Category Archives: Quote of the Week

Quote of the Week

The preservation of a free system is so difficult precisely because it requires a constant rejection of measures which appear to be required to secure particular results, on no stronger grounds than they conflict with a general rule, and frequently without our knowing what will be the costs of our not observing the rule in the particular instance. A successful defence of freedom must therefore be dogmatic and make no concessions to expediency, even where it is not possible to show that, besides the known beneficial effects, some particular harmful result would also follow from its infringement.

— Friedrich Hayek, Law, Legislation, and Liberty: Rules and Order (Chicago: Chicago University Press, 1973), p. 61.

Quote of the Week

…[T]he banking system has always been viewed as too big to fail. When the demands for cash during a crisis cannot be met, there are two choices: either don’t enforce debt contracts or liquidate the banking system. No society with a market economy has ever (intentionally) chosen to liquidate its banking system.

— Gary B. Gorton, Misunderstanding Financial Crises: Why We Don’t See Them Coming (Oxford: Oxford University Press, 2012), p. 99.

P.S. For those thinking of this problem in terms of the bailout, Gorton’s argument might seem very wrong. But, think also of how private clearinghouses protect their member banks, as long as these member banks follow certain rules established by the clearinghouses. Think about how clearinghouses pooled their member banks’ assets and issued their own notes to maintain liquidity within the banking system (and, oftentimes, even outside the banking system). I think Gorton is more right than wrong. Also, note that he’s not arguing against individual failures, only against systemic failure.

Quote of the Week

I saw this on Facebook. Aristotle on the tragedy of the commons,

What is common to the greatest number gets the least amount of care. Men pay most attention to what is their own; they care less for what is common; or at any rate they care for it only to the extent to which each is individually concerned. Even when there is no other cause for inattention, men are more prone to neglect their duty when they think that another is attending to it.

— Politics, II.3.

Quote of the Week

Self-organizing social systems economize on the knowledge people need to pursue their goals successfully. Science, the market, and democracy are so complex that no human being can grasp them except by using a theory divorced from concrete details. Such a theory, however, can provide little or no guidance in making specific decisions within such an order. Few economists are successful entrepreneurs, few political scientists win public office, and few philosophers of science do valuable scientific research. The skills required to succeed within a spontaneous order are little connected to the skills needed to understand it.

— Gus diZerega, “Market Non-Neutrality: Systemic Bias in Spontaneous Orders,” Critical Review 11, 1 (1997), p. 123.

Quote of the Week

Charles Goodhart (1984, p. 96) has proposed the hypothesis, which has come to be known as Goodhart’s Law, that any stable relationship between a monetary aggregate and national income will break down as soon as it becomes the object of a policy to stabilize that aggregate.

— David Glasner, Free Banking and Monetary Reform (Cambridge: Cambridge University Press, 1989), p. 217.

One of the first things that flashed through my mind when I read that is Nick Rowe’s recent post on why finance has become so important (although, I’m not sure I buy his story, because finance has always been a big part of the story — most significant fluctuations in output during the gold standard era came with financial panics, the Great Depression included financial panics, and we have had recurrent financial panics since intermediaries began to borrow through non-deposit liabilities).

Quote of the Week

What we find in the real world of social democracy is not Popperian or Weberian science in action, but a cacophony of confident voices that unwittingly express factual ignorance, theoretical ignorance, ignorance of logic, ignorance of their own possible ignorance, ignorance of their opponents’ possible ignorance; and, in consequence, dogmatism, demagoguery, and demonization.

— Jeffrey Friedman, “Popper, Weber, and Hayek: The Epistemology and Politics of Ignorance,” Critical Review 17, 1–2 (2005), pp. 23–24.

Quote of the Week

The human mind in its search for knowledge resorts to philosophy or theology precisely because it aims at an explanation of problems that the natural sciences cannot answer.

—    Ludwig von Mises, The Ultimate Foundation of Economic Science (Irvington-on-Hudson: Foundation for Economic Education, 2002 [1962]), p. 117.

I like to interpret that sentence as “…the human mind resorts to philosophy or theology precisely because it aims at an explanation of problems that the natural sciences [and social sciences] have not yet answered.”

Quote of the Week

In response to a panic, toward the end of the nineteenth century, clearinghouses issued their own money, called clearinghouse loan certificates. There were two uses for this new credit instrument. First, these instruments were used only among members of the clearinghouse as a substitute for cash in the clearing process. Later, as their use evolved, clearinghouse loan certificates were issued directly to the public as money. Clearinghouse loan certificates were a way of creating safe collateral by bank coalitions — the clearinghouses — during crises. These credit instruments were liabilities of the clearinghouse members jointly, rather than of any individual member.

— Gary Gorton, Misunderstanding Financial Crises (Oxford: Oxford University Press, 2012), p. 52–55.