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On the stupidity of (some) Central Banks – Guest post by Lorenzo

By Legal Eagle

[LE: Regular commenter Lorenzo has written a post on what the role of central banks ought to be in setting financial monetary policy goals. He starts with some historical examples, and continues on to contemporary central banks. Part of the issue (as I read his post) is that people must get some idea of where monetary policy is going from the Central Bank so that they can plan their affairs accordingly.

Lorenzo's piece starts over the fold.]

How stupid can a Central Bank be?
The short answer from history is: a central bank can be really, really stupid.

I am using ‘stupid’ in a technical sense: doing things that seriously adversely affect lots of people with no justifying benefits to any wider public good—that is, which show a lack of intelligence, understanding, reason, wit or sense. The actions may seem a good idea to the central bank at the time—due to perverse incentives, policy framings disconnected from economic reality or whatever—but in terms of wider public policy, they are (to varying degrees) disastrous. Central banks exist to serve, so how that “serving” is framed can make a great difference.

For example, hyperinflation is usually a deliberate attempt to inflate away government debt and/or generate revenue well beyond the willingness or ability to tax. It may be wicked, but it is not stupid in quite the above sense. (There are justifying benefits for decision-makers, without necessarily justified benefits.)

Beware of the French and central banks
Among stupid central banks, the all-time winner is the interwar Bank of France turning the gold standard into a doomsday device (pdf), helped by the US Federal Reserve, by building up its gold reserves without issuing money to match, so taking gold out of the monetary system, thus driving up the price of gold in the monetary system (and so the price of money, as such gold set the price of money) and thus driving down the prices of everything else. It and the Fed created the Great Deflation of 1929-32 we call ‘the Great Depression’ and so mass unemployment, the impoverishing of millions, the unravelling of much of (pdf) the world trade system, the fall of Weimar Germany and the rise of Nazism (followed by the Fall of France). It was a disaster of monumental proportions.

It was hardly the only disaster of central banking, however. Another (in)glorious episode also came from France with John Law’s Banque Générale gaining the right to issue paper money, which stimulated economic activity. The Regent, the duc d’Orleans, decided that if some paper money was good then even more paper money must be even better, leading to the truly spectacular Mississippi Bubble. This French disaster was based on the same logic (using that term loosely) as that which created the Great Deflation/Depression namely, “if some is better (some paper notes, some level of gold backing of the franc) then more is better and even more is better still.” One is reminded of the Abbe Sieyes dismissing the argument for bicameralism on the grounds that if the upper house agreed with the lower it was pointless and if it disagreed it was pernicious. Pernicious simplification passing itself off as sophistication: how very French. (Perhaps the baleful influence of Cartesian rationalism?)

By contrast, the Bank of England has a long history of considerable policy success, starting with vast improvement in management of government debt. The South Sea Bubble was rather less of a problem than the Mississippi bubble precisely because the Bank of England had disapproved from the beginning. While the Bank’s management of the gold standard over the two centuries up to 1914 suffered various bumps and problems, it had nothing to equal the aforementioned French disasters.

In our own time, the Bank of Japan’s management of the yen since the collapse of the bubble economy has come in for much criticism. However, the demographics of Japan make some of that criticism less clear-cut than is often suggested.

Even though some of the ECB’s problems are “built in”, there are also plenty of grounds for criticism for the European Central Bank (ECB), until recently with a French head (perhaps not encouraging; especially as the euro is effectively an artificial gold standard for its member countries).

Doing right
A contemporary example of successful central banking is the Reserve Bank of Australia. It has run an inflation target since 1993 (pdf). Its website is very clear on its policy target. In the words of the Reserve Bank:

The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over the cycle. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.

The minutes of its Board meetings are published two weeks after each meeting: this matters much less than that it has a clear monetary policy regime.

The Reserve Bank sees its role as providing an anchor for private sector inflation expectations and it does so by being upfront about its policy target. That it has an explicit target since 1993 is no coincidence: the experience of the severe 1992-93 recession where inflation was squeezed out of the Australian economy in a particularly costly way made it clear to policy-makers that being explicit about monetary policy was preferable. As had the problems with monetary policy in the 1980s:

In the early 1990s, the Reserve Bank did not enjoy the largely uncritical press it receives today.
The conduct of monetary policy in the 80s was fundamentally incoherent, unsuccessfully pursuing multiple objectives and shrouded in a veil of secrecy.
Without a policy commitment to price stability, the Australian economy lacked a nominal anchor.

(Does any of this sound familiar, by chance, to American readers?)

The success of the Australian economy since then has provided strong evidence for the good sense of this approach of a clear monetary policy regime via an explicit target. But there is also no mystery about why being explicit has been a successful approach. The point of money is to facilitate transactions by massively decreasing transaction costs. Not only are the search costs that barter imposes avoided by use of money, but there are a range of problems with barter than using money eliminates or greatly ameliorates, thereby greatly facilitating transactions.

If people have reasonably accurate expectations of how (money) prices in general will go, they can make arrangements (including contracts) based on those expectations. As Canadian economist Nick Rowe points out, inflation targeting in Canada came out of pressure from the private sector. They wanted reliable expectations about prices so as to set wage contracts.

Sudden, unexpected changes in prices can leave these arrangements misaligned with actual prices. If, for example, that results in changes in the terms of labour—the ratio of labour costs to the price(s) of what the firm sells—so that wages become seriously over-priced (in normal, somewhat imprecise, economic speak, “real wages have risen”) then firms will stop hiring, workers may be sacked, firms may collapse (i.e. they absolutely stop hiring and all their workers lose their jobs). It is not good to have significant, unexpected downward shifts in price movements, since that essentially guarantees that the terms of labour will rise unexpectedly. (So unexpected disinflation can have similar effects to deflation.)

Doing wrong
Which is what happened at the beginning of the Great Recession in the US. When uberblogger Matt Yglesias calls it a “huge failure of central banking” he is absolutely correct. To put it another way, serious expectation failures were imposed on the US economy, resulting in a dramatic drop in transactions. (That the Federal Reserve decided to surreptitiously disinflate as a financial crisis—the sub-prime crash—was building made things much worse: including the financial crisis, providing some reprise [pdf] of the Great Depression.)

How did this happen? Have a look at the US Federal Reserve website. There is no statement about what the specific aim of US monetary policy is. The US Federal Reserve provides no explicit anchor for expectations in the economy. So, the US Federal Reserve can decide to disinflate—to significantly reduce the inflation rate—and there was no warning for private agents that this was happening. To act in this way is to actively degrade the level of information in the economy and so misdirect expectations.

This is deeply stupid in both theory and practice. There is no economic gain from changing monetary policy surreptitiously, there are only unnecessary costs. Australian policy makers found this out the hard way in 1992-93. They learnt the lesson and have moved on. But, alas, almost no one takes what Australia does seriously: we are too small, too far away, too “lucky”, too “colonial”. Europeans and Americans tend to be deeply parochial people, seeing themselves as the measure of all things, and so are rather bad at learning from the policy experience of others.

Australian policy-makers, facing what had been a long-term downward trend in our terms-of-trade (the ratio of the prices of what we sell compared to the prices of what we buy) and conscious of the tyranny of distance, have undertaken a series of reforms over three decades which have, overwhelmingly, paid off. Not only are we the country where the Great Moderation has not ended; in fiscal balance and public debt we are in a very different world from the US, Japan, the Eurozone and the UK.

In the US, by contrast, people try to “read the signals” of the Fed in ways reminiscent of how Kremlinologists used to try and glean Soviet policy from indirect signals. US Federal Reserve Deputy Chair Janet Yellen’s statement in a recent speech:

I believe that the Federal Reserve qualifies as one of the most transparent central banks in the world.

is a stunning piece of parochial blindness. (Nick Rowe is even more pointed about it.)

In the same speech, Deputy Chair Yellen tells us:

Inflation picked up significantly over the first half of this year, with the price index for personal consumption expenditures (PCE) rising at an annual rate of about 3-1/2 percent–a pace that is well above the level of 2 percent or a little less that most Federal Open Market Committee (FOMC) participants consider consistent with the Federal Reserve’s dual mandate for price stability and maximum employment. In contrast, PCE inflation averaged less than 1-1/2 percent over the preceding two years.

The members of the FOMC have views: the Federal Reserve has no explicit target. So, there is no explicit anchoring of nominal (i.e. in money terms) expectations in the US economy.

It is not as if people in the Federal Reserve are not aware of the problem. The current Federal Reserve Chair Ben Bernanke co-authored an article 12 years ago that proclaimed:

The Fed needs an approach that consolidates the gains of the Greenspan years and ensures that those successful policies will continue—even if future Fed chairmen are less skillful or less committed to price stability than Mr. Greenspan has been.

We think the best bet lies in a framework known as inflation targeting, which has been employed with great success in recent years by most of the world’s biggest economies, except for Japan. Inflation targeting is a monetary-policy framework that commits the central bank to a forward-looking pursuit of low inflation—the source of the Fed’s current great performance—but also promotes a more open and accountable policy-making process. More transparency and accountability would help keep the Fed on track, and a more open Fed would be good for financial markets and more consistent with our democratic political system.
As our research on the use of this approach around the world documents, successful inflation targeting requires that the central bank and elected officials make a public commitment to an explicit numerical target level for inflation (usually around 2%), to be achieved over a specified horizon (usually two years). Equally important, the central bank must agree to provide the markets and the public with enough information to evaluate its performance, and to understand its reasoning when policy and inflation deviate from the long-run goal–as they inevitably will at times.

Too bad he has not followed his own (excellent) advice since becoming Chair of the Fed. (If that is because he does not have agreement within the Federal Reserve that just underscores the lack of an explicit target, of any clear monetary regime, and so the lack of any clear anchoring of expectations.)

In the absence of an explicit, open monetary policy regime we instead have a ludicrous focus on instruments—such as ‘Quantitative Easing’ (QE) or “Operation Twist”. In the absence of an explicit monetary policy regime, these actions are self-defeating as they do nothing to change expectations because they provide no reliable, continuing framing for such expectations. Lars Christensen puts it well:

The real problem with QE is not that the money base is increase[d], but that is done in a completely random fashion without any clear framework.

Quite so. As Christensen points out, when the monetary policy regime is clear, people often pay little or no attention to the instruments by which it is brought about since the implications thereof are clearly framed. In the absence of such policy regime clarity, waving those instruments around is much ado signalling nothing; nothing that anchors (or, in this case, shifts) expectations. And expectations matter. (Including expectations of inflation and spending.)

Expectations and actions
We have no knowledge of the future, we merely have expectations about the future based on inferences from the past. Including our experience of the patterns and structures of reality (both physical and social). A clear monetary regime provides such pattern and structure.

Economist Frank Knight famously distinguished between risk and uncertainty:

Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. … The essential fact is that ‘risk’ means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating…. It will appear that a measurable uncertainty, or ‘risk’ proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all.

To put it more simply, uncertainty is risk that is immeasurable, not possible to calculate. But (calculable) risk and uncertainty are about expectations: about looking forward. All action, being future-directed, is about expectations, is framed by expectations. Indeed, requires expectations.

If we cannot frame sufficient expectations, we have no basis on which to act. If the level of uncertainty is too great over some range of action to even frame sufficient expectations on which to base actions, we will direct our actions elsewhere. Uncertainty is fundamentally based on information, because our ability to calculate risk is a function of the information available. (So, expected risks are a function of information.)

The centrality of expectations to action, btw, is why law and economics analysis by people such as Richard Posner has been so fruitful; law is all about creating pattern and structure to frame expectations. (Posner blogs here.) This work uses the two key insights of C20th economics—transaction costs matter and information and action are not separable.

Just because something cannot be calculated does not mean we will not frame expectations to cover that uncertainty: it just means that such expectations cover more than is directly inferable from such information as we have. Economic “confidence”—including business confidence—is, to a large degree, how what cannot be calculated is being framed in a given time period: whether it is being framed positively or negatively and how strongly so. This confidence will be in part based on various indicators but, by uncertainty’s non-calculable nature, cannot be definitively or wholly so. The wider the range of uncertainty (provided it is not too wide to frame any expectations to base action on at all), the more unstable confidence is likely to be, because the greater the possibility of new information changing how uncertainty is being framed. (John Maynard Keynes’ notion of animal spirits represents a rather clumsy formulation of this—since he was a noted theorist of probability, I put down said clumsiness to too much Bloomsbury.)

If confidence is how we frame uncertainty—and so is the more unstable the wider the range of uncertainty—then it is a central obligation of a central bank to narrow such uncertainty, to give a clear monetary policy framework for private agents to frame their actions. The point of money, after all, is to facilitate transactions. The point of monetary policy can hardly be to either lessen money’s ability to facilitate transactions or to lower the trend level of transactions. On the contrary, the “dual mandate” of stable prices and low unemployment is all about facilitating transactions; which is much more likely to be achieved by a an explicit monetary regime, especially in adverse economic circumstances.

What Greenspan got wrong
This is where criticism of Greenspan’s tenure as Federal Reserve Chair should be directed. Criticising him for various asset bubbles is misguided. Stable macroeconomic conditions in an expanding economy will tend to lead to expansion in credit and other forms of capital (and so rises, even surges, in asset prices): both because rising incomes lead to larger sums being available to be lent or spent on assets and because assessments of risk will tend to fall, making credit cheaper and pushing up asset values (due to increased confidence in the future). There are also the effects on asset prices of (pdf) innovation generating uncertainty about growth of income from assets. There are some fascinating issues regarding prudential regulation, the undermining of prudence and the effects of land rationing (including its ability to create land value surges and attract credit to housing), but they are not monetary policy matters.

Besides, the various asset boom and busts, and other economic shocks, were dealt with considerable success in terms of the maintenance of macroeconomic stability during Greenspan’s tenure. (A useful partial list of such shocks and difficulties is provided here.)

Greenspan’s gnomic central banking policy persona was much more problematic. It was basically “trust me” framing of an, at best, implicit policy regime; which turned out to be self-fulfilling as confidence-in-Greenspan (including his ability to “manage” the Fed) framed expectations that prices would be kept relatively stable in ways which would not too adversely affect output and which gained strength the more things continued to turn out that way. In practice, what he was doing was keeping growth in GDP in money terms (nominal GDP or NGDP) stable.

Two points about this: first, what happened when Greenspan left? Bad things, it turned out, because no new basis for confidence was generated to replace him nor any guarantee that his implicit policy regime would continue. On the contrary, the implicit policy regime became something quite different while the myth of the master-lever puller generated the belief that it was all about pulling the “right” lever, of what you did with the instruments, rather than framing expectations (even if only implicitly). This was profoundly misguided: confidence in Greenspan, in what Greenspan was about with the levers (his implicit policy regime), was at least as important as which levers he pulled (provided it was congruent with that confidence and implicit policy regime) because that confidence and implicit expectations framed the lever pulling: said framing and actions then led to stable growth in NGDP. (To use Nick Rowe’s Chuck Norris theory of central banking, Greenspan was the ultimate Chuck Norris of central banking—the central banker was the message.)

It can be fixed
Second, the Reserve Bank of Australia (RBA) with its explicit target, did better. Yes, it ran a slightly higher inflation premium, but that may well be justified given the differences between the US and Oz economies. But it also oversaw less fluctuation in output. In terms of facilitating transactions, competent bureaucrats (or econocrats in Oz wonkspeak) running an explicit monetary policy target providing a clear anchoring of nominal expectations did better than the maestro. This is because the RBA provided explicit anchoring of expectations (so greater narrowing of uncertainty) as a basis for confidence (positive framing of the remaining uncertainty) rather than merely implicit anchoring of expectations derived from confidence in the incumbent central banker. (Any claim that the Oz economy is persistently less pressured by major economic shocks than the US economy, which is almost twelve times its size, is not very plausible.)

To put it another way, the RBA reduced uncertainty in a way that generated confidence; Greenspan generated confidence by positively framing a higher level of uncertainty based on implicit rather than explicit expectations. The former proved to be superior: both in less fluctuations in output and in being a far more robust monetary regime—it had no “succession problem”.

By delivering narrowing of uncertainty via an explicit monetary regime (specifically, one of inflation targeting), the Bank of Canada and RBA minimised the danger of systematic expectation failures in part because a plausible central bank target can be self-fulfilling, as people acting on the basis of such expectations help to make them come true. (The Swiss central bank’s exchange rate target is currently providing a nice example of how credible price targeting by a central bank can operate without the bank having to intervene: the market equivalent of the parent or teacher “don’t make me come over there!” threat.) The US has no such explicit central bank target: which is the first and greatest problem of US monetary policy.

The RBA’s target of stabilising growth in prices (P) over the business cycle means that if output (y) falls, then there is more scope to let prices rise, which improves the terms of labour for firms (since their prices rise before wages do), lessening the impact of the fall in output. (That economic reform and structural changes mean that more Australian labour income is paid in ways responsive to economic conditions also helps cushion employment levels against changes in output.) Conversely, if output surges, then that means that there is scope for less rise in prices, both evening out movements in prices over the business cycle as per the RBA’s target and passing on benefits of output growth to wage-earners, reducing upward pressure on wages and allowing employment to grow faster. In effect, the RBA has been stabilising growth in Py (since more y means less P and less y means more P) and Py = NGDP. So, the RBA has basically been doing the same as Greenspan was, but with an explicit monetary policy regime rather than an implicit one, and so more effectively.

In arguing for an explicit monetary policy regime, I am not arguing for a monetary policy rule. A target is of the form “the Bank will operate in what way it deems appropriate to achieve that target”. Indeed, part of the anchoring of expectations within the Australian economy is the credibility the RBA has that it will operate as required to achieve its declared target.

A rule is of the form “the Bank will act as the rule determines”. First, that presumes the optimum rule is already known so retards learning in the system, beyond learning how to operate the rule. Second, a rule can result in de-stabilising expectations if circumstances become such that acting as the rule requires results in sharply diverging results from previous experience. (Pause here for nod to Goodhart’s law.) A target can be adaptive in a way that a rule is not.

So, yes to explicit anchoring of expectations; no to rule-based roboticism in central banking.

The ECB has a (price stability) target that does not respond to circumstances (at least, not outside Germany) while running an “artificial gold standard“: a sort of bastardised roboticism that anchors expectations about price but destabilises expectations about spending (i.e. NGDP) and debt. The countries that had problems with the gold standard during its 1873-1895 deflationary period included Greece, Italy, Spain, Portugal (scroll down to version in English): the same countries which are now having problems with the ECB’s tight money policies.

There is a fascinating debate about the optimum monetary policy regime. That Christina Romer, President Obama’s original Chair of the Council of Economic Advisers (CEA), has come out in favour of targeting nominal GDP, supported by Paul Krugman, is important in the building pressure toward the US Federal Reserve adopting such a monetary policy regime. Something which is apparently being considered inside the Fed. That stabilising NGDP growth was what Greenspan was, in effect, doing is certainly a strong argument for making it the explicit target.

But the first need is to have an explicit monetary policy regime. This the US Federal Reserve does not have, and (short of a new “Greenspan”: that is, an icon-for-confidence with attached implicit policy regime) any US economic recovery is likely to be anaemic until it does.

On which point, if you look at the US Federal Reserve website, you will see reference to the seven Governors of the US Federal Reserve, but only five pictures. That is because two positions are vacant. Which is the clearest single instance of economic incompetence by the Obama Administration. If President Obama can get people appointed to the US Supreme Court, he can get them appointed to the US Federal Reserve Board. If he could be bothered to seriously try to do so.

It is stunning that such key positions have been left vacant for so long. Any Australian Government that left two positions on the RBA Board vacant for any length of time (let alone months) would be savaged in the economic media and by its political opponents: it is remarkable that there seem to be little or no political costs to the Obama Administration for its amazing, and culpable, negligence.

Disastrous monetary policy destroyed Hoover’s Presidency (Herbert Hoover was a highly travelled, intelligent and open-minded progressive, we should remember), and it is likely to take down Obama’s as well, unless there is strong economic growth between now and the election. If FDR is Obama’s inspiration, it was FDR changing monetary policy that began the economic recovery from the Great Deflation/Depression: the key difference between the Hoover and FDR Administrations was not the New Deal (pdf) but monetary policy. Without serious economic growth, Obama is likely to be, like Hoover, a one-term President. (Not that any Republican alternatives are advocating the right policy mix: but that will not stop Obama losing, as incumbent Administrations get blamed for economic conditions.)

Alas, being “inside the policy loop” does not make you policy smarter: Christina Romer’s public advice on economic policy was better before and after she was CEA Chair than during. The illusion of special knowledge (fostered by the reality of extra information); the pressure to conform, to be a “team player”; the institutional comfort of a lack of an accountable “bottom line”: they all help create official stupidity. And when central banks become stupid, they can be really, really stupid in thoroughly disastrous ways, insulated as they are from the consequences of their actions.

What does the US need? An explicit monetary policy regime. When does it need it? Now.


  1. Posted November 8, 2011 at 8:38 am | Permalink

    Much more than just a post, a great essay!

  2. Adrien
    Posted November 8, 2011 at 10:10 am | Permalink

    Criticising him for various asset bubbles is misguided.

    Why? Did he not keep interest rates artificially low in the early part of the last decade? Was this not one of those fatal steps to the meltdown?

    I continue to be amazed at how this gets side-stepped again and again?

  3. Posted November 8, 2011 at 10:29 am | Permalink

    You are mistaken. Check this post for an exposition of the AD approach to the crisis:

  4. Posted November 8, 2011 at 10:32 am | Permalink

    Or maybe this much shorter one:

  5. Posted November 8, 2011 at 10:48 am | Permalink

    LE: Technical point, I am talking about monetary policy rather than financial policy (which is more about regulating banks and such).

    Marcus@1: thanks.

    A@2: What Marcus said. I have become deeply sceptical about the “money expansion” theory of asset bubbles.

    If monetary policy can achieve macroeconomic stability, that is enough. Such stability in a growing economy will make asset price surges more likely, for the reasons I advance above. But blaming the monetary policy which produces the macroeconomic stability for producing the asset bubbles is a bit like blaming farmers for obesity. Yep, they produce lots of food, but overeating is not their fault.

    Regarding my post: naturally, after I sent it off, I read Gauti B. Eggertsson’s analysis (pdf) of FDR as changing expectations by a change in (mainly) monetary policy. Points even more to what the US needs: a clear and credible change in its monetary policy regime.

  6. kvd
    Posted November 8, 2011 at 11:44 am | Permalink

    Stripped of all technicalities [the rule of law] means the government in all its actions is bound by rules fixed and announced beforehand — rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s affairs on the basis of this knowledge. (Hayek – Road to Serfdom, 1944)


    Stripped of all technicalities [the role of a Reserve Bank] means its actions should be bound by explicit targets fixed and announced beforehand — targets which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s affairs on the basis of this knowledge. (Lorenzo – Road from Ruin, 2011)

    Have I got that right? Great essay Lorenzo; thanks as always (not! ;) ) for prolific reference material.

  7. Adrien
    Posted November 8, 2011 at 3:11 pm | Permalink

    Now how did I know I was going to get a bunch of links to a shitload of graphs and econospeak gobbledegook rather than a straight answer.

    I’m terribly sorry. But considering that economists insist that they are scientists whilst at the very same time being categorically unable to agree on anything or predict anything or do anything except stuff up our lives. Considering furthermore that economists are obviously pushing an ideological barrow that fits neatly over the party political spectrum and that, like their political counterparts, are incapable of ever considering where they went wrong or what the shortcomings of their ideology is…

    Considering all that I find it a little rich when I’m told that degrees like mine are useless and mickey mouse etc. At least I know how to string a sentence together and don’t assume on that basis that I can set the world to rights.

    It is obvious that interest rates were too low, that the financial sector was allowed to get away with criminally fraudulent behaviour and that the advocates of this went into overdrive blaming the ‘government interference’ like so many scribes at Pravda when it all went fubar. It’s likewise obvious that the banks have used their old school tie networks to get back to packing away record profits whilst the rest of the United States quickly comes to resemble Rome c. 1311.

    I’ve had enough.

  8. kvd
    Posted November 8, 2011 at 3:55 pm | Permalink

    Now, now Adrien. It’s maybe because you don’t grasp the scientific terminology that you’re having trouble?

    ‘stupid. perverse, French (I mean, really I should stop right here!), disaster, fear, uncertainty, doubt, confidence, coincidence, unexpected” – I mean, what’s bugging you? These are all widely acknowledged Econ terms with precise meanings; as seen on Fox Business daily, nay! hourly. Now you may well feel you’ve “had enough”, but I can assure you that they have not…

    Now about “pushing a barrow over a spectrum”. I sense I need to know the wherewithhow of that :)

  9. kvd
    Posted November 8, 2011 at 4:04 pm | Permalink

    And if you feel unsure about discussing the “inherent co-joined instability resonance coefficient” of the EU, you could always mutter something about Greek tragedy and Rome Burning – although I think they’ve been used before.

    Mostly by Patrick ;)

  10. Posted November 8, 2011 at 4:47 pm | Permalink

    kvd@6 Thanks, and I am flattered by the comparison :)

    A@8 When disparaging economics, try and distinguish between macroeconomics (rather a mess I agree) and microeconomics (in much better condition).

    And graphs are evidence, they are facts conveniently presented. I approve of graphs.

    It is obvious that interest rates were too low,

    I dislike the notion that monetary policy is all about interest rates. But there are lots of asset markets out there and not all of them surged.

    Possibly interest rates were too low ( John Taylor, he of the Taylor Rule, thought so) but
    (1) such is less likely to happen with an explicit monetary policy regime; and
    (1) the later surreptitious disinflation was a MUCH bigger issue.

    1987 was one of the biggest stock market crashes ever. Had almost no effect on the goods-and-services economy. There is no reliable connection between asset crashes and economic conditions. An asset crash and massive drop in spending (and so income), THAT is a big issue. In 2007-8, the Fed presided over the biggest crash in nominal spending since 1937-8.

    that the financial sector was allowed to get away with criminally fraudulent behaviour and that the advocates of this went into overdrive blaming the ‘government interference’ like so many scribes at Pravda when it all went fubar. It’s likewise obvious that the banks have used their old school tie networks to get back to packing away record profits whilst the rest of the United States quickly comes to resemble Rome c. 1311.

    Nothing to do with monetary policy. There is much in what you say, but none of the above are monetary policy issues. Central banks get involved because they usually have other regulatory responsibilities as well and because having your entire financial system seize up is bad. (There are connections between large scale financial/banking collapse and prolonged anaemic economic growth.) But what you are referring to are prudential regulation and fraud issues, they are not about the monetary policy regime.

  11. Adrien
    Posted November 8, 2011 at 5:08 pm | Permalink

    I approve of graphs.

    Indeed and it’s a shortcoming of the Arts part of the Arts/Science divide that I don’t plug into a graph the way I do into a paragraph. However the vast majority of graphs I’m presented with fail to tell me what I want to know.

    Over at Catallaxy there’s a bunch of (I assume) young economics students. Who are all hot shit when it comes to graphs but the respond to everything that requires more than the most boneheaded understanding of words with witless vitriol and a dogmatic clone mindset that would embarrass even a Trotskyite.

    Well may we approve of graphs but let us remember Horatio the limits of our philosophies.

    When disparaging economics, try and distinguish between macroeconomics (rather a mess I agree) and microeconomics (in much better condition).


    Well I’m glad I got that out. :)

    I’m sorry, I’m feeling a little stroppy today and I guess I’m in danger of losing my decorum but please see this all palava from my point of view.

    In Liberty Park you have a sit in protest. They had one here in Melbourne and the State’s response to that resembled a Roman legion clearing a village in Gaul. Not anywhere near as violent but still..

    These people were automatically vilified by people who claim to be ‘libertarians’ as ignorant hypocrites. Now I thought myself standing behind one of the OM occupiers waiting for a long black while he was talking on his iPhone and awaitin’ his espresso.

    But… can we blame them?

    Anything that can be expressed in complex terms can be expressed simply if you understand it well enough. Carl Sagan explained relativity in a way that a 9 year old could comprehend. You don’t get much of that in economics. You get support for a particular ideology and combat between combatants of the various secular creeds.

    I have yet to read one single piece in which a supporter of liberal economics seriously considers the shortcomings of economics, its ideological blinkers and it faith in doctrines in relation to the GFC. The different ideologies have their different stories, and they stick to them.

    Back in the 1930s and 40s two defenders of liberal economics Michael Oakeshott and Wilhelm Röpke wrote quite a bit about the dangers of rationalist ideology and made a point of including classical liberalism amongst the culprits. Röpke even said it was the culprit, that the hubris of the mind that confirmed ideology produced had led to the situation of the 1940s where liberal economics was a fringe position. Oakeshott called Hayekian libertarianism the same style of politics as Marxism. He was right. These young economics students; they sound like Trots.

  12. Posted November 8, 2011 at 5:24 pm | Permalink

    A@12 There is a wide world of economic debate out there that extends way beyond eager young libertarians.

    I find folk who complain about the “ideological blinkers” of economics typically know a lot less about economics than they think they do. I also find that relaxing, for example, rationality constraints does not typically improve analysis: on the contrary, one so often wonders off into “whatever you think is a fair thing” analysis. (I am all for including things like information, transaction and cognition constraints, but that is a different matter.)

    Dogmatism did have a great deal to do with the Great Depression (do read the pieces I linked to), but indicting classical liberalism wholus bolus seems overdone, with all due respect to Ropke and Oakeshott (and a lot is due to both).

    After all, consider the alternatives offered at the time!

  13. conrad
    Posted November 8, 2011 at 5:33 pm | Permalink

    Lorenzo, I’m less inclined to believe that the current _long term_ problems of the US are really down to money managment. Whilst I think central banks can and do screw things up, there seems to be a relatively broad range of stuff they can do without too many terribly ill effects (that’s not to say the can’t help around the edges a lot, as the RBA did with Aus).

    It seems to me that the longer term problem with the US is that their current system simply doesn’t seem to produce great long-term outcomes in terms of a populace that invents and does smart stuff. I think everyone once believed it would, but in the end, Germany, with one quarter of the population, still exports more than the US. In addition, the great lead that they had for a long time in the 20th century in terms of science and technology appears to be evaporating (who knows why — school system? Or maybe just inevitability if the rate of technological change is slowing). So if you’re not the winner at manufacturing and you’re not the winner in science and technology anymore, then what’s left and why should you be one of the richest places in the world?

    These are deeper problems, and I don’t see how any central bank is going to fix them, no matter how good it is. To me, the US is a bit like a once lovedt ech stock — everyone believed in the promise, valuations got high, but once no-one did anymore, the value collapsed back to reality — and there is nothing any bank can do about that. Thus, I don’t think the central bank can do anything that will _look_ like it works.

  14. Posted November 8, 2011 at 5:49 pm | Permalink

    You wrote:
    It is obvious that interest rates were too low, that the financial sector was allowed to get away with criminally fraudulent behaviour and that the advocates of this went into overdrive blaming the ‘government interference’ like so many scribes at Pravda when it all went fubar. It’s likewise obvious that the banks have used their old school tie networks to get back to packing away record profits whilst the rest of the United States quickly comes to resemble Rome c. 1311.
    No, nothing is “obvious”. Yours is just one, albeit unconvincing, story.

  15. Posted November 8, 2011 at 6:13 pm | Permalink

    C@14 I would like the US to have a much lower rate of unemployment and a monetary policy that does not lead to major expectation failures. Will that solve all the US’s problems? Of course not. But it will do a great deal to fix some specific problems they have at the moment.

    Macroeconomic stability is not the be-all and end-all: but it is still a good thing to have.

  16. Posted November 8, 2011 at 6:16 pm | Permalink

    C@14 Also, that Germany exports so much is to a very large degree due to its membership of the EU. The US has to export across two wide oceans (Canada and Latin America can only take so much). Makes a difference. You could carve out a Germany-size (in population economy) bit of the US and, if you counted in its exports to the rest of the US, it would be a bigger exporter than Germany.

  17. Patrick
    Posted November 9, 2011 at 10:40 am | Permalink

    Adrien, economics can indeed be explained in child’s terms:

    1. People will try and do what they want to do.
    2. People will generally pay more or less for something as a function of how much they perceive it to be worth.
    3. If you make something cheaper people will buy more of it, if you make something more expensive people will buy less of it.
    4. If people really want something they will work out a way to get it.

    That covers a hell of a lot of economics.

  18. Adrien
    Posted November 9, 2011 at 4:42 pm | Permalink

    Lorenzo, I’m not indicting classical liberalism ‘wholus bolus’ I’m indicting those who supposedly advocate it but refuse to practice its mandate to objective criticism when inconvenient. Neither Röpke nor Oakeshott agreed that that ‘laissez faire was kaput’ what they were trying to say was the the ideological codification of liberal economics wherein every problem with it was either dismissed as not a problem or else explained away with the all-curing panacea let the market solve the problem ironically did immense damage to the credibility of liberal economics.

    At the heart of the problem is that if you have an economic system that says you are free, nay obliged, to pursue self-interest above all else you require a counter-balance to said self-interest. This does not exist. The role model of capitalism these days is not George Eastman, it’s Tony Montana. Libertarians simply ignore this.

    It’s not enough to retreat into technocratic specialist discourse. The vast majority of economic theory is beyond most of the rest of us. Actually it seems to beyond most economists as well. But it doesn’t take much save a little critical thinking to understand that there’s a lot of doctrinal conflict at the heart of economic debate. Such understanding seems to wane the close you get to the centre of economic philosophy.

    Röpke and Oakeshott called for a certain sincere and thorough re-examination of liberal economics not with a view to scrapping it but to improve it. This did not happen then. And it hasn’t happened now. So far as it does not the whole ‘freedom project’ remains under threat.

  19. Adrien
    Posted November 9, 2011 at 4:43 pm | Permalink

    Marcus – That is not a rebuttal.

  20. Posted November 10, 2011 at 7:53 am | Permalink

    A@20 It is to the claim that it is “obvious”. One can argue interest rates were left too low for too long (though I think the case is arguable either way). But that they had any connection to particular asset bubbles is very dubious. This paper (pdf), for example, fails to find any clear connection between Chinese monetary policy and the dramatic asset bubbles going on there.

    Similarly, the dynamics of the housing (land) price surges in the Oz economy don’t seem to have much connection to monetary policy, they seem to be fairly standard interactions between land rationing and sustained economic growth.

  21. Posted November 10, 2011 at 8:01 am | Permalink

    A@19 That there was some analytical complacency and dogmatism among economists in the late 1920s and early 1930s was true, but that is hardly a peculiar sin of economics and economists.

    Actually, you could make a case that economics as a discipline was a bit too open to new ideas. Hayek’s brilliant exposition of the Austrian business cycle theory gained considerable adherents for a time. Keynes famously generated a new school of economic thought.

    I have come to the conclusion that it was a case of disastrous brilliance, in both cases. That the tools already existed in mainstream economics to analyse what had happened — as the careers of Gustav Cassel and R G Hawtrey demonstrated (pdf) — but that the flashy new ideas diverted people from what was already available and created quite unnecessary analytical rifts in the discipline.

  22. Posted November 10, 2011 at 8:55 am | Permalink


    Interesting post. The main two points I get out of it are:
    1) Markets don’t handle uncertainty well.
    2) Therefore, governments should take actions that reduce rather than increase uncertainty. In this case explicit price targets for monetary policy.

    I’m not sure I see such a policy change as having a significant effect on the current crisis though.

    relaxing … rationality constraints does not typically improve analysis

    I find this more an indictment of the capability of economists than a justification for keeping the rational expectations assumption.

  23. Posted November 10, 2011 at 9:13 am | Permalink

    D@23 Thank you. Basically yes, except I would put it not so much that markets do not handle uncertainty well (not sure any social mechanism does) as that uncertainty tends to destabilise markets, so therefore …

    On rational expectations, David Glasner provides both a useful series of links and an entirely sensible take on it. It should not be an assumption, but a working hypothesis one diverts from only on good grounds.

  24. Posted November 10, 2011 at 9:17 am | Permalink

    D@23 I have considerable confidence that adopting an explicit monetary regime could do a great deal to improve the US economic situation. Scott Sumner puts the case well here.

    For historical evidence about what a credible change in policy regime can do for expectations and thus economic activity, see my link @5 above. Also, the difference in the performance of the Oz economy pre and post 1993.

    (My comment on relaxing rationality constraints was actually more a critique of non-economists.)

  25. Adrien
    Posted November 10, 2011 at 12:41 pm | Permalink

    That there was some analytical complacency and dogmatism among economists in the late 1920s and early 1930s was true…

    Some? There was some? And that was then? Ay carumba.

    Actually, you could make a case that economics as a discipline was a bit too open to new ideas. Hayek’s brilliant exposition of the Austrian business cycle theory gained considerable adherents for a time. Keynes famously generated a new school of economic thought.

    I’m not saying it isn’t open to new ideas, I’m, saying it’s prone to the doctrinarial tendencies extant in all humanities disciplines but, because it uses scientific methodologies, is even more unable to perceive this (in some ways) than more literary fields like history.

    The disciples of Hayek and Mises wage war against those of Keynes to this day and each group regards the other as lunatic. That’s the way it looks from the outside anyway.

  26. Adrien
    Posted November 10, 2011 at 2:04 pm | Permalink

    Patrick – Economics can be summed up ever more succinctly. Resources are limited, human desire is not. What do we do about it and what should we do about it is the sum of economic debate.

  27. Adrien
    Posted November 10, 2011 at 2:08 pm | Permalink

    Lorenzo – An example of a successful contradiction to doctrine. You’re probably familiar with the book. Others weren’t.

    People whose knowledge of economics I quite respected were unaware of its thesis and unable to defend their doctrine against it. They took it for granted that industrial civilization was created by laissez-faire policy. This is not entirely the truth.

    Mr criticism of economic ideology boils down to the fact that rationalist doctrine leaves no room for an awareness of the limits of knowledge. That any model of understanding, any paradigm of principle will be unable to cover all bets all the time.

    This consequences are real .

  28. kvd
    Posted November 10, 2011 at 2:40 pm | Permalink

    ‘Bad Samaritans’ reviews:

    “A well-researched and readable case against free-trade orthodoxy.” –Business Week

    “A lively addition to the protectionist side of the debate…well written and far more serious than most anti-globalization gibberish.” — New York Sun

    “I recommend this book to people who have any interest in these issues–i.e. everyone.” –Bob Geldof

    So, it’s “readable”, “well written”, and liked by Bob Geldof (except on Mondays [dissociated cultural reference]). The author is described as “‘one of the leading heterodox economists”.

    Recently (according to wikipedia) leading heterodox thinkers have moved beyond the established paradigms of Austrian, Feminist, Institutional-Evolutionary, Marxian, Post Keynesian, Radical, Social, and Sraffian economics—opening up new lines of analysis, criticism, and dialogue among dissenting schools of thought

    DEM was right a couple of months ago: “we’re all doomed”.

  29. Posted November 10, 2011 at 8:09 pm | Permalink

    L@24, yes that’s probably a fairer way to express the effects of uncertainty. However, I would express rational expectations as a working hypothesis that can be utilised on good grounds, rather than the other way around.

    @25, my comments about the impact of explicit monetary targets was more about the fact that solvency (and liquidity) issues are the main source of uncertainty at the current time, not so much about the value of monetary certainty; uncertainty seeded by unregulated financial instruments rather than vague monetary policy.

  30. Ross Johnson
    Posted November 10, 2011 at 9:05 pm | Permalink

    The US Federal Reserve is a private group of banks who since 1913 own the US currency.They in conjunction with the other priavte banks ,create from nothing all the money to equal increases in productivity + inflation.Congress is beholding to their powers and do their bidding just like our Govts.

    We don’t live in a democracy but mostly bankruptacy.We are looking at total global financial meltdown orchestrated by the central banksters.Their next plan like the past is the expansion of wars for more profit.

  31. Adrien
    Posted November 11, 2011 at 2:08 pm | Permalink

    KVD – a. I welcome the move beyond doctrinaire schools of ever squabbling bollocks. The only doom that will follow this are those of rigid technocrats. Boo hoo. I’ll miss them.

    b. The central thesis of the book stands so far unrefuted by any substantial rebuttal. All that I’ve ever gotten from unabashed laissez-faire forever and always people is mantra.

    c. Chang is not ‘on the protectionist side’ so much as noting that industrial economies in early development deployed selective protectionism and industry policy in order to assist the infant industries in their growth; these economies include: England, the United States, Japan, Korea and China. In other words he notes that the doctrine is flawed. I hope he writes another book about the fatal flaws of some other doctrine.

    d. It’s perfectly possible that sometimes some policy mechanism is desirable and at other times not. If we had an honest across the board appraisal of the history of economics, its successes and failures we might have better policy.

    e. This unfortunately presumes the victory if ideas over interests. Right now the world is being screwed by a virus in suits. The ideological differences espoused by said virus have nothing to do with its beliefs, it’s all distraction.

    f. I’m heterodox, all the best people are. :)

  32. Posted November 11, 2011 at 3:43 pm | Permalink

    A@28+32 Haven’t read the book, but I am been very unimpressed by every article of Ha-Joon Chang’s I have read. Seemed like typical protectionist cherry-picking.

    If people cannot rebut the thesis that just means they are ignorant of economic history.

    First, trade policy is actually not that important: there are a series of other institutional factors which are much more important in explaining wider economic outcomes.

    Second, that interventions occurred is not interesting, what is important is their scale and effects. Anyone who knows their economic history knows such interventions as you mentioned occurred: it is their consequences which are of interest.

    Third, if you divide instances into “x” or “laissez faire” then that is an impoverished analytical framework.

    Fourth, allegedly “successful” protectionisms are vastly outweighed by failures of varying degrees of grotesqueness. Even the allegedly successful cases, other institutional factors are typically much more important in explaining wider economic outcomes.

    Fifth, if you want a two-part division “commerce-friendly” and “commerce-hostile” works better. But, even then, whether it is broadly or narrowly so also counts.

    Yes, I agree the Austrian v Keynesian battles are tedious. And utterly unnecessary, conventional economic analysis was both completely able to both explain the Depression and what to do about it, as Gustav Cassel and R G Hawtrey proved at the time.

    The biggest single economic problem at the moment is poor central banking. There are a range of problems in financial markets but all of them would be much more manageable if the ECB and Fed could get their act together.

  33. Posted November 11, 2011 at 3:46 pm | Permalink

    D@30 My point is that

    (1) less uncertainty is generally better than more in monetary policy;
    (2) what we need is a major shift in expectations and
    (3) the best way to get that is to explicitly and credibly change policy regime. See my link @5

  34. kvd
    Posted November 11, 2011 at 4:19 pm | Permalink

    A@32 thank you for your points. I found them readable, well written, and in fact a lively addition to the present debate.

    I’m just a little disappointed in your summary dismissal of the “we’re all doomed” theory; I think it a quite succinct and plausible analysis. In the heterodox world is there no room for opinions at variance with your own views?

  35. Posted November 12, 2011 at 6:31 am | Permalink

    A@32 Greece and Italy are going for technocrats as saviours. But those other technocrats at the ECB probably will continue to be disastrously unhelpful.

  36. Posted November 12, 2011 at 7:45 am | Permalink

    Brad DeLong provides a nice history lesson in the periodic “lawlessness” of the C19th Bank of England. Now, there’s some fascinating interaction between law, central banking and monetary economics.

  37. Adrien
    Posted November 13, 2011 at 9:13 am | Permalink

    KVD – I’ve been known to change my mind. I don’t dismiss the we’re-all-doomed theory. It has many proponents. The argument amongst them has to do with the causes. There are so many.

    Personally I’m inclined to the ‘we’re all fish and should go back to the sea’ solution. I’ll be a radical advocate of this for most of the summer.

  38. Adrien
    Posted November 13, 2011 at 9:17 am | Permalink

    Greece and Italy are going for technocrats as saviours.

    That’s a different brand of technocrat. It’s the interaction of the various brands that are providing food for Corporate-State Behemoth. Myself, I’m a PropogandaBot model technocrat and we’re the most evil you’ll find anywhere outside a petroleum company. :)

    Just so’s you know’s I ain’t pointin’ fingers Jack.

  39. kvd
    Posted November 13, 2011 at 9:27 am | Permalink

    Adrien, I thought of your very valid earlier comments reading this yesterday, while waiting for a client:

    “But though men, in later times, have believed all that the prophets have said unto them, it does appear that those prophets, or historians, disbelieved each other; they knew each other too well.”

    Thomas Paine ‘The Age of Reason’

  40. kvd
    Posted November 13, 2011 at 2:46 pm | Permalink

    I’m inclined to the ‘we’re all fish and should go back to the sea’ solution

    But it would be good if you didn’t end up sleeping with them – even if you are heterodox. Just sayin’ ;)

  41. Patrick
    Posted November 14, 2011 at 6:41 am | Permalink

    The biggest single economic problem at the moment is poor central banking.

    L, I’m going to give you the benefit of the doubt and assume that you were carried away by the subject matter; the biggest economic problem atm is surely poor economic policies!!

    If Italy wasn’t a regulatory clusterfuck, and hadn’t been so for decades, surely they would right now be about as central-bank dependent as the Dutch?

    Secondly, the ECB has been a great Bundesbank, which everyone knows, but everyone overlooks that this is exactly what it was designed to do. So whilst Krugman and you and all the rest are probably right to excoriate it for its ridiculously Germanic behaviour, that was supposed to be the feature, not the flaw, and you have to give the institution, and its designers, credit for functioning, without ever having a German chief, exactly as intended.

    That is the danger, of course, of technocracy – the ECB is the ultimate technocratic success, but wasn’t designed for the actual world in which Greece cheated to get in and the Southern Europeans never had an inner German.

    PS: Just in case you are serious, that would be like someone presented with their bankrupt daughter’s credit card saying that the single biggest problem is credit card companies!

  42. Posted November 14, 2011 at 2:15 pm | Permalink

    P@42 I doubt those stupid economic policies have got particularly worse, it is just that the tight money downturns have made their consequences worse. For example, Italy’s economic growth got noticeably worse after it joined the Euro.

    Debt crunches are typically the result of income crunches. Which, in the current circumstances, were caused by bad central banking.

    Yes, the Euro was a deutschmark for everyone, just sign up: I said that in my original post on the Euro. (So, no, I did not overlook it.) The ECB is the Deutschesbank on steroids, as it was designed to be. Agreed. That does make it a good idea.

    The ECB looks set to righteously drive the Euro into meltdown. That would not be successful central banking.

    Also, your credit card analogy does not work. It is more like a banker offering really low borrowing rates to employees and later seriously reducing their income.

  43. Patrick
    Posted November 14, 2011 at 9:17 pm | Permalink

    P@42 I doubt those stupid economic policies have got particularly worse, it is just that the tight money downturns have made their consequences worse. For example, Italy’s economic growth got noticeably worse after it joined the Euro.

    N’empeche, but for the stupid economic policies, there would not be a problem for the Euro to aggravate.

    Debt crunches are typically the result of income crunches. Which, in the current circumstances, were caused by bad central banking.

    Arguably! Or, the debt crunch was caused by some little kiddy (or hedge fund) noting that the Emperor had no clothes: that not all euros (euro-denominated sovereign bonds at least) were in fact the same. It is hard to believe that Italy has an income problem when it has a primary budget surplus and a 4% deficit. Ireland patently didn’t have an income problem until it assumed the expense of nationalising its banks. A relatively under-developed country like Spain should not have ever had an income problem if it practised sane economic (by which I mean mainly labor/regulatory) policies.

    Yes, the Euro was a deutschmark for everyone, just sign up: I said that in my original post on the Euro. (So, no, I did not overlook it.) The ECB is the Deutschesbank on steroids, as it was designed to be. Agreed. That does make it a good idea.

    I’m not sure it made it such a good idea. It turned out to be wrong kind of central bank since no-one made the Europeans dependent on it German.

    The ECB looks set to righteously drive the Euro into meltdown. That would not be successful central banking.

    No, but it would not happen if they were Germans. Unfortunately the Bundesbank has only hammers but there are lots of screws.

    Also, your credit card analogy does not work. It is more like a banker offering really low borrowing rates to employees and later seriously reducing their income.

    I’m not particularly wedded to my analogy and this is certainly consistent with the rest of your discussion.

    But to try and defend my analogy, a country that has its own currency is subject to a degree (not enough over time!) of market discipline in that its interest costs rise and fall with its explicit inflation (printing) and perceived credit risk (mainly political). I.e. very few young women or men run up that big credit card debts on their own because banks won’t lend them that much. But if the banks think they are still lending to Mummy and Daddy they will allow much higher debts to rack up before they blink.

    Much like the markets, thinking that the PIGS were really Germans, lent to them as if they were. And then realised that they weren’t. This then became much worse (this is partly your ‘bad central banking’ point) when the markets realised that the Germans were still Germans, and hadn’t lost any of those attributes that had made the markets so keen to believe that they were lending to them all along.

    But I certainly don’t claim any special expertise here. My core point is that (at the very least) it is more than just central banking which failed.

    Central banking is not a utopian ideal. Central banking is an institution and institutions are culture-dependent. This central bank was designed to be and is a German central bank. By that standard it has done fine. It just happens to be the central bank to a lot of countries that are not Germany or like Germany. I believe this is the non-optimal currency area argument.

    But it is a bit hard to say that the ECB should have been a more American or more French central bank. It amounts to little more than saying that the PIGS should have been more German, in which case the ECB would have continued to do just fine.

    Which brings me full circle: (at the very least) it is more than just central banking which failed.

  44. Posted November 15, 2011 at 7:30 am | Permalink

    P@44 There was a ‘not’ missing in my comment, as in “That did not make it a good idea”.

    And I certainly don’t deny there were plenty of failures: just that the one with the most immediately disastrous consequences was bad central banking.

    There are various problems here: the Euro-as-artificial-gold-standard which means major economic shocks (e.g. Ireland) cannot be dealt with by exchange rate shifts. The Euro changing the rules of political economy for the Mediterranean countries without them changing accordingly: all they saw was “hard” money and low borrowing costs.

    That all the Eurozone countries broke the fiscal rules (including France and Germany) whenever they felt like it means that the artificial gold standard aka Euro was not going to work.

    Then there are the ECB’s tight money policies while a major economic shock was sweeping across the global economy. That made everything worse. And I fail to see how you can have a debt problem without an income problem–if people think you have the income to cover it, your debt is no problem.

  45. Patrick
    Posted November 15, 2011 at 8:50 am | Permalink

    ah, little words and big meanings!

    I think we agree on the income problem but you think the primary cause was the central bank’s failure to print more money (and lower rates, we certainly agree on rates), I think the primary cause was the politicians/voters failure to think about how they were ever going to generate income.

    That may be, in a nutshell and my 600+ word comment notwithstanding, the only important difference between us.

  46. Posted November 15, 2011 at 9:23 am | Permalink

    P@46 Yep, that seems correct.

    A useful post on the problem of EMU.

  47. Posted November 15, 2011 at 9:33 am | Permalink

    And a very depressing one.

  48. kvd
    Posted November 15, 2011 at 12:23 pm | Permalink

    Dunno if this Business Spectator article link will survive, but it seems some obscure German political party no-name might get to unpick the whole edifice anyway – mid December.

    Also, Lorenzo@47, let’s maybe hope for the kids that San Fran bourbon tastes like sh*t ;)

  49. Posted November 16, 2011 at 4:27 am | Permalink

    kvd@49 The link works. More fun! On Kentucky and San Fran comparison, I was amused by the number of commenters who were outraged at the notion that the former were more productive than the latter.

  50. Posted November 16, 2011 at 1:07 pm | Permalink

    That should be the latter were more productive than the former!

  51. Adrien
    Posted November 18, 2011 at 1:33 pm | Permalink

    Lorenzo – Sorry to start it up again so late, but…

    Haven’t read the book, but I am been very unimpressed by every article of Ha-Joon Chang’s I have read. Seemed like typical protectionist cherry-picking.

    Well I didn’t see any example of what I would call cherry-picking in Bad Samaratins. What I did see that was not quite as bad is that he avoided discussing The Netherlands which did not practice industry policy or erect trade barriers to favour local industry. I call this ignoring inconvenient facts. For me, cherry picking is much more extensive than simply leaving what doesn’t fit out.

    If people cannot rebut the thesis that just means they are ignorant of economic history.

    Well we’re agreed there. :)

    First, trade policy is actually not that important: there are a series of other institutional factors which are much more important in explaining wider economic outcomes.

    I would expect that to be so, yes. Altho’ the argument there would be to what extent was government policy essential to the success of the development of industry.

    Second, that interventions occurred is not interesting, what is important is their scale and effects.

    Well the interventions are interesting if they had effects, yes? The scale question is pertinent as the industry/tarrif policy practiced by the Tudor/Stuart dynasties was minimalist and light on.

    Third, if you divide instances into “x” or “laissez faire” then that is an impoverished analytical framework.

    That’s a mathematical metaphor I’m not sure alI appreciate. Historically there’s a view of history consistent with this ideological viewpoint (eg Manifest Destiny in the US) and a view that contradicts it and the values of each view depend on the accuracy, breadth and interpretation of the facts cited.

    Fourth, allegedly “successful” protectionisms are vastly outweighed by failures

    That depends on whose judging. Tariff barriers were a success if you were employed by an Australian car manufacturer in the 60s. It is of course a failure from the point of view of consumers and the long term. Industry policy is usually a very bad idea. But Bad Samaratins does not spruik endless tariffs and industry policy. It argues instead that such measures have been used by the vast majority of today’s successful industrial economies in the infant period of that economy’s development.

    Therefore the mild tariffs exercised by the British monarchy on Flanders’ textiles as well as measures to import expertise etc helped develop Britain’s economy so that it became a textile manufacturer rather than simply an exporter of wool.

    At a certain point the industry was able to compete by itself. Naturally the development of industrial technology caused the massive expansion of England’s textile industry. However the United States and Japan and Korea have all practiced these measures during industrial infancy.

    This does not mean that these measures are always good or that the arguments against their use are always wrong, merely that an aspect of the laissez-faire view of history might be mistaken.

    When I spruiked the thesis at the Cat people were genuinely unaware of the roll of the monarchy in developing the English textile industry, of the (Republican) US governments’ role in developing competition for England in the 19th century.

  52. kvd
    Posted November 24, 2011 at 1:15 pm | Permalink

    Lorenzo xkcd has exceeded himself – yet again.

  53. Posted November 25, 2011 at 10:41 am | Permalink

    A@52 On the failure of protectionism: yes, certain privileged groups benefit but the developing world is rife with protectionist policies which made countries poorer.

    Parsing the difference between cherry-picking and ignoring inconvenient facts does not seem a productive thing to do.

    The question is not whether x was done, the question is whether x is reliable way of promoting economic development. The very best one can argue for is that infant industries has apparently worked in very specific circumstances. The trick then becomes specifying those circumstances, and you cannot do that if you do not consider all the relevant facts, no matter how inconvenient.

    My suspicion is that it was much more that there was a general concern with promoting commercial activity, which included a range of institutional factors. Hence the success of the Netherlands, Hong Kong, Singapore, the UK after it liberalised, Oz after we liberalised, etc.

  54. Adrien
    Posted November 25, 2011 at 1:01 pm | Permalink


    Hong Kong and Singapore are trading centres; city-states that thrive on the trade routes that run thru them. They are not large centres of manufacture. Australia, likewise is not a centre of manufacture.

    The difference between cherry-picking and ignoring a certain fact is one of degree, yes. But there’s a difference between picking only the facts that help you and relating them to the reader without mentioning the existence of the inconvenient ones. Chang doesn’t omit the fact, he mentions it but does not elucidate.

    Rather he concentrates his energies on the other economies that follow the pattern he describes. He doesn’t promote protectionism on principle, he believes that you must eventually lift the barriers to competition once you’re ready to compete.

    Okay this is still ideological ping-pong but I’m yet to read any basic debunk of the policy relevant argument.

  55. Posted November 26, 2011 at 6:19 am | Permalink

    A@55 So, we are limiting the cases to manufacturing. (Actually, all those examples have significant manufacturing, it is simply not their primary export sector: and Australia flogged the infant industry argument to death, I would have thought.)

    I am still not sure what the basic argument is. It cannot persuasively be “protectionism sets off manufacturing success at net benefit to the wider society” since there are too many cases where it clearly didn’t.

    If it is “various countries which became manufacturing exporters protected nascent industries” that is an observation not an argument. They did lots of other things too, why was one or more of those not the key factor?

  56. Posted November 26, 2011 at 6:28 am | Permalink

    A@55 To continue my last point, if we have x cases of protection of infant industries with y cases of apparent success and x is much larger than y, then the implication is that some other factor or factors was the crucial differential. (A lot of these arguments look much weaker if one includes the developing world in the examples.)

    Japan, for example, had low tariffs imposed on it in the C19th, yet managed to build up manufacturing very successfully. While India also did, and yet did not. Hence my point about trade policy not actually being that important.

  57. Adrien
    Posted November 27, 2011 at 9:02 am | Permalink

    So, we are limiting the cases to manufacturing.

    Yes, Chang is discussing industrial development

    I am still not sure what the basic argument is.

    That those nation-states which became dominant industrial powers used government protection and promotion to do so. They dispensed with same when those industries became competitive.

  58. Adrien
    Posted November 27, 2011 at 9:02 am | Permalink

    Or in the case of Detroit, they didn’t and looked at what happened.

  59. Posted November 27, 2011 at 1:17 pm | Permalink


    That those nation-states which became dominant industrial powers used government protection and promotion to do so. They dispensed with same when those industries became competitive.

    The second is an observation, the first is a correlation parading as causation. In which case, all my preceding objections apply.

  60. Adrien
    Posted November 28, 2011 at 9:18 am | Permalink

    Lorenzo you have not established that it’s a correlation posing as a causation. I’m well aware that they are different things but correlation quite often is a causal factor.

    That the second is an observation means what? What I observe is that the [pattern of development does not fit comfortably into either ideological set. Generally free trade is best, but it might be the case that industries need subtle help before they can compete. This is experience. Let’s not discount it because of our favoured formulas.

  61. Posted November 28, 2011 at 10:09 am | Permalink

    A@61 If, in x cases, protection of infant industries has been used, and in y cases it has prima facie been successful but y is much smaller than x, then causation has not been established. On the contrary, success is almost certainly due to some other factor or factors. Especially if there has been z cases of successful industrial development which did not use such protection.

    If y is bigger than z, there will be some correlation but no causation will have been established. Indeed, even if z was an empty set, causation would not be established.

  62. Posted January 26, 2012 at 12:17 pm | Permalink

    An Irish journalist treats a European Central Bank bureaudroid with the contempt he deserves.

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