One of the striking features of (propertarian) libertarianism, especially in the US, is its reliance on a priori arguments based on supposedly self-evident truths. Among[^1] the most extreme versions of this is the “praxeological” economic methodology espoused by Mises and his followers, and also endorsed, in a more qualified fashion, by Hayek.

In an Internet discussion the other day, I was surprised to see the deductive certainty claimed by Mises presented as being similar to the “certainty” that the interior angles of a triangle add to 180 degrees.[^2]

In one sense, I shouldn’t be surprised. The certainty of Euclidean geometry was, for centuries, the strongest argument for the rationalist that we could derive certain knowledge about the world.

Precisely for that reason, the discovery, in the early 19th century of non-Euclidean geometries that did not satisfy Euclid’s requirement that parallel lines should never meet, was a huge blow to rationalism, from which it has never really recovered.[^3] In non-Euclidean geometry, the interior angles of a triangle may add to more, or less, than 180 degrees.

Even worse for the rationalist program was the observation that the system of geometry (that is, “earth measurement”) most relevant to earth-dwellers is spherical geometry, in which straight lines are “great circles”, and in which the angles of a triangle add to more than 180 degrees. Considered in this light, Euclidean plane geometry is the mathematical model associated with the Flat Earth theory.

Read More »

John Howard’s endorsement of Ian Plimer’s children’s version of his absurd anti-science tract Heaven and Earth has at least one good feature. I can now cut the number of prominent Australian conservatives for whom I have any intellectual respect down from two to one.[1] Howard’s acceptance of anti-science nonsense shows that, for all his ability as a politician, he is, in the end, just another tribalist incapable of thinking for himself. [2]

Although not all the tribal leaders are old men, an old, high-status man like Howard is certainly emblematic of Australian delusionism . Like a lot of old, high status men, he stopped thinking decades ago, but is even more confident of being right now than when he had to confront his prejudices with reality from time time. Like other delusionists, Howard has no scientific training, shows no sign of understanding statistics and almost certainly hasn’t read any real scientific literature, but nonetheless believes he can rank clowns like Plimer and Monckton ahead of the real scientists.

The situation in the US is similar but even more grimly amusing, with the sole truthteller in the entire Republican party, Jon Huntsman, recently reduced to waffling (in both US and UK/Oz senses of this term) because he briefly looked like having a chance to be the next non-Romney. This tribal mindlessness is reflected in the inability of the Republican Party, at a time when they ought to be unbackable favorites in 2012, to come up with a candidate who can convince the base s/he is one of them, but who doesn’t rapidly reveal themselves as a fool, a knave or both.

And, as evidence of the utter intellectual shamelessness of delusionism, you can’t beat the campaign against wind power, driven by the kinds of absurd claims of risk that would be mocked, mercilessly and deservedly, if they came from the mainstream environmental movement.

The global left is in pretty bad shape in lots of ways. Still, I would really hate to be a conservative right now.

fn1. Now down to zero. Turnbull has proved he lacks any real substance.

fn2. I’m not saying that all Australian conservatives are mindless tribalists. There’s a large group, epitomized by Greg Hunt and now Malcolm Turnbull, who understand the issues quite well, but are unwilling to speak up. Then there is a group of postmodern conservatives of whom Andrew Bolt is probably the best example, who have passed the point where concepts of truth or falsehood have any meaning – truth is whatever suits the cause on any given day.

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.

Read More »

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.

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.

This is going to be a long and wonkish post, so I’ll just give the dot-point summary here, and let those interested read on below the fold, for the explanations and qualifications.

* The dominant model of unemployment, in academic macroeconomics at least, is based on the idea that unemployment can best be modelled in terms of workers searching for jobs, and remaining unemployed until they find a good match with an employer

* The efficiency of job search and matching has been massively increased by the Internet, so, if unemployment is mainly explained by search, it should have fallen steadily over the past 20 years.

* Obviously, this hasn’t happened, but economists seem to have ignored this fact or at least not worried too much about it

* The fact that search models are more popular than ever is yet more evidence that academic macroeconomics is in a bad way
Read More »

I have a couple of pieces up on the topic that’s likely to consume much of my attention for some time to come: Piketty’s Capital in the 21st century.

Here’s a long review article at Inside Story focusing on the conditions that have made Piketty a bestseller. And here, at The Drum is my take on claims by Chris Giles at the Financial Times that Piketty’s data is fatally flawed.

Update Piketty has responded to the Financial Times. To sum up, as I said in the Drum piece, the criticisms are (mostly incorrect) nitpicks except for the point about UK wealth inequality. Here Piketty’s demolition is convincing. The FT hasn’t used a consistent series. Rather, it’s taken a recent survey estimate (likely to underestimate wealth) and spliced it onto older estate data to produce the counterintuitive finding that the inequality of wealth hasn’t increased.

Like lots of other readers of Thomas Piketty’s Capital, my big concern is not with the accuracy of the diagnosis and prognosis but with the feasibility of the prescription. Piketty’s proposal for a global wealth tax requires an end to the capacity of capital to escape taxation by exploiting the limitations of national taxations system, through tax havens, transfer pricing, artificial corporate structures and so on.

Given the limited record of success in past efforts to control global tax evasion and avoidance, Piketty is reasonably pessimistic about efforts in this direction. But the latest news from the OECD is remarkably positive. All members of the OECD (notably including evader-friendly jurisdictions like Austria, Luxembourg and Switzerland) have agreed to a system of automatic information exchange for tax purposes. Moreover, the “too big to jail” status of major banks engaged in facilitating tax evasion and money laundering, may finally be coming to an end.

On the face of it, the oft-repeated, but so far unjustified claim that “the days of tax havens are over“, may finally be coming true, at least for all but the wealthiest individuals. But the crackdown on individual tax evaders only points up the ease with which corporations (and individuals with the means to establish complex corporate structures) can avoid tax through a mixture of legal avoidance and unprovable evasion (for example, by illegal but unprovable internal transfers).

At the core of the problem is the ability to establish corporations in ways that make their true ownership impossible to trace. And, the jurisdiction most responsible for this is not a Caribbean island or European mini-state, but the “First State” of the US – Delaware, which has long been the preferred location for US incorporation by reason of its business friendly laws.

Read More »