That's the title of a new, short essay by James M. Buchanan. Excerpt:
Economists do not really understand what they are doing as they seem forced to make efforts to control aggregate variables that are not controllable in any direct sense. For example, the rate of employment (or unemployment) cannot readily be shifted by governmental mandate. At best, small and peripheral changes may be made while the emergent aggregate generated by the working of the large and complex economy remains stubbornly immune, or worse, to wrongly conceived reform efforts.
Hat tip goes to BookForum.
That might be because the rules of what works in a post-industrial world are not the same as a pre-industrial or even an industrial world. Most economic theories came into existence in a world very unlike the one we now live in.
fusion: First thing the guvmint would need to purchase 5,000,000 shovels for them to lean on.
I oppose Obama because I’m a racist who believes that the economy is a conglomeration of hundreds of millions of rational individauls acting in their own best interests. As such central (control economy) planning cannot work unless the actors are enslaved and (most of them) impoverished.
Fusion, at best there will be a NET increase in employment of one million and a NET increase in value added of $50B per year (around 0.35% of $14,250B). You can argue that my estimates are nonsense because I’ve just made them out of nothing but that’s precisely Buchanan’s point. Anyway I’m sure my estimates are as good as estimates from the best macromodels of the US economy.
wlu2002 et al, do you believe that Ricardian equivalence is true in reality, or merely in recent macro theory? There isn’t a lot of evidence to suggest the former.
I’m not very impressed. Sure, macroeconomics as a field of inquiry has been more or less totally unsuccessful. There is, almost literally, no settled science as to how the economy works. And this is a problem. But various theories do postulate certain effects from government action and some of the cause and effect relationships postulated do seem to be borne out by some real world cases. For example, most economists believe that increased government spending and other fed actions prevented a deeper recession with higher unemployment. To argue that they are entirely wrong requires adopting a contrary (and significantly minority view) of macroeconomics.
I think the better argument is that economists have no clothes because they have failed to develop the institutional tools to resolve even the most academic disputes of fundamental macroeconomic theory.
fusion:
I think you miss Buchanan’s point. That a government job is “not a real job” goes to the core of the argument.
It surely is possible for the government to simply hire people, but as pointed out above the taxes needed for this destroy other jobs (which is not easy to measure since these losses are “unseen” and difficult to trace back to the taxes).
The important point Buchanan makes is that “jobs” are the result of value-creating exchanges between individuals in the spontaneous order of the market.
Because information about the needs of the individuals and the available resources to satisfy them is dispersed over all individuals in society, the efforts of a central planner to create value creating jobs is severely limited. If a central planner tries to “create jobs” by his centrally planned allocation of resources, the central planner in effect prevents the utilization of very much knowledge in society, and hinders the resources under his control to be as advantadgeously employed as they can be.
Only the creation of jobs in the spontaneous order of the market by profit-seeking individuals guided by the price system utilizing their own knowledge of specific circumstances of space and time which only they themselves know of is able to fully utilize the knowledge dispersed in society about possible valuable opportunities for exchange and the creation of valuable jobs.
Sure, the government can change the employment rate… at a cost that no one in their right mind would be willing to pay. Which, of course, makes it a non-serious argument and Buchanan’s point dead on.
Why do people even make claims like this? Three years ago, nobody would have disputed the claim that during an economic expansion as unemployment drops and inflation begins creeping upwards, the fed should raise rates which will lead to a more balanced correction, though one with a temporary increase in unemployment. And certainly, who would dispute that the fed raising rates right now would lead to increased unemployment? But if you’re willing to agree that the government can make things worse, than it can also make things better, if for no other reason than that it’s already doing something and that might be the thing making it worse (which it could obviously stop doing). And arguing that there aren’t very good monetary or fiscal tools to help right at this moment is an entirely different claim which can’t be substantiated by general claims regarding ‘the working of the large and complex economy’.
Because information about the needs of the individuals and the available resources to satisfy them is dispersed over all individuals in society, the efforts of a central planner to create value creating jobs is severely limited. If a central planner tries to “create jobs” by his centrally planned allocation of resources, the central planner in effect prevents the utilization of very much knowledge in society, and hinders the resources under his control to be as advantadgeously employed as they can be.
Only the creation of jobs in the spontaneous order of the market by profit-seeking individuals guided by the price system utilizing their own knowledge of specific circumstances of space and time which only they themselves know of is able to fully utilize the knowledge dispersed in society about possible valuable opportunities for exchange and the creation of valuable jobs.
According to this argument, the government had better get out of the business of building roads, hiring police officers and teaching kids. Clearly, nothing the government can ever do creates value.
Arguments like these only establish more clearly that this entire viewpoint rests on a very particular and highly contentious interpretation of exactly how our very large and complex economy functions.
No? What would happen to the rate of employment if the government hired 5 million people to build out the country’s infrastructure?
Do slaves count as employed or unemployed? Or three-fifths employed?
@ mpowell “According to this argument, the government had better get out of the business of building roads, hiring police officers and teaching kids. Clearly, nothing the government can ever do creates value.”
I was talking about jobs in the production of private goods. I tried to make that clear in my second post.
Of course with public goods the market-price system cannot beneficially coordinate actions of individuals, and the government has a role in producing these goods, which can of course can be of real value. The goods you mention are probably a good example of such goods.
However, the government should produce these public goods whether we are in a recession or not, and whether there is unemployment or not, if the citizens are willing to pay the tax-price for them.
From the context of fusion’s post, I gathered that the discussion was about government creating jobs in the production of private goods just for the sake of it.
The governments potential for beneficial action here is an entirely different story.
Fusion, neither Buchanan nor anyone else denies that there will be an effect on employment. The point is that no one knows the size of the effect, and we may even argue whether the effect is positive or negative. We don’t know enough to claim that our predictions can justify particular policies; in your example we may believe that there will be some net positive effect of unknown size, but we cannot rule out entirely the possibility that only one net job is created at the cost of reducing GDP significantly. That’s why in my previous comment I started by saying “at best”. Economics as a science cannot provide the knowledge we need for policy making–that’s Buchanan’s point–but then we need to ask ourselves on which other knowledge decisions should rely–for this I recommend you to read Tom Sowell’s Knowledge and Decisions. The fact that science does not provide ALL the knowledge does not mean that is irrelevant or that it should be ignored, and indeed does not imply that we should delay decisions until science can provide all the answers. It’s unfortunate that scientists claim to know what they don’t know and act as any other interest group, but adults should not be surprised.
The thinking need to re-invent the science of economics is not the kind that happens in solitude. So I set up a wiki that allows anyone to interact with these issues. Economics from ground zero if you will.
The wiki site is http://rethinkingeconomics.wikidot.com
I definitely acknowledge crowding out and that there’s no free lunch, but how big of a deal is crowding out anyway? If everyone has a marginal propensity to consume of .5, then out of my $100 income, I’ll spend $50. Say government taxes 30% of my income. Then I’ll spend $35, however, if government spends the whole $30 it taxed me, aggregate spending goes up $65. Yes there is crowding out, but it’s very clear that spending is not 100% crowded out. It’s the same deal if you spend in deficit and increase interest rates; interest rates only go up to the point that the new government spending is financed.
Bull. Reread the “public goods” chapter of your economics textbook.
And, by the way, it’s more than just any statistic. It’s GDP.
dwr, we’ve recently had a professor on comments here write about teaching his class from free texts he downloaded from the “Library of Economics and Liberty”, so I don’t think you will win the argument about public goods in economic textbooks – it’s quite likely that they aren’t mentioned!
I think the point that is getting lost in the comments is this: the government actually can manage the economy to achieve a single variable, over a short to medium time frame. If all you want to do is increase unemployment and you don’t care about any thing else, the government can do that. It just employs more people as long as it can until something breaks. If you care about achieving a favorable result involving more than one variable, however, the complexity of the economy is very likely to overwhelm your efforts fairly quickly, no matter how much thought goes into them.
Interestingly, McKinsey agrees:
http://www.mckinsey.com/mgi/mginews/five_myths.asp
“Individual choices to shift nominally valued assets among differentially leveraged accounts cannot be allowed to generate multiplier effects over the whole
system. Some modern equivalent of one hundred percent, or full, reserve banking must finally be installed and enforced. The Glass-Stegall efforts to separate deposit and investment banking should presumably be updated and put in play.
Some extension-application of the antitrust laws to the banking conglomerations seems to be in order here. And, economists, in particular, must break free
from institutionally imposed biases and, instead, imagine settings in which the liberties of traders to choose among alternatives are utilized in tandem with the tools available through the wonders of modern electronic technology, while, at the same time, still achieving some close approximation of ideal money neutrality.”
I could nitpick with his post, but I basically agree with him. I also find myself in a similar situation. I am a Burkean/Pragmatist who believes that you need to show how to get from A to B through a series of tiny steps that confirm your general view. You can’t say, for example, “It’ll work when everything has changed, no matter how iffy it looks right now”.
I’m for Narrow/Limited/Utility Banking, which seems to be favored by a small number of people. I suppose it seems radical to some, while I consider pretty basic. In any case, if Fisher, Knight, Viner, and Simons, couldn’t get it done in the 30s, there’s no reason for me to believe that Kotlokoff, Wolf, Buiter, King, and John Kay, can get it done today.
BTW this sort of bubble/crisis should take money and power from the fools and give it to the wise but with the current monetary system it hurts everyone fools. The fools are hurt the most than the innocent bystanders and even the wise. We need to change the system so the fool’s wealth is given to wise but without the huge collateral damage.
mpowell is a perfect example of what’s wrong with this blog (and many like it): he admits he’s full of shit
yet so many are taking him seriously.
In other words, unwind all the financial “reforms” of the past three decades….
Radical rethinking is required here—a rethinking that has not occurred since the Great Depression.
Individual choices to shift nominally valued assets among differentially leveraged accounts cannot be allowed to generate multiplier effects over the whole system. Some modern equivalent of one hundred percent, or full, reserve banking must finally be installed and enforced. The Glass-Stegall efforts to separate deposit and investment banking should presumably be updated and put in play. Some extension-application of the antitrust laws to the banking conglomerations seems to be in order here. And, economists, in particular, must break free from institutionally imposed biases and, instead, imagine settings in which the liberties of traders to choose among alternatives are utilized in tandem with the tools available through the wonders of modern electronic technology, while, at the same time, still achieving some close approximation of ideal money neutrality.
Seems like a real repudiation of Greenspan, et al.
the debate in these comments proves buchanan’s point (if economics were a real science, could really explain how things work, either fusion would be right or he wouldn’t, and it would be provable (without all sorts of caveats and contingenices), instead it’s subject to debate).
Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach.
RE: my comment above:
And if those infastructure improvements are viewed by the private industry to increase future productivity (ie, better transportation, electric grids, water, etc.) then that may further increase the desire of private industries to expand their present level of investment.
In short. Crowding out is a problem when gov’t pushes private industry out of the market, but when the private sector isn’t really in the market, there isn’t really anyone to crowd out, and you may just provide the backbone for which the private industry builds their own investments on!
Think of the internet. This was a gov’t project the private industry never would have started on its own, but once built up via government financing, it provided an amazing backbone on which private industry expanded amazingly.
“The costs and consequences of the govt hiring 5 million people is debatable, but I don’t see a serious argument that it wouldn’t affect the employment/unemployment rate.”
Um… then how come so far as far as anyone can tell it hasn’t?
What do you think Bush + Obama shelled out a trillion+ dollars for? Altogether, we have spent that money mostly either to hire people directly or to prop up businesses as they hired people or refrained from firing people — essentially doing exactly what you say would obviously reduce the unemployment rate… yet, the unemployment rate has only risen.
So, either (a) it has not worked yet, but in another year or two it will, (b) the unemployment rate would have risen faster, so the government has succeeded in “affecting” the unemployment rate, only it is affecting one that we never got to see because it was a future rate, (c) we just haven’t been spending enough and to reduce the unemployment rate we need to spend several trillion really fast hiring people directly or (d) you’re wrong, it is not that easy, government cannot be sure to reduce unemployment even if it spends trillions trying to do so.
The thing is that, as you admit, the spending has other consequences – crowding out – and it also takes time. But the private sector could reduce unemployment too given time (!) so can the government really do better? Not if it crowds out the private initiatives, which would be sustainable jobs doing things people want. Government can keep borrowing and spending and borrowing and spending, but it is crowding out more efficient initiatives in the private sector at the same time, and as time passes this leads to stagnation not growth. Stagnation comes with high unemployment. So, perhaps government can never reduce unemployment.
Today is a good example of that – and so is the 1930s. FDR faced 20% unemployment and for years he spent massive amounts trying to hire all those people — but years later he still had 10-15% unemployment, finally falling to 8% and then climbing again… whereas the crash of 1920 had 20% unemployment initially, but in less than 2 years the private sector had brought that down to 6% and then a year after that to 2% (!)
So, did FDR succeed in affecting the unemployment rate? Hardly – unless by “affecting” you mean increasing it.
Delong wasn’t impressed with Buchanan’s essay; anyone shocked by this?
I find it ironic that Buchannan decries the practice of macroeconomics of using aggregates that hide important sub-categories in an article in which he lumps all economists together as “having no clothes”. He goes on to exclude himself, Adam Smith and several others from the accusation, but says nothing about the Austrian school. Whats up with that?
Governments can definitely affect employment and do it every day. For a negative example, look at minimum wages. Are there still economists claiming otherwise?
Yes, in principle, all jobs created by government are a misallocation of resource. Activities of the government are valued less than voluntary activities from individual with their own resources.
You should check out Walter Block’s thought-provoking book on the privatization of roads and highways.
One thing that is interesting realizing how the decision of keeping roads public trickles down onto other goods, which share a lot with roads: water, phone, cable TV, etc. Instead of rational economic calculation (is this project economical) to decide whether we should have 1, 2, 3 or 10 water companies, the public road system forces government to control who gets permission to dig trenches. So you start with one monopoly and end up with multiple.
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