Unforeseen Contingencies

One positive effect of the financial crisis is that it has made it more fun than ever to be an economist. There's no end of fascinating material to study, more than enough examples of hubris deflated, and hardly a better example of what an "unforeseen contingency" is.

Of course, a number of economists did sound the alarm early (e.g. Roubini, Shiller, Rogoff, and Steele*) but the crisis blindsided far too much of the profession. That led Paul Krugman to write a thoughtful and provocative piece discussing where macroeconomics went wrong. I'm no fan of Krugman, but much of his attack on the EMH & REH crowd is on target and well-deserved. (That's "efficient market hypothesis & rational expectations hypothesis"). This was the macro I studied at NYU, and while I think these models do have some sense and some use (mostly for exploring what a logically consistent equilibrium would look like), if one thinks this is all there is to macro, one has... umm... well... what's a nice way to say "a completely crazy view of the world?"

But Krugman's alternative, behavioral irrationality, is no alternative at all, and neither is Old Keynesianism. Old Keynesianism is internally inconsistent and empirically discredited, and irrationality isn't a coherent basis for economic theory... nor does behavioral economics actually demonstrate irrationality.

Roman Frydman and Michael D. Goldberg have an extremely nice little post on Roubini's Global Economics Monitor that goes straight to the point on this issue: real world humans are rational, and they face enormous problems of knowledge. Markets can't possibly be "perfectly efficient," because they are "mechanisms" for discovery and testing of imperfect personal knowledge, and for communicating this knowledge. They are the method by which we cope with our sheer ignorance and unforeseen contingencies, and are ultimately able to coordinate our behavior into productive channels.

Of course, this position isn't mainstream at all. It certainly doesn't fit with the EMH crowd, and for that matter not with any economics that focuses entirely on equilibrium. It's what first Roger Garrison and then Israel Kirzner identify as the "Austrian Middle Ground." While they were speaking of a reasonable medium between the "equilibrium always" crowd and the "kaleidic world" view of Ludwig Lachmann and co., it fits equally well here. In the "perfect rationality" vs. "irrationality" debate, the only rational position is the "neither of the above, rationality is bounded."

Oddly but unsurprisingly, Alan Greenspan had been a devotee of the former position. I recently heard him on BBC replying to the question "where did you go wrong?" His reply was that he hadn't realized that people, and markets, are inherently irrational.

What a wild swing, from one extreme to another, missing the one solid spot of sanity. Alan, as one NYU alumnus to another, won't you please read this book, finally? It will do your soul good.

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*I've now even found notes from a lecture I gave at Montana State in Spring 2006 in which I warned of growing U.S. fiscal imbalances, foreign borrowing, the housing bubble, and an eventual nasty unwinding.

I've been in a lengthy (and ongoing) discussion with a friend who argues that "job creation" should be the first economic priority of the U.S. government at this juncture. So long as "job creation" is left undefined, it's hard to disagree. But in his view, "job creation" means stimulus spending, paid for by borrowing abroad (he has no illusions about the federal government being a font of wealth waiting to be distributed).

One problem (among many) with government "job creation" is the entire concept of what constitutes a "job." Is it any activity? Or is it any activity that creates sufficient value to warrant it being done. If it's the former, well, there's little doubt that government can drive people into activity for activity's sake. And it can then "pay" them with funds borrowed from China, or with newly created fiat money. But if net value isn't being created, this is a losing proposition. It's just the thing that brought down the Soviet Union: "We pretend to work, they pretend to pay us." Either we get stuck with additional debt burden (but no new means to pay the addition) or China gets stuck with non-performing debt. And the alternative of monetizing the debt is even more destructive, since the resulting price inflation generates additional distortions.

It's hard to see how "stimulus" spending is creating value on net, as if the government had some special ability or incentive to identify good projects that private entrepreneurs don't have. When stimulus spending is specifically devoted to "job creation" it's no different. If we continue to incur debt or create dollars to pay for projects that don't create value, we consume our capital and further jeopardize our future.

President Obama is planning a Jobs Summit in December. The danger is that job creation will become an excuse for further fiscal irresponsibility and capital consumption.

Of course, not everyone agrees with this analysis. So my question for them: "just how much additional debt to China do you you think we should incur to clean up streambeds?"

It's simply crazy. Why is it so hard to understand that prosperity can't result from borrowing to finance unproductive activities?

According to New York Times, police officer Sergeant Mark Todd is probably the one who stopped the Fort Hood terrorist after Sgt. Munley engaged him. We at Unforeseen Contingencies also salute Sgt. Todd.

Both Munley and Todd faced a madman, at risk of their own lives, and stopped his rampage. Civilization depends on this sort of courage.

A pity there's also an unpleasant note. The Rockwellites smell a NWO conspiracy, of course.

I am not quite sure what the conspiracy is supposed to be, but I gather it has something to do with the fact that Sgt. Munley is a female.

I wonder if the Rockwellites realize that Sgt. Todd is black.
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(You have to wonder at the viciousness of the Rockwell crew. There's no dispute from them that Sgt. Munley attacked Hasan in a gun battle and was shot. So now she's slammed as a Jessica Lynch, someone who didn't do anything but was anointed a hero anyway. Yet by every account I've read, both Munley and Todd attacked Hasan and shot at him. One of them was shot, and the other expected to be shot. We can let ballistics analysis determine whose bullets actually stopped Hasan [maybe it was some unidentified third party] but it's clear that Munley behaved heroically, as did Todd.)

The Rockwellites had been doing decent work of late denouncing Fed, Treasury, and their various four-letter programs for turning the world over to Goldman-Sachs. Add to this some on target criticism of Obamacare, and the site was starting to look fairly reasonable. I was hoping that they would limit themselves to such things, the sorts of things we here at Unforeseen Contingencies endorse: the consistent promotion of reason and liberty.

However, (to celebrate the anniversary of the fall of the Berlin wall, I guess)...

They are now promoting a three part "analysis" of the coming World War III. It turns out that the "colour[sic] coded revolutions" are part of a secret U.S. conspiracy to impose a new world order. Part 2 "analyzes" the overthrow of Milosevic in Serbia, and the Rose and Orange Revolutions of Georgia and Ukraine. According to this "analysis," the western media (active participants in the NWO, of course) create the illusion that these are instances of people "demand[ing] democratic accountability and governance from their despotic leaders and archaic political systems." But in fact, "it is the people who lose out, as their genuine hope for change and accountability is denied..." The piece goes on to point out the odd coincidence that the revolutions "just happened" to be on behalf of pro-western viewpoints, rather than Milosevic, Shevardnadze, and Yanukovych.

Hard to believe that this could be coincidence...must be conspiracy! Promoted by the West!

OK, I confess. I, your correspondent and host at Unforeseen Contingencies, worked for two and one half years in Ukraine, helping in my own small way to lay the groundwork for the Orange Revolution. I was paid a handsome sum to do so, too... paid by The Eurasia Foundation, no less, one of the nefarious organizations exposed in the article.

In my capacity as a shill for the New World Order, I promoted... umm... Ludwig von Mises' theory of why socialism cannot calculate and must fail, Ludwig von Mises' theory of why interventionism leads to socialism, Friedrich Hayek's theory of how free markets communicate knowledge and create general prosperity, Ronald Coase's theory of why property rights are crucial underpinnings for a free market economy, and similar NWO ideas. As one of my studentsvictims put it after the re-election of President Kuchma in 1999, "If we could only make these ideas more widely known, things would turn out very different here."

And I must confess, too, I knew many other people who were working in similar capacities. I met people who were conducting classes or otherwise promoting ideas like how commercial law works, what an impartial court is and how it functions, why a court should rule according to law and facts rather than orders from politicians, how to conduct an honest election, how to ensure ballot boxes weren't stuffed, etc. etc. etc. You get the picture, all those insidious NWO principles that prevent democratic accountability and ensure despotic rule. I met USAID people who were going to Ukrainian mayors and explaining how if they stopped municipal bureaucrats from oppressing local entrepreneurs, their cities would begin to grow. I even met World Bank officials who had successfully convinced the local central bankers to stop running the printing presses and destroying the monetary system!

So there it is, exposed, the NWO conspiracy that the Rockwellians are warning us about: the world no longer safe for the likes of communist mass murderer Milosevic, corrupt communist Shevardnadze, or the thuggish puppet of Putin, Yanukovych. Oh, how insidious!

Keep in mind how insidious this really was. In Ukraine, Victor Yanukovych was President Kuchma's confidant and handpicked successor. Kuchma beheaded a journalist who criticized him. Kuchma had masses of students beaten for the "crime" of peacefully protesting his regime... but not during the demonstration, of course. This wasn't about preserving law and order, but rather a warning that you don't oppose the regime. The students were ambushed and beaten by police after the protests, while they waited on train platforms. For the 2004 presidential election, Vladimir Putin supported Yanukovych, spent a fortune trying to directly affect the election results, and put his right-hand-man, Dmitri Medvedev, in charge of running the Russian operation to "help" with the elections...which included, among other things, the printing of fake ballots, and most likely the attempted assassination of opposition candidate Victor Yushchenko.

Yushchenko was the pro-western former central bank head who had stopped the printing presses, and who advocated private property and free markets -- apparently sins in the Rockwellians' eyes. He's no anarcho-capitalist, but his ideas are generally pro-market. And keep in mind that Ukraine was still in the clutches of its old communist bureaucracy. Yushchenko opposed this system.

Yushchenko won the elections, but Kuchma and Yanukovych altered the vote count. The fraud was detected and contested, with massive popular outrage -- the Orange Revolution (this was the campaign color of the pro-Yushchenko coalition... for some reason the Rockwellites find it sinister that the campaign issued orange items to supporters)(we're also assured that orange is "sickly"). Many of my Ukrainian students and friends participated, at great personal peril. Yanukovych urged Kuchma to set Interior Ministry troops on the demonstrators, a la Tianamen, but Kuchma ultimately refused. Meanwhile, Ukraine's Supreme Court, having been brainwashed by western indoctrination into thinking that courts should render verdicts based on evidence and law rather than orders from political leaders, listened to charges of election rigging and ruled that indeed the results were tainted, and ordered a new election, which Yushchenko won.

Insidious, no? Soon after Yushchenko took office, a journalist suggested, to his face, that Yushchenko's son had received various illicit payments. And this journalist's head...remains on his shoulders. Yushchenko furiously denounced him, and sent him packing back to his office to write up the scandal. This is what Rockwell & co. call "genuine change denied."

I regret I missed the Orange Revolution -- I had tried to find a way to get back to Ukraine as an election observer but couldn't swing it. But I returned to Kyiv in 2006 and was astounded by the obvious economic growth. Imagine that! It turns out that pursuing market reforms actually creates wealth and raises peoples' incomes, even if the reforms aren't the Rothbardian anarcho-capitalist full monty.

I make light of all this, but it really is not funny. Ludwig von Mises was a thoroughly consistent advocate of liberty, of private property, and of free markets. He was a fierce opponent of communism, and a supporter of the pro-capitalist West, despite the fact that capitalism in the West isn't pure.

Rockwell & co. abuse this great man's name. Ludwig von MisesLew Rockwell Institute: shills for dictators, murderers, and communists.

It's worth noting that woman who shot the terrorist at Fort Hood, Kimberly Munley, is a civilian police officer, and a lifelong civilian shooter. And we at Unforeseen Contingencies (OK, I) salute her and wish her a full recovery.

It's perhaps also worth noting that, as usual, gun control worked as we would expect it to...it disarmed the victims.

I'll leave it to the Army to set its own policies for firearms on bases, but gun control doesn't make us safer.

Good grief! I'm at a loss for words. H1N1 vaccine for these crooks?

No, apparently not.

Well, would you please hurry up and die?

There seems to be something of a semi-conservative Republican resurgence in the latest election, a very unfortunate development in several respects.

First, the Democrats haven't even had a chance to demonstrate that their big government approach to the economy doesn't work. Unpleasant as destruction is, we'd still be better off with a clean "experiment" on this. I would not say this if the alternative to the status quo were laissez faire, but it's not, because...

Second, the conservative Republicans do not have a better approach to offer than the Democrats. The primary values they promote include bigotry against gays, state religion, skepticism about environmental problems, everlasting war, the surveillance state, and strict fiscal responsibility...except when Republicans control the purse-strings, of course. Then it's "deficits don't matter" as Dick Cheney put it. Bigger government, while denying it's really bigger is today's Republican way. The GOP has become the party of overt, militant ignorance. (The Democrats at least pretend to believe in science and reason.)

I'm hoping that the apparent Democrat victory in New York's 23rd Congressional District is more illustrative of the strength and position of the GOP -- weak and in a shambles. America has a two party system, and so long as the Republicans are our alternative to Democrat-style fascism... well, what makes Republican fascism any better? Obama has largely followed the Bush line in most areas...he's just more articulate and soothing when he does it.

Meanwhile, one of the puppet-masters behind the Republicans, Rupert Murdoch, has spoken out against free speech (in Beijing, of all places). It appears that he's upset about "content kleptomaniacs," i.e. people who quote him and his news services. We'll pay, if he has his way.

Yikes! So much for conservative leaders' respect for free speech. (Listen to this maniac, and the rather sensible discussion from Google afterwards.)

I have quite a few friends who love freedom and are thus genuinely and very sensibly opposed to big government. Unfortunately, they tend to be drawn to the conservatives of the Republican Party, because the Democrats are fairly explicit that they are for big government. For reasons I still can't fathom,* my friends don't see through "soothing words" when spoken by conservative Republican leaders, even when these words are every bit as supportive of tyrannical government as those of Obama.

Friends, we'd be better off if conservatism would just die.

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* Bruce Schneier has a very thoughtful post that goes a long way to explaining why politicians can systematically manipulate followers, without the followers seeming to ever catch on. Today's conservative leaders seem particularly adept at wielding fear.