November 13, 2008

Requests: Forgotten insights of Marx and other dead economists on the mortgage meltdown

I want to write something major about how the mortgage meltdown illustrates the wisdom of certain ideas of old economists that had, unfortunately, disappeared down the memory hole before the Housing Bubble.

'd like your help with this, both conceptually (I invite your suggestions of more ideas and criticism of ideas I outline below) and with helping me find short readings that specifically address these questions. (The classic works of economics tend to be way too long for me to read -- the summer when I was 14, I made it through the first 300 pages of The Wealth of Nations, but only by skipping Adam Smith's 75 page "Digression on Silver." I don't have that kind of time anymore.)

Here some ideas I have:

#1. Karl Marx would rattle on a lot about how under late-stage capitalism, the workers couldn't afford to buy their own output, which leads to economic crises.

Marx's argument was a major concern of Americans throughout the first three-fourths of the 20th Century, but then the idea just disappeared. For example, when Henry Ford invented the moving assembly line in 1914, he soon doubled the wages of his workers. His immediate goal was to pre-empt unionization, but he justified it to his fellow capitalists who were angry at him for changing the pay expectations of workers by saying that he wanted Ford workers to be able to buy Ford cars.

That was an extremely famous statement by Ford for decades, but in recent years, the Establishment stopped talking like that, or worrying about it. Thus, we see America recently importing huge numbers of low-skilled immigrants to build houses selling for $500,000. Marx would have asked: How can they afford their own production?

Well, oddly enough, they could ... for awhile. In the casino-like atmosphere of late stage finance capitalism (another concept of Marx's), they could just buy the houses on credit.

How's that working out for us lately?

Since the fall of the Berlin Wall 19 years ago, the general assumption is that we don't have to worry about anything Marx ever said. It's all discredited, 100%. Well, maybe, maybe not. Maybe the less attention we pay to Marx's critique, the more likely we are to blunder in to actual problems he identified.

2. Thomas Malthus: I want to update Malthusian concepts of scarcity and fertility. For example, why is the Total Fertility Rate in Mexico about 2.4 while the Total Fertility Rate of immigrant Latinas in California is 3.7? Why did the non-Hispanic white TFR fall from 1.93 in 1990 to 1.65 in 2000?

3. Henry George -- Henry George's criticism of investing in land as a way to get rich without actually producing anything seems extremely relevant in explaining the last decade, but nobody has talked about Henry George for decades.

4. Ludwig von Mises: The Austrian business cycle theory of misallocation of investment seems highly pertinent.

5. Some forgotten economist -- David Ricardo's theories of the advantages of free trade have triumphed so utterly that I can't even think of the name of a critic of his.

6. John Maynard Keynes: Obviously, Keynes's fiscal policy theories have a whole school of defenders, such as Paul Krugman, but what I'm interested in about Keynes is his one phrase in which he attributed much of the ups and downs of the business cycle to the "animal spirits" of businessmen. Having spent a decade or so around the executive suites of three corporations, that strikes me as spot-on. A lot of the things we did, we did because they seemed like good ideas at the time. Later, when the collective mood had changed, they didn't seem like such hot ideas. It's an interesting alternative to the mechanistic monetarist explanation of the business cycle advanced by Milton Friedman.

Did Keynes ever develop his "animal spirits" wisecrack further?

7. Milton Friedman: Uncle Miltie certainly doesn't lack defenders, or critics who are blaming him for the deregulation of the financial industry, but my vague recollection is that he advocated, at least at one point, the most stringent financial regulation imaginable: the abolition of fractional reserve banking.

My published articles are archived at iSteve.com -- Steve Sailer

47 comments:

Occam on the farm said...

Ford's justification was silly then and now. In 1914, 13,000 Ford workers made 260,720 Model Ts. If every one of those employees bought a Model T *every year* it still wouldn't make much impact on Ford's sales. That's the entire point of efficient production - producing far more than you yourself consume.

In reality he probably just liked the idea of his employees making good money. It helps a lot at hiring time, and as you say, it staved off unionization.

Anonymous said...

#2. I believe I've read before that the fertility rate of native born Hispanics is about the same as whites. (If it's higher, it's not much higher).
I think what happens is immigrant Latinas have 3.7 kids rather than 2.4 because their old country domestic values find having kids is more affordable in the US of A. Their native born kids and grandkids however, revert to the white pattern of having 1.8 or 2.0 kids or whatever. Hey man, why crank out more kids when you can buy a fancier SUV or more Xbox games with your paycheck?!
Assimilation, materialist style.

#3. I've been a big fan of Henry George's for awhile now. I'd love to see income and sales tax rates cut and a land value tax levied in their place.

#5. Good question. Are there any anti-free trade economists who aren't written off as cranks?

#7. I've always wondered what a world with full reserve banking would look like.

Chief Seattle said...

Steve, the Marx predictions are something I think of periodically, and they make a lot of sense. Basically, as productivity improves, less workers are needed to produce the same amount of stuff. So society can decide to use more stuff, but more of the same stuff has diminishing marginal utility. If creativity/technology doesn't keep up with productivity advances then at a certain point consumption will slow, stall, and reverse in a vicious cycle of less spending causing less employment.

One answer to this is government spending, which is the answer the population came up with this year. Another is artificially limiting production, via regulation, via tariffs, or via unions. All three of these keep a climate of scarcity that allows technological advance to keep up with productivity improvements.

Of course the other answer to this is war, since that consumes plenty of resources without giving anyone any utility. That's the Orwellian answer, and by far the most depressing solution.

Non-Boomer said...

J.K. Galbreath: In society, there are the rich and the poor. In an affluent society, the rich form the majority and vote to oppress the poor. The mortgage meltdown represented a shift in wealth from the empowered rich to the oppressed poor and was, on the whole, both necessary and just.

/just tried reading one of his books recently
//holy crap it was godawful

Big John said...

Yeah, Galbraith is a stinker.

Re. Marx, I've never been able to get past Paul Samuelson's formulation of him: in economic terms, he was a minor post-Ricardian; in philosophic terms, a minor post-Hegelian.

To which one might add: in literary terms, he's a major pain in the posterior.

Anonymous said...

The forgotten economist is Friedrich List (1789-1846), author of National System of Political Economy.

Last decade, Gomory and Baumol made a dent in formal trade theory by relaxing some of its axioms and proving the the richer dynamics included cases of absolute loss under free trade. Their work, while strictly within the framework of classical theory, is still unmentionable. (And is still very abstracted from the real world.)

Jeff Burton said...

I spent a lot of time in college reading Marx. I couldn't take anything he said seriously after I had grok'd the Labor Theory of Value.

kurt9 said...

The Austrian business cycle theory is most relevant here. All booms lead to misallocation of investment which, in turn, leads to the necessary corrective slowdown that sets the stage for the next boom. This is the nature of economic systems.

The problem with the Keynesians (top among these is your egotistical buddy Krugman) is that they are trying to "jump-start" the economy before the corrective cycle can complete its job. This is much like curing a hangover by drinking more alcohol.

Perhaps Keynesian economics should be referred to as "hair of the dog" economic theory.

WLindsayWheeler said...

On another website, The Economic Populism Forum, I started a thread on what I see is the biggest problem of this Diversity recession and that is "Gaming the System". I am studying Murray Rothbard who advocates the Austrian Economic School but they don't take into consideration the Human dimension and the ability of Humans to abuse any system for profit. It is "Gaming the System".

You can find it here at Business Error or Gaming the System or at http://www.unlawflcombatnt.proboards84.com/index.cgi?board=general&action=display&thread=4163

I am on a libertarian website on another place and they are adamant that "gaming the system" is a business error.

WLindsayWheeler said...

On Ford's justification on astronomically raising his rate of pay----He had trouble keeping workers. He had terrible attrition rate. The working conditions may have been terrible. He raised the pay rate to keep workers. It worked. He cut his attrition rate in half.

But Ford may have caused the depression because he shut his factory down for two years to engineer another model car. This thru dealerships into bankruptcy and workers out of work. That started the ball rolling for the Great Depression.

Anonymous said...

Steve, regarding anti free trade, how about Paul Craig Roberts?

http://www.vdare.com/roberts/071008_cato.htm

MQ said...

I think Marx was a genius and a brilliant analyst of capitalism, when you consider he was writing in 1850 or whatever. Marx's concept of fictitious capital strongly prefigures what Keyenes wrote about the economic instabilities generated by the future-dependence of the investment cycle. Not to mention that it sounds spookily prescient today.

Anonymous said...

"I am on a libertarian website on another place and they are adamant that "gaming the system" is a business error."

Yes, the more extreme libertarian
Austrians sometimes act as if human vices are always beneficially self-correcting on larger scale in market systems. They either underestimate the tragedy of the commons or ignore it all together.

I think that is both a result of their rationalistic conception of human beings and their bias towards wanting to resolve every economic or even social and political problem with the free market.

I'm sure Paul Craig Roberts or George Borgas could find some critique of free trade or the law of comparative if sufficiently pushed on the subject. So much of economic analysis today is divorced from a qualitative analysis of human nature, especially racial differences, that someone can both secure his place in history and become ostracized by rebuilding international economics on a experimental economics foundation that takes into account racial differences.

MQ said...

Re. Marx, I've never been able to get past Paul Samuelson's formulation of him: in economic terms, he was a minor post-Ricardian; in philosophic terms, a minor post-Hegelian.

actually, I can see this interpretation. As a pure economist he was certainly inferior to Ricardo, by the standards we judge economists by today. But as an overall theorist of capitalism and what it meant as a linked economic / sociological / historical phenomenon, he was brilliant. I mean, look at the Communist Manifesto, where he predicts feminism, globalization, urbanization, and the advent of unceasing market-driven technological change...all in 1848.

Marx also identified the key macroeconomic problem of capitalism as overproduction. I think we're still getting our minds around the possibilities of that insight today.

Finally, his labor theory of value reads like BS today, but it was the orthodox economic theory of his time. Faulting him for that is like faulting some economist today for using marginal valuation or utility functions. (His part was the "exploitation" part). Truthfully, just like utility functions or marginal valuation today, the labor theory of value is both sort of BS but also was adopted by smart people as a response to some real intellectual problems.

bj2x said...

The problem with the land tax is that land is going down as a percentage of total assets every year. They're not making any new land, but they are making new businesses every year. Plus, unlike other forms of wealth (not income), land is taxed. As for economists against free trade, David Landes is one (Argentina would have been better off imposing tariffs instead of selling resources) and Bad Samaritans by a Japanese economist is an anti-free trade book recently published.

non-boomer said...

PS The book was The good society: The humane agenda, 1996, excerpts here:

http://books.google.ca/books?id=RsypCJwcLtUC&dq=The+good+society:+The+humane+agenda&pg=PP1&ots=dFCPBXrQGZ&source=bn&sig=_enfm7hOXVkFNSkS224oG3PSc5g&hl=en&sa=X&oi=book_result&resnum=4&ct=result

http://www.amazon.com/Good-Society-Humane-Agenda/dp/0395859980

On page 8: "For the poor, the government can be central to their well-being, for some even to survival. For the rich and comfortable it is a burden save when, as in the case of military expenditure, Social Security, and the rescue of failed financial institutions, it serves their particular interest. Then it ceases to be burdensome and become a social necessity, a social good, as it certainly is not when the government serves the poor."

Moira Breen said...

Anonymous: Last decade, Gomory and Baumol made a dent in formal trade theory by relaxing some of its axioms and proving the the richer dynamics included cases of absolute loss under free trade. Their work, while strictly within the framework of classical theory, is still unmentionable. (And is still very abstracted from the real world.)

Gomory (his and Baumol's book here) did testify before Congress last May - maybe to an empty chamber?

Anonymous said...

I would think you'd want to discuss Dani Rodrik at some point.


I see you already mentioned Philip Longman a while back on patriarchy.

Curve of Freedom said...

Great minds and/or reactionary cranks think alike. Yer pal Mencius Moldbug, has recently promoted a modified version of Henry George's taxation theory, and beat up on fractional-reserve banking, which he considers a subset of the maturity transformation fraud.

With my halfway great mind, I have no opinion on the second matter, but he is exactly right about the first. But back to the fractional reserve banking thing - how would it work for the Fed to gradually move away from FRB by increasing the reserve requirement by five percentage points a year? Too radical?

BoneyM said...

Friedrich List was active a decade or so after list. A German economist before there was a Germany, he had lived in the US and admired both Hamilitonian economic nationalism and Clay's American System of infrastructure. He was instrumental in establishing the Zoll-verein , the customs union that was the first step in German unification. And, aside from a 4 year and 12 year detour, that seems to have worked out pretty well.

I'd also recommend Thorstien Veblem, esp. his theory of the leisure class. He writings on pecuniary emulation are terrific -- and go along way towards explaning phenomena like 'liars poker'.

Henry Canaday said...

1. Karl Marx on workers unable to buy their own output, which leads to economic crises. Dumb argument by brilliant but innumerate crackpot. Dead end.

4 John Maynard Keynes on animal spirits. Best modern counterpart is theories of asset bubbles, by Shilling et. al. But they tend to ignore the government's even more
irrational exuberance.

7. Milton Friedman on fractional reserve banking. Worth pursuing as it leads to recognition than banks are different from every other private enterprise, in both their importance and incomplete subjection to market discipline.

c23 said...

I've read Malthus - he just assumed that couples would have eight or so kids if they could provide for them. Remember that the majority of people then were farmers, who needed child labor.

Fertility rates have changed because kids have become a burdensome luxury. The more of a whiterperson you are, the more karate lessons and whole foods organic eggs you have to buy for your kids and the more money you have to send them as they earn their phDs. But if you're a Mexican, you buy thrift store clothes and beans instead, and your kid is flippin burgers by 17, maybe even helping pay some bills. That's why I don't buy the idea that Hispanic birthrates will equal white ones, even though they've been dropping. But you'll have to go somewhere other than Malthus for insight into this sort of thing.

Henry Canaday said...

Here is another of Keynes's ideas that might prove more fruitful in the present crisis and in addition be a 'keeper' for all future crises. It is contained in a short essay, "Economic Possibilities For Our Grandchildren," originally published in 1930 and re-published in the Norton edition of Keynes's "Essays in Persuasion."

Keynes was arguing that the current crisis of unemployment was masking the favorable long-term trends in wealth, living standards and easier lives that had taken place in the previous 160 years and was still going on, under the surface, during the 1930s. Indeed, it was only this great wealth that made it possible for British government to pursue the foolish policy of trying to re-establish the pre-World War gold value of the pound and for British labor to try to maintain unrealistic wages, despite high unemployment. Only countries that are basically very rich can afford to be that stupid.

He predicted that the 'economic problem,' meaning how to produce enough for a comfortable life for all, would be essentially solved in two generations. Despite Depression and another World War the economic problem, so defined, was solved about two generations later, in the 1970s, in rich countries like the United States. So we had another kind of crisis, inflation and stagnation, because we were rich enough to do stupid things, like promise everybody a continually rising living standard without the necessary effort, risk, discipline or occasional upset of changing jobs.

I suspect you can fill in the blanks for the follies of 1998 through 2008. Extra credit question: how is an even richer United States going to screw up the 2040s?

Born Again Democrat said...

On the free trade issue, I studied up on it good in the early 1990's after Harper's offered me $4500 to do a 4000 word piece.

The classic anti-Ricardian piece is Eli Heckscher's essay entitled The Effect of Foreign Trade on the Distribution of Income,” Ekonomisk Tidskrift 21: 497-512, (Upsala, 1920), English translation in Hoeckscher-Ohlin Trade Theory (MIT Press, 1991).

In essence he showed that when a country's comparative advantage lies in a relative abundance of low-wage labor, the effect is to lower the real wages of workers in the rich country.

This doesn't violate the Ricardian claim that both countries are made "better off" because the total size of the economic pie in the rich countries does in fact grow absolutely bigger.

What conclusions can we draw from these two facts? Simple: labor's share of the pie grows even smaller than it was before, not only relatively, but absolutely!

As a corollary it follows that there is a redistribution of income from labor to capital which exceeds the amount by which the pie got bigger (the so-called "gains of trade")

Samuelson later made a name for himself when he and a guy named Stolper wrote, "Protection and
Real Wages," (Review of Economic Studies, 9: 58-73, 1942). In fact Heckscher's original insight now goes by the name of the Samuelson-Stolper theorem. I think there is a name for that kind of misattribution.

The real scandal though was when Samuelson stood up in the East Room of the White House on the eve of the Nafta vote and said, "there has never been a case in history when erecting protectionist trade barriers caused wages to go up in a rich country" or words to that effect. Can anyone detect the disengenuousness of this remark?

Of course a few years later Samuelson was quoted in The Economist (or maybe it was Newsweek) saying that of course Nafta and Gatt are causing wages to go down in America. It is called "factor price equalization" which is the name of another unorginal theorem he is famous for.

It is all written up in my "Gatt Justice: Who Gets the Gains of Trade." Lewis Lapham decided not to publish it in the end (but gave me a $1500 kill fee) because he said it was above the intellectual heads of his readers. He straight out asked me to dumb it down, and to emphasize the short-run consequences of Nafta and Gatt, instead of what it was going to do over the course of the next several decades. That's elite journalism for you.

AS said...

How about Thomson Hankey a contemporary critic of “Walter Bagehot who laid down the law that, in a credit crisis, a central bank should lend freely against good collateral at a high rate of interest. Hankey emphatically disagreed, and he answered Bagehot in a little book titled, ‘The Principles of Banking,’ first published in 1867 in the wake of the famous Overend Gurney run...
Hankey, in a losing cause, marshaled two principal arguments against the Bagehot doctrine. No. 1, moral hazard: Let profit-maximizing people come to believe that the Bank of England will bail them out, and they themselves will take the risks, and pile on the leverage, that will require them to be bailed out. No. 2, simple fairness: If Britain's banking interest can claim a right to the accommodation of the Bank of England, why shouldn't the shipping interest, the construction interest, the railroads, ‘and, last of all, the much-maligned agricultural interest,’ do the same? Shouldn't all economic actors ‘be equally entitled to benefit by any favors for which the public have a right to look from such an institution as the Bank of England?’...
‘Ready money,’ writes Hankey in a passage on liquidity that seems to speak directly to the post-Bear Stearns world of 2008, ‘is a most valuable thing, and cannot from its very essence bear interest; every one is therefore constantly endeavoring to make it profitable and at the same time to retain its use as ready money, which is simply impossible. Turn it into whatever shape you please, it can never be made into more real capital than is due to its own intrinsic value, and it is the constant attempt to perform this miracle which leads to all sorts of confusion with respect to credit. The Bank of England has long been expected to assist in performing this miracle; and it is the attempt to force the Bank to do so which has led to the greater number of the difficulties which have occurred on every occasion of monetary panics during the last twenty years.’ “
http://www.nysun.com/opinion/walter-bagehot-was-wrong/80283/

beowulf said...

Ahh yes, full reserve banking, what was called "the Chicago Plan" back in the day. Actually a damn good idea.

"The young Milton Friedman was the best known advocate for the Chicago Plan in the postwar period, writing: “Henry Simons held the view…which I share - that the creation of fiat currency should be a government monopoly.” Friedman testified on this before Congress as late as 1975 and in 1985 wrote: “I have not given up advocacy of one-hundred percent reserves.” Friedman thought the transition to 100% reserves would not be difficult – “say 25% a year from now, 50% two years from now, etc”..."
http://www.monetary.org/chicagoplan.html

Jim Bowery said...

Actually Milton Friedman claimed that Henry George's land value tax was the "least distorting" tax -- so it isn't strictly true that "no one has talked about Henry George" (admitting that by "anyone" you mean to exclude those not counted among the Great and the Good).

For Riccardo you should talk to Paul Craig Roberts. For George you should talk to Randall J. Burns.

If you want to talk about recasting Henry George within modern portfolio theory, talk to me.

TGGP said...

I've gotten tired of rebutting that crap about Henry Ford, so I'm glad I was beaten to it. The reason he was worried about his attrition rate was that it was costing him money to keep training new workers. When he raised wages and retained them longer he didn't have to keep paying for more training.

I was about to rebut your point about Friedman and talk about his idea to replace the Fed with a computer that gave a constant low rate of increase in the money supply, but beowulf taught me something new.

Anonymous said...

"Fertility rates have changed because kids have become a burdensome luxury. The more of a whiterperson you are, the more karate lessons and whole foods organic eggs you have to buy for your kids and the more money you have to send them as they earn their phDs. But if you're a Mexican, you buy thrift store clothes and beans instead, and your kid is flippin burgers by 17, maybe even helping pay some bills. That's why I don't buy the idea that Hispanic birthrates will equal white ones, even though they've been dropping. But you'll have to go somewhere other than Malthus for insight into this sort of thing."

Steve and C23,

Pat Buchanan's opinion, and one that I tend to agree with, is that religiousity correlates "absolutely" with birthrates. I would modify it to say "very strongly".
This is critical: the "investments" we "have" to make in our children vary considerably from person to person. To a secular parent, those expensive eggs, karate lessons, high status private school, and loads of "individual attention" from mom and dad may be critical in said parents' eyes. Why? Their values to a very large extent dictate what's important. What are the chances that a fervent Catholic would agree that those things were critical for bringing up children? In the first world, children don't go hungry or without adequate health care so for the vast, vast majority of us, our kids have their basic needs met, have a roof over their head, and receive a free education. We don't have a scarcity problem nor have we had one. We have a spiritual problem. Our society does not confer high status to the dad struggling to raise five kids, but we would confer high status to the same man if he were going into debt in order to start an inner-city charitable organization. Why? Our beliefs about what is true, good, and moral says that the Patriarchy isn't that great while multicultarism is a good thing.

Anonymous said...

>3. Henry George -- Henry George's criticism of investing in land as a way to get rich without actually producing anything seems extremely relevant in explaining the last decade, but nobody has talked about Henry George for decades.
>>>>>>>>>>>>>>>>>>>>>
That isn't really true. There has been a resurgence of interest in Henry George-and two relatively recent Nobel prize winners(Vickery of Columbia and Simon of CMU) have been very sympathetic to Georgism.

Now, a lot of what is said about George has little to with what George actually wrote about.

In the case of the mortgage melt-down:
First George supported nationalization of de facto monopolies-and Fannie May and Freddie Mac come pretty close to qualifying.

Secondly George thought that speculation in land was a major cause of depressions-and that the way around depressions was to ease off land taxes in areas where people were moving out.

George was also an immigration skeptic(he became famous for writings advocating restriction of Chinese immigration before he published Progress and Poverty.

Randall Burns
vdare.com/burns

Anonymous said...

You ought to look into the work of Nikolai Kondratiev on long cycles in Western economies. Everyone looks for proximate causes, but if Kontratiev was right, the seeds of this were sown a long time ago.

Juan Carlos de Borbon y Borbon

zylonet said...

“I am studying Murray Rothbard who advocates the Austrian Economic School but they don't take into consideration the Human dimension and the ability of Humans to abuse any system for profit. It is "Gaming the System".”

Austrian's do follow the human dimension and that is why the theory is so attracting to many supporters of HBD. http://en.wikipedia.org/wiki/Praxeology With regards to gaming the system, this could be viewed as arbitrage. The more efficient the market, the more difficult the arbitrage. Therefore, a free market system will still produce the most efficient means of capital expenditure even if some of it is taken through “gaming.”


“Marx also identified the key macroeconomic problem of capitalism as overproduction. I think we're still getting our minds around the possibilities of that insight today.”

I am not sure what is difficult to understand about Marx. He was obviously a man driven by some interesting internal motivations and did not mind distorting reality to deliver his message. Most everything I have read of his seems based in an alternate universe. People have tried his methods and misery resulted.


In evaluating the current economic mess, I would argue that a quick trip down Mises lane is what is needed. I do not favor debating which interventionist strategy works best, because all are built upon the faulty premise that governments can predict human behavior. Moreover, attempting to codify measurable nuance in economics is impossible because of individual myopia. There will always be so much that is unseen, and therefore unable to be evaluated. The Broken Window Fallacy speaks beautifully to this premise. A few other thoughts:

Governments and machines cannot predict human behavior well enough to manage an economy. This should be obvious, but people fail to heed history. People suffer from hubris and believe they know how people will act and respond. The Austrians told us it was impossible, and they were right. We can rightly assume that many economic models employed by Wall Street firms were worthless. This is pathetic, and we are left to assume that the models did not properly account for consumer debt loads and artificial wealth based on easy credit and monetary expansion. Very basic calculations appear to have failed consideration or were deliberately removed so that the speculating firms could benefit from moral hazard. What differences does it make if your firm fails if you make billions and the government bails out the firm. In general, it should have been obvious to more people that real estate is a zero sum game; there is no new production value or efficiency value created. The inflated home prices represented only phantom wealth and served only to enable a speculating class to profit far beyond what otherwise would have been possible.

Incentives and Intervention
The Austrians are right to consider incentives as core to human action. Therefore, any trenchant analysis should look to incentives to explain the current market. The incentives to act are infinite in nature, but they are the be all and end all. Government intervention has created false incentives to maximize short-term wealth and borrowing. Consider a home renter, who was incentivized to buy before the price climbed too far. Now the reason the prices were rising so fast was not a pure market-determined response, but rather the result of expansionist monetary policy and other government social engineering that produced more scarcity than would otherwise have existed. Let's say our renter was in a great school district, but prices were rising fast, and she feared that she might be denied future accommodation. In such a case, and where lending standards were reduced, she would be heavily incentivized to buy. Of course, she might not have wanted to purchase a home, but with government busing ensuring that the alternative nearby district is half NAM, she became doubly afraid of the fate that might befall her young children. Moreover, with the rising house prices (resulting from artificially low interest rates and expansion of the money supply), she was worried that her $60,000 annual salary wouldn't be good enough in three years. She feared that she might live in that nearby district where huge extended families have pooled resources to buy corner lots and where cross-county busing means her teen daughter just might be spoiled by the wrong boy. Everything was against her, therefore, she was heavily incentivized to buy so that she could lock in a good school for the kids. In a free-market, lacking state intervention, then she might have been able to continue renting because housing prices likely wouldn't rise so fast and the school districts wouldn't suffer social engineering.
You can take that example anyway you want, but it details some of the reasons people had to buy. The government has created scarcity in good schools leaving peopled incentivized to spend like crazy to live in those districts. Moreover, monetary policy incentivized people to buy bigger and also allowed more people to clamber for homes in good districts. Then add to this all that you have written about profiting from second and third homes and you have a disaster in the making.

Look to Stanley Milgram
One of the biggest problems with economics is that it confounds the minds of most people. Therefore, you end up with a great many Milgram subjects who fail to think and thus follow the actions dictated by the proctor. So today we have politicians and blowhards lobbying for a solution to the so-called housing crises. These people are just like the people in Milgram's study. They are following the direction of a limited few and do not offer much in the way of pushback. They are acting upon emotion and falling prey to their perceived low position in the command (intelligence) hierarchy. They are doing as told. Moreover, as we have seen, when these people are presented with counter evidence, they often girder their position. Check any of the videos of Peter Schiff and his calling the real estate market bogus; everyone laughed him off. Of those who laughed him off, I would wager that few know much of anything about economics and fewer still understand the role of incentives and scarcity.

Jeff Burton said...

OK, since a lot the commenters seem to admire Marx as an economist, I'll elaborate. When you penetrate Marx's obsessive concerns (Commodity Fetishism, Alientation of Labor, etc.) what you find is less an economist and more an economic moralist. Consulting him today makes as much sense as looking to Medieval Catholic theologians' treatment of economic matters. And BTW, his "key insight" was not capitalist overproduction. The biggest gear in his history machine was class expropriation. Marx's biggest blindspot was actually a complete ignorance of technogolical progress as it relates to productivity. It makes sense when you realize he was a socially isolated German immigrant sitting in the British Library reading parliamentary reports that were decades out of date.

Anonymous said...

Basically everything that was written after the time of the pioneers such as Adam Smith and Thomas Malthus can be disregarded.
During the enlightenment, it was French thinkers who first sought to discern academic pribciples of 'political economy' as it was then called.Previous to that, no one really questioned why some nations were richer or poorer (it's no surprise that Smith's work was entitled 'The Wealth of Nations').
Basically, Smith and the Frenchmen who came before him merely used defendable priciples of logic and axioms (ie the laws of supply and demand etc), to try to form an academic framework for reality as they saw it.
(it is interesting to note how many 'clever' modern economists actually quibble with the law of supply and demand - ie with regard to immigration - and have to deny and qualify it, basically the law in its rawest form is the only 'truth' that economics has - the rest is bullshit).
We must also remember that Smith wrote in a time when money actually had an inntrinsic value in itself, could not be forged by politicians and represented the 'fixed stock of wealth' and production in any particular nation.I belive that this crucial axiom - and the way it has been destroyed by the economists and politicians is at the root of our troubles today.
As for Marx- well he had a kernel of truth - the proletraian worker IS disadvantaged by capital in today's society - but here Malthus that other great ancient (but sadly disdained sage) comes to the rescue.
Malthus's great work was, of course, the fact (quibbled over by 'clever' economists and the Marxists)that population growth will always outrun the means of sustenance for the workers.
The truth of this amply demonstrated by today's third world and the reality , for example, of massive Mexican immigration into California.
Marx really should have noted that the real enemy of the worker is mass population growth - the real force that destroys wages - and not the capitalist per se, but he never let facts get in the way of a good argument.
Now, the bonum of the low population growth of western world should now accrue to its workers with wages being bid up as the capital/labor ratio turns adverse for the capitalist.But this is just not happening, due to massive 3rd world immigration encouraged not only by the capitalists themselves (understanbly) but by representatives of organised labor!!!
As for free trade.Ricardo's and Smith's theories always envisionec that the debtor nation would actually be drained of physical gold.This way the debtor nation would be made poorer (by reduction of the money stock) - an inescapable fact.
By being impoverished, the debtor nation's prices of goods and labor is supposed to fall, this is supposed to make exports from the debtor 'competitive.'
All well and good in theory, but in practice?
By being made poorer

Anonymous said...

"[Ford's] immediate goal was to pre-empt unionization..."

Unions weren't the main problem; it was staff turnover. Workers who had used to building cars in artisan-style workshops hated assembly-line work. AFAIK turnover was several hundred percent just prior to Ford's introduction of the $5/day policy. That was twice the going rate, and reconciled the workforce to the new, mind-numbing, but highly productive regime.

intellectual pariah

Mr. Anon said...

"TGGP said...

I was about to rebut your point about Friedman and talk about his idea to replace the Fed with a computer that gave a constant low rate of increase in the money supply, but beowulf taught me something new."

It seems to me that our money supply should be tied to the total amount of energy produced in the U.S. Energy is the fundamental input into the economy, and the money supply should reflect it's abundance or scarcity.

John of London said...

Short Books: The Worldly philosophers by Robert Heilbroner is a concise survey of the thinking of many key economists.
Imperialism the Highest Stage of Capitalism by Lenin (1916) is amazingly prescient and seems to describe the late 20th/21st century more than 1916. Wouldn't you have thought that putting someone with such a good diagnosis in charge would have worked out better than it did?
Ford's wages: the problem was supposed to be that a closed capitalist system doesn't generate enough income to buy all its production. This was the basic idea of Social Credit, a Canadian variety of prairie populism. It's claimed they won an election in Alberta on the slogan "you don't have to understand Social Credit to vote for it".

Peter Frost said...

I would recommend:

Seccombe, W. 1992. A Millennium of Family Change. Feudalism to Capitalism in Northwestern Europe, London: Verso

It's a very readable book about the relationships between family size and economic systems during the transition from medieval to industrial Europe.

James Kabala said...

Re #5: Henry Carey was the leading advocate of protectionism in 19th-century America. I never read his works, though, only know the name, so I don't know if he is intelligent and/or readable.

He has a Wikipedia entry that seems helpful (but is not written from NPOV):
http://en.wikipedia.org/wiki/Henry_Charles_Carey

Anonymous said...

It seems to me that our money supply should be tied to the total amount of energy produced in the U.S. Energy is the fundamental input into the economy, and the money supply should reflect it's abundance or scarcity.

Legal tender laws already do this. Our money is backed by all the goods and services available for exchange, of which energy is a fundamental factor of production.

--Senor Doug

MQ said...

Hey, Born Again Democrat -- great comment.

Marx's biggest blindspot was actually a complete ignorance of technogolical progress as it relates to productivity.

Marx's entire theory was driven by technological progress and growth in productivity, saying this is a blind spot just shows you have no idea what you're talking about. If you wanted to identify a blind spot it would be about his theory of distribution and belief that productivity gains could not trickle down to workers through competition for labor. But if Marx greatly underestimated the ways that competition could drive up wages, I also think more conventional theories of distribution underemphasize the role of class conflict.

Anyway, I mostly like to talk about Marx because mentioning his brilliance drives ignorant right-wingers crazy. Very few 19th century social theorists have *anything* relevant to say to us any longer, Marx is one of those few. He's not the greatest -- in the end he suffers not just from the theoretical flaws (many of which were shared with conventional economics of the time), but from the obscurantism and internal contradictions that make his theory difficult to understand on its own terms.

If I had to pick a great economist who would most illuminate this crisis, Keynes would come way before Marx. I also do think the critics of fractional reserve banking are interesting. A move to full reserve banking would be a profound social change that would completely transform the financial system. We haven't reached the point of crisis where those kind of views can influence the establishment yet...

WLindsayWheeler said...

To tie the human condition more with Economics, one should study how the ancient Greeks saw it. The more conservative Greeks hated capitalism. The Spartans were forbidden to enter the market place and have money. Only iron ingots were used.

Why?

Money getting is inherently corrupt. Aristotle in his Oeconomics praises Agrarianism as producing "More Honest people". Capitalism affects greatly the character of men. It harms them.

Socrates said, "Where Money is Prized, Virtue is despised". Virtue which resides in the Golden Mean can not exist in men while engaging in capitalism because money-getting knows NO moderation.

See, Capitalism only exists between two people. It doesn't exist in nature, is not a mathematical mechanical operation. Capitalism ONLY exists where there are two people. Otherwise, it doesn't exist. You can NOT separate Capitalism, economy from the human dimension and from original sin.

This is the importance of understanding "Gaming the system".

For more information, please read this article to understand the ancient Greek outlook on capitalism: Banavsos. (Say it like I have written it.) This is important to understanding the inherent nature of capitalism.

Please don't forget to use this in your book.

Ronduck said...

For example, why is the Total Fertility Rate in Mexico about 2.4 while the Total Fertility Rate of immigrant Latinas in California is 3.7?

The Mexicans may have a TFR that is 2.4 in the US. The government keeps repeating that there are 12 million illegal Mexicans in the US but there may actually be 36 million. If you misestimate the number of parents, then you can easily end up calculating the number of children per mother.

Mary Pat said...

Marx's argument barely makes sense. Construction workers will not be able to afford the skyscraper they're building; the jeweler cannot afford to buy the diamond neckalces he assembles -- OH NOES!

Yes, if the entire economy is workers making luxury goods they can't afford, then there is a problem. But there's also a problem if everyone is making very low cost/low price items that everyone can buy 100 at a time - how is that supposed to work out? Everyone accumulates a lot of useless cheap crap? Oh yes, something of the retail bubble, too.

It wasn't so much a bunch of low-wage workers building expensive homes (that was happening before the subprime bubble, you know), just that the volume was such that these McMansions were being sold to people who could not afford them in any sane world (not just to the construction guys).... because they thought they'd be able to flip said homes. Hmmmm.

neil craig said...

A reason (possibly not the only one) for higher fertility among Mexican immigrants than back home will be that immigrants, always & everywhere, are disproportionately drawn from young adults since they have the energy to move & don't have the ties to hold them.

They are also the ones of childbearing age. When half the Mexican population are over 40 the average number of children they are producing will halved.

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