Man has only one tool to fight error: reason.
— Ludwig von Mises
1. Last week I wrote on foreign investment, as a critique of Luiz Carlos Bresser-Pereira’s post on Argentina’s expropriation of YPF. Álvaro Vargas Llosa’s essay explains the situation very well. A brief history of the nature of the Argentine regime is given by Daron Acemoglu and James Robinson, authors of Why Nations Fail.
2. The May issue of The Freeman is out. Richard Fulmer, writing “The Keynesian Cure for Hunger: Eat More,” takes advantage of an unfortunate quote used by Sylvia Nasar to explain the causes of the industrial revolution. In one word: consumption; “[c]onsumer demand was the ultimate economic key to the Industrial Revolution.” Fulmer argues: (1) the key to the industrial revolution was supply, or wealth creation; (2) this is your typical Keynesian consumption argument. Fulmer is absolutely right that consumption did not drive wealth creation in 19th century England. He is wrong, however, to peddle the consumption argument as Keynesian.
If Keynes really thought it was consumption that mattered then he would not have argued in favor of lowering the rate of interest through monetary stimulus nor would he have suggested socializing investment — what Keynes was interested in was increasing effective demand. Neither did Keynes argue that “supply does not create its own demand.” What Keynes argued was that we live in a monetary economy, as such a fall in spending means a loss in income and productivity. Keynes’ theory was not so much about a general monetary glut (scarcity of money), but insufficient investment to maintain effective demand.
3. Larry Ball, “Ben Bernanke and the Zero Bound.” Why did Bernanke change his mind on the proper monetary response to an economy entering into a liquidity trap? Ball blames the Federal Open Market Committee, specifically Vincent Reinhart, “groupthink,” and Bernanke’s insecurity. I think the psychology portion of the paper is difficult to swallow, but the overview of the theory is good. With regards to the latter, Ball writes that social psychology suggests these are the only two options. Of course, Bernanke could not have been genuinely persuaded. Alternatively, if we want to strike at the other end of the spectrum, we could say that Bernanke adopted the consensus to make a promotion for palatable.
4. Who said private industry is not interested in space exploration? The private sector has been interested in space for quite some time. The problem is that expected returns just have not been large enough to warrant real exploration. I agree with Karl Smith, as society becomes wealthier there will be more private space exploration. Further, I predict that the outcomes of private space exploration during its first fifty years will be magnitudes greater than the aggregate of what NASA has accomplished so far — I will be bolder and claim that the outcomes will be many times greater than what NASA would have accomplished with a larger budget.
5. The second edition of The Elgar Companion to Post Keynesian Economics is out. This book sounds outstanding. At $280, if anybody wants to donate to the Jonathan Charity I am all for it. I guess I will have to wait and see if San Diego State’s library buys it.
6. Perry Merhling reviews Lawrence White’s The Clash of Economic Ideas. Merhling’s main criticism attacks the open favoritism towards Austrian ideas, especially when concerning how White characterizes certain ideas (free-market versus interventionist, which Merhling suggests is analogous to good versus bad in White’s book). I have yet to receive my copy, so I cannot comment, but something that strikes me is that a lot of economists belonging to different paradigms tend to talk past each other. Merhling chastises White for framing everything within the context of the socialist calculation debate. If this is true — and, for now, we will have to take Merhling’s word for it —, I think it is a product of how Austrians interpret the importance of Mises’ arguments. Mises wanted to emphasize the importance of the pricing process, as the pricing process is really the backbone of the market process. Post-Keynesians have their own alternative theory of prices (that, actually, can be similar in conclusion, but very dissimilar in explanation of causation), and so the importance of Mises’ contribution is lost (or rejected).