Hazlitt and the glazier’s fallacy

I’ve been working for quite a while now on a book which will respond to Henry Hazlitt’s Economics in One Lesson a book that was issued just after 1945 and has remained in print ever since. It’s an adaptation of the work of the 19th century French free-market advocate Frederic Bastiat for a US audience, specifically aimed at refuting the then-novel ideas of Keynes.

My planned title is Economics in Two Lessons. In my interpretation, Hazlitt’s One Lesson is that prices are opportunity costs[1]. My Second Lesson is that, in the absence of appropriate government policy, private opportunity costs (market prices) won’t reflect social opportunity costs. Here’s a central piece of the argument, responding to Hazlitt’s exposition of Bastiat’s glazier’s fallacy.

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Productivity yet again

The ABC has yet another story about economists warning on the need for more productivity. It’s a mixed bag. First up, this from Professor James Giesecke from Victoria University’s Centre for Policy Studies

“We’re going to need a growth rate in multi-factor productivity more like the rates that we saw back in the ’70s and ’80s, about 0.7 per cent per annum, in order to begin increasing per capita living standards going forward

appears to mark an abandonment of the mythical 1990s productivity surge, though he goes on to talk about micro-economic reform. More clearly positively, a bit of attention paid to bloated and lazy management rather than telling the rest of to “work harder and smarter” Many economists are turning their eyes to the business sector to take the productivity baton from the labour market to galvanise growth. Finally, there’s this from Peter Harris of the Productivity Commission who has

nominated energy, health and education and other parts of the non-traded sector as candidates for reform. (emphasis added)

Wow! I would have thought that, 20 years after the Hilmer report, the Australian energy sector has been as thoroughly reformed as it can possibly be, short of going back to oil lamps. We’ve had corporatisation, privatisation, pool markets and full retail competition. And of course, the results are evident for all to see. Apparently, though, we are in need of more.
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Macrofoundations of Micro

I was very pleased with my post on this topic, making the point that standard microeconomic analysis only works properly on the assumption that the economy is at a full employment equilibrium.

But, it turns out, exactly the same point, using the same title, was made by David Colander 20 years ago

Colander (1993), The Macrofoundations of Micro, Eastern Economic Journal, Vol. 19, No. 4 (Fall, 1993), pp. 447-457

And he wasn’t the first. The term and the idea have a long history, including a contribution by my UQ colleague Bruce Littleboy

The term macrofoundations, I suspect, has been around for a long time. Tracing the term is a paper in itself. Axel Leijonhufvud remembered using it in Leijonhufvud [1981] . I was told that Roman Frydman and Edmund Phelps [1983] used the term and that Hyman Minsky had an unpublished paper from the 1970s with that title; Minsky remembered it, but doubted he could find it and told me that he used the term in a slightly different context. I was also told by Christof Ruhle that a German economist, Karl Zinn, wrote a paper with that title for a Festschrift in 1988, but that it has not been translated into English. I suspect the term has been used many more times because it is such an obvious counterpoint to the microfoundations of macro, and hence to the New Classical call for microfoundations. While he does not use the term explicitly, Bruce Littleboy [1990], in work that relates fundamentalist Keynesian ideas with Clower and Leijonhufvud’s ideas, discusses many of the important issues raised here.

Stafford by-election

Another big loss for the Newman LNP government here in Queensland, with a swing of nearly 19 per cent in the Stafford by-election. I did my little bit for this, speaking at a public forum on asset sales. However, since only the Labor and Green candidates showed up, and no-one in the crowd seemed inclined to vote for the LNP or Family First anyway, I doubt that my contribution to margin was noticeable.

Like Newman’s previous drubbing, this by-election was caused by the resignation of the sitting LNP member. However, whereas in the previous case, the resignation resulted from personal financial scandals, the member for Stafford was a doctor who resigned as a result of disagreement with Newman’s health policy. So, the outcome may fairly be interpreted as a rejection of the government’s approach, both in terms of policy substance and authoritarian style.

There is so much disillusionment with politics at present that just about anything can happen. My own guess is that the state election, due in March next year, will see Newman lose his own seat of Ashgrove (held on a margin of 5.7 per cent) and that no party will secure a majority. After that, who knows? Informed or uninformed speculation welcome.

Finance: global or international ?

I have a piece in The National Interest, looking at various recent events including the latest round of the Argentinian debt crisis, in which a New York court ruled in favor of a group of ‘vulture’ investors, led by a New York billionaire, and the agreement of the US Department of Justice and Citibank, involving a financial settlement to avoid a lawsuit over bad mortgage deals and CDOs in the pre-crisis period.

My central observation is that while legal forms are being observed, these are obviously political processes, with outcomes reflecting relative political power rather than any kind of neutral application of the law. So, the world financial system is part of international power politics: it matters a lot that Citibank is a US bank, while BNP Paribas is French and so on. This is very different from the picture of a global financial system independent of, and standing in judgement on, national governments that seemed to be emerging in the 1990s.

As an illustration, I found this ad put out by the ‘vultures’. To see my point, try interchanging “US” and “Argentina” throughout and assuming an adverse judgement by an Argentinian court against the US government.