terms of practical relevance for your work as you described it.
Good risk management is clearly founded on a clear understanding of the markets in which you operate. Without this understanding there cannot be risk management as you cannot understand the risks the markets throw up. (BTW – try reading Mandlebrot if you have a real interest in this – his work on VaR is particularly interesting).
If you insist on getting a bit more precise, then a good look through Hayek’s collected essays in “Good Money”, with an emphasis on Part II – he clearly goes through financial system stability. There is also plenty of relevance from either the Austrian or Chicago schools on all of these – and it all serves to give a better picture of a real market than speculating about metaphysical economics.
M. Friedman’s perspective on deposit insurance (see Money Matters or the interveiw here reflects the market distorting effects the Fed has and attempts to reduce these by putting in deposit insurance. Personally, I would have said it would be better to solve the problem rather than treat the symptom, but under the conditions he is discussing, I have no real problems with his analysis.
Now we have that cleared up, perhaps you could let us know your opinion.
Ernestine,
If you prefer a little bit more from actual economists on this topic, a look at catallaxy may assist. I know it does degenerate into “chit-chat” on a regular basis, but Jason, and and a few others will be able to provide some of the specific references that you are seeking. A good place to start would be here.
Andrew,
Why would you need ‘risk management’ if the market works as per v. Hayek’s beliefs? Why would you need any managers at all? Isn’t it the individual who counts and doesn’t v. Hayek believe (at the same time) in the benefits of ‘the division of labour’?
As for ‘money’, there is v. Hayek’s “Denationalisation of Money: The argument refined, 1978”
Would you please tell me what v. Hayek has to say on the point of the importance of strict risk aversion of all issuers of financial securities in non-explosive solutions to a ‘competitive private ownership’ economy and would you please tell me what von Hayek has to say on the incompleteness of financial markets?
What exactly is v. Hayek’s concept of ‘stability’? How did he make it precise?
I’ve told you my opinion several times over.
Terje,
“But why bother engaging people when ivory is so nice and smooth and secure.”
Have you given up on the idea of a contract and adhering to it because it is so much easier to engage in a bit of rhetoric?
(Sorry about the delay; I overlooked your comment.)
Ernestine,
You need risk management because, as he pointed out, things change unpredictably. Only if you could know what is going to happen in the future do you not need to manage risks. Come on – this is basic stuff. I simply cannot believe that you are asking questions like this.
As for the others, you appear to know it. If you do, could you please let us all know? I am sure you are going to be better at summarising it than I am.
You may have told me your opinion, but I cannot locate it. Can you please let me know or at least link to a comme tthat carries it?
Andrew,
You asked for my opinion again. Here it is:
I understand that in your experience v. Hayek has nothing to offer regarding ‘risk management’, ‘financial stability’, ‘deposit insurance’ and the practical problem of an individual who decides whether or not to put his or her few bobs into a bank.
Mind you, I would not criticise v. Hayek for this – as said in one of my earlier posts, his work from the mid-1940s is still considered important in its historical context. My consternation arises from you promotion of v. Hayek without being apparently able to give even one concrete example of v. Hayek’s relevance in 2006, either in terms of economic theory or in terms of practical relevance for your work as you described it.
Sorry, Ernestine – it was a little way up the thread. The actual question unanswered at the moment – as far as I can see – is the below:
“I would be interested to read under which conditions you consider government interference in the markets would be justified. This need not be from the point of view of you as an economist (although I would expect that this may be incorporated) but you as a person.”
It was here.
Andrew
On a different topic, SBS is showing a PBS Frontline story tonight on lies and the Iraq war. I thought of you when I saw it advertised, since you were arguing a while back that the invasion was an honest mistake. I’ll be interested in your reaction, if you catch it.
James,
I hope I will be home from work in time to see it. I still maintain the WMD issue was an honest mistake – at least I have seen no evidence to the contrary.
From my POV, the whole thing was a cock up from the moment the victory was won on the battlefield – the US (and Britain) plainly had not put enough into deciding what to do afterwards. It seemed to be “beat Saddam, find the WMD, crow at how well we had done and then hand over to Chalabi”.
That was on Tuesday actually, Andrew. But you can still watch it or read the transcript.
Shows I should be reading here more often;-)
.
Ernestine,
Back on the point I raised – interesting little piece over at catallaxy that is directly relevent. I would be very interested in your perspective on this.