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The Prima Facie Case that Great Depression Policy was Really Really Bad

As a Canadian, it’s very strange hearing Americans talk about the Great Depression. The American public education system apparently has a monolithic view on the subject. Based purely on my interactions with people who have passed through that system, I imagine their kindergarten classes must be something like this:

TEACHER: Alright students, what’s 1 + 1?

STUDENTS: 2!

TEACHER: What’s 2 + 2?

STUDENTS: 4!

TEACHER: What do you call someone who doubts the efficacy of FDR’s policies in bringing an end to the Great Depression?

STUDENTS: Insane!

The Great Depression is a complex historical event, so the level of confidence I see from American laymen certainly makes it seem like they’ve been brainwashed from a young age. Maybe it’s just the sort of Americans who make internet comments.

If you believe that it is clearly and obviously true that (1) the New Deal ended the Great Depression or that (2) World War 2 ended the Great Depression, this article is for you. I’m not going to make a slam-dunk case against these notions; if you’re looking for one, you’ll need to read something far longer than a blog post. I recommend Robert Higgs or Bob Murphy. My goal here is to make the case that these ideas, far from being obvious, are actually very counter intuitive given the facts. Continue reading The Prima Facie Case that Great Depression Policy was Really Really Bad

Civil Asset Forfeiture with Don Boudreaux

Don Boudreaux is a professor of economics at George Mason University. He blogs at Café Hayek. I invited him to discuss civil asset forfeiture on the podcast because of a conversation we had about it at a recent Mercatus Center colloquium.

Civil asset forfeiture is the practice of the state taking someone’s property on suspicion that the property has been used for wrongdoing, without having to charge the owner with a crime.

Civil asset forfeiture had its origins in British maritime law. The British had difficulties with pirates along the Barbary Coast. When the pirates were apprehended and their ships brought back to London, British courts had difficulty deciding what to do with these ships. The ships’ owners were outside the jurisdiction of British law, so the courts couldn’t try and convict them, but they couldn’t send the ships back to them either only to have them return to the seas with a fresh pirate crew! Parliament thus passed a law allowing the courts to charge the property itself with the crime if and only if the property’s owner was outside the jurisdiction of British law. Continue reading Civil Asset Forfeiture with Don Boudreaux

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Experimental Economics, Norms, and Prosocial Behaviour with Erik Kimbrough

Erik Kimbrough, assistant professor of economics at Simon Fraser University, is an experimental economist. In this episode, we discuss his paper, “Norms Make Preferences Social” which he coauthored with Alexander Vostroknutov.

Experimental economics began with Vernon Smith’s double auction experiments in the 1950s. Smith wanted to test whether market participants could converge to the equilibrium prices and quantities predicted under neoclassical theory. He found that, indeed, the students in the lab did converge to the optimal prices and quantities, and experimental economics was born.

In the late 1970s and 1980s, the practice of testing game theory models in the lab caught on and became mainstream. One of these games, the ultimatum game, features two players dividing up a sum of money. The first play offers the second one an amount, and the second player can accept or reject. Rejection means neither player gets anything, so a (naive) game theorist would predict that player one will offer the smallest amount, a penny, and the second player will accept it. In reality, people often offer a 50-50 split, or 60-40. And when the person offering gets too greedy, say offering an 90-10 split, people routinely reject such offers. Continue reading Experimental Economics, Norms, and Prosocial Behaviour with Erik Kimbrough

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The Bubble Films with Jimmy Morrison

Jimmy Morrison is an independent filmmaker who is currently directing two films: The Housing Bubble and The Bigger Bubble. The Housing Bubble deals with the history of business cycles in America, spanning from the First World War to the 2008 crash. The Bigger Bubble deals with the aftermath of the 2008 crash. These films began as a single project, but Jimmy chose to split it into two films in order to tell the full story.

The films’ website provides a synopsis:

The Bubble is coming out at a crucial time in American history. Numerous films have blamed the free market for the economic woes of the country. Uniquely, Tom Woods has teamed up with experts such as Ron Paul, Peter Schiff, Jim Rogers, Marc Faber and Doug Casey to explain the economic problems America is facing and what is needed to restore prosperity.

You can’t watch the news today without hearing more calls for regulation. Deregulation is consistently the boogey man when it comes to sound bite explanations of this economic crisis. The public currently believes the government saved us during the Great Depression and that it will save us again today. America needs a simple economics lesson on this recession and Tom Woods has done just that in his book Meltdown. The Bubble successfully adapts Meltdown into a feature-length documentary.

The Bubble features interviews with numerous economists and financial analysts who actually predicted the housing crisis and recession. The people we are trusting to solve this problem claim no one saw it coming. The fact is Austrian economists predicted this recession years ago, and they are the only ones with the insight necessary to bring us out of this economic slide. This film asks them why this crisis happened, how we recover, and what America is facing.

Download this episode.

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Was Murray Rothbard a Good Economist?

Someone on Quora was wondering whether Murray Rothbard was a good economist. I obliged with an answer:

Yes. Murray Rothbard was a prolific thinker whose contributions to economics were numerous, original, and significant.

His magnum opus, Man, Economy, and State, was the first complete treatise on economics in a half century. The book was originally meant to be a textbook version of Mises’ Human Action, but Rothbard built on Mises’ work to create a more complete body of thought. He contributed his own theory of production and supply, while critiquing Mises’ theory of monopoly as a static conception that did not fit with his generally dynamic view of the economy. Rothbard argued persuasively for a return to the original definition of a monopoly as a government grant of exclusive privilege.

His work in economic history is excellent. His book, The Panic of 1819: Reactions and Policies is the definitive work on the titular panic. America’s Great Depression applied Mises’ theory of the business cycle to the Great Depression, showing how the Fed under Benjamin Strong pumped up an inflationary bubble in the 1920’s, which led to the 1929 crash. He also demonstrated that Herbert Hoover was not a laissez faire President but a big-state interventionist, in opposition to what was commonly (and wrongly) believed at the time.

An Austrian Perspective on the History of Economic Thought, Rothbard’s two-volume work on the history of thought, is by far the most exhaustive history of economic thought up to 1870 (he tragically died before he could write a third volume covering the developments after 1870). While most histories of economic thought focus on a few key figures, maybe Smith, Ricardo, John Stuart Mill, Marx, and Keynes, Rothbard covers everyone. If someone had a passing thought about economics before 1870, and it came down to us in print somehow, Rothbard probably discusses it. While most histories of economic thought will treat Adam Smith as the inventor of the discipline (maybe with a passing nod to the French Physiocrats), Rothbard spends over 500 pages discussing the economic thinkers who preceded Smith, beginning with Aristotle. It turns out that economics had a rich history before Smith, and some earlier thinkers (Turgot and Cantillon) even surpassed Smith in many respects. Even if you disagree with Rothbard on absolutely everything else, he deserves credit for being an outstanding historian of economic thought.

Finance and the Austrian School with George Bragues

This episode of Economics Detective Radio features George Bragues, professor of business at the University of Guelph-Humber, discussing his work developing a distinctly Austrian theory of finance. While there have been forays into finance by Austrians such as Mark Skousen and Peter Boettke, Austrians have not yet fully developed a complete and distinctly Austrian theory of finance.

George names five pillars of modern finance theory: (1) The capital asset pricing model (CAPM), (2) the Black-Scholes option pricing model, (3) the efficient markets hypothesis (EMH), (4) behavioural finance, and (5) the Modigliani-Miller theorem.

CAPM is a model that derives the value of assets based on the risk-free rate and market risk, that is, risk that cannot be diversified away. The Austrian response to this model is that there is no such thing as a risk-free asset, as risk is inherent to human action. An Austrian alternative to CAPM would incorporate the Austrian theory of a natural interest rate derived from time preference. Continue reading Finance and the Austrian School with George Bragues

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Is a Small Amount of Money More Valuable to a Low Income Person than to a High Income Person?

I answered this question over at Quora. Just about all the other answers were wrong, so I thought I’d set things straight.

No. Value is not a quantity. It cannot be compared across individuals, so we cannot say that $50 is more valuable to person A than to person B.

To understand value, you must understand action. To act is to select one thing and set aside another. Thus, an ability to evaluate one thing over another is a necessary prerequisite to action, one that all mentally functioning humans possess. Valuation is always a comparison between two alternatives. It is a comparison made in the mind of an acting human.

Because the high income person and the low income person are different individuals, their valuations cannot be compared. We could say something like, “the low income person values an hour of his time less than $50, while the high income person values an hour of his time more than $50.” But this does not mean the low income person values $50 more than the high income person does in any absolute sense, because an hour of time is not the same to different individuals.

Some people have said that the answer is yes because marginal utility decreases with quantity. This is a misinterpretation. It is true that people tend to value additional units of a stock of interchangeable consumer goods less with each additional unit. This is because a person will use the first unit of the good to satisfy his highest unmet need, the second unit to satisfy his second highest unmet need, the third unit to satisfy his third highest unmet need, and so on. Thus, marginal utility does decrease with quantity. But it only meaningfully decreases with respect to other goods! If I have five dumplings, I might value an additional dumpling more than a battery, but if I have six or more dumplings I might value the battery more than an additional dumpling.

While I value things less with each additional unit, we can’t take this to mean my valuation of my total wealth must decrease as I grow wealthier. Total wealth comprises everything, leaving nothing to compare it against, so valuation is meaningless.

Continue reading Is a Small Amount of Money More Valuable to a Low Income Person than to a High Income Person?

Teaching Economics: Age of Empires and Central Planning

When I was young, I played a lot of Age of Empires. For those who are unfamiliar with the series, they are games where the player must direct a tiny civilization’s development. He begins with one building and only a few villagers. By right clicking on a villager, then left clicking on a tree, stone mine, gold mine, or animal, the player can direct the villager to gather wood, stone, gold, or meat. He can also direct villagers to make buildings. And with buildings, he can recruit more villagers or soldiers.

By directing every action of every person in his civilization, the player can eventually turn his tiny village into a sprawling city, clashing militarily with other players’ civilizations.

I think a game economy like that one could be a good teaching tool for young people. In the early stages of the game, centrally managing a few villagers works well. But as the civilization grows, the player’s attention becomes more stretched. It is common, in the game economy, for the player to discover a group of villagers clustered around a (now exhausted) mine or forest. The growing economy becomes ever more difficult to manage, and it becomes more difficult to coordinate the growing numbers of workers and soldiers. Continue reading Teaching Economics: Age of Empires and Central Planning

Jane Jacobs as Spontaneous Order Theorist with Pierre Desrochers

This episode of Economics Detective Radio features Pierre Desrochers discussing the life and work of Jane Jacobs. Jacobs, born Jane Butzner, was a thinker and activist who wrote about cities. She spent her early career as a business journalist. When she started writing about urban renewal, she recognized the policy for the disaster it was. Jacobs became a voice for the general dissatisfaction with a policy that would bulldoze whole neighbourhoods, relocating the inhabitants into new buildings preferred by urban planning reformers and political elites.

The editors of Fortune Magazine invited Jacobs to write a piece about downtowns. Her piece, “Downtown is for People” became the magazine’s most-discussed article. She developed the ideas in that article into her first and most famous book, The Death and Life of Great American Cities. The book launched her as a minor celebrity.

In New York City, she successfully opposed initiatives to “renew” Greenwich Village. She also opposed a plan that would have cut a highway through SoHo, Chinatown, and Little Italy. Eventually she found herself opposing the Vietnam War, and, fearing that one of her sons would be drafted, moved to Toronto. Continue reading Jane Jacobs as Spontaneous Order Theorist with Pierre Desrochers

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TruthCoin, Prediction Markets, and Anarchy with Zack Hess

This episode of Economics Detective Radio features Zack Hess. Zack is working on a project called “TruthCoin,” a decentralized prediction market based on the technology behind bitcoin.

Prediction markets are a highly effective way to bring together dispersed information and insight into prices that reflect the likelihood of any future event. However, recent attempts to create centralized prediction markets have been thwarted by governments under antiquarian anti-gambling laws.

Enter TruthCoin. TruthCoin is a prediction market (currently in beta) that will not depend on any central server or organization. This online market will be dispersed among all the participants and thus more difficult to shut down.

Furthermore, TruthCoin will not depend on a central arbiter. The main difficulty faced by the creators of TruthCoin is in creating incentives for human arbiters to judge the outcomes of bets correctly. The solution is for judges to be set against one another, for each judge to get a higher payoff when other judges are wrong. Then any attempted collusion between arbiters falls apart. Continue reading TruthCoin, Prediction Markets, and Anarchy with Zack Hess

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