Is economic literacy directly correlated to direct experience with the free market?

[Toro]

Anybody on this thread with a degree in economics? No offense, just curious. Also any major countries at present practicing austrian economics?

I have an undergrad degree in economics. I have several books on Austrian economics. I started reading economic theory when I was 15 after I was introduced to libertarian economics in a high school economics class. A guy came in and gave a lecture on libertarian economics and told us about the books The Law and Economics in One Lesson and I was hooked. I was an Ayn Rand Objectivist at one time.

However, my views began to change in my 20s, and especially when I entered the financial industry and began investing for a living. The market didn't behave as the free market ideologues said it would behave. I began to realize that ideologues view the world as they want to see it, not as it is. I saw guys getting taken out because of a strict adherence to ideology (not just free market ideology, but others). Ideologues of all stripes will engage in confirmation bias to reinforce their own beliefs, regardless if they are correct or not. Questioning deeply held beliefs is very uncomfortable for humans, not just ideologues (and I'm no different). I came to the view that Austrians are just as ideological and intellectually inflexible as Marxists. Austrians and Marxists are different sides of the same coin (though Austrians are generally much more correct than Marxists).

Empiricism is a much more useful tool than ideology. Ideology is a trap that presumes the world works a certain way, then tries to discredit contrary evidence. The empiricist will change his beliefs in light of contrary evidence. The ideologue will retain his beliefs in spite of contrary evidence.

Of course, that doesn't mean ideology is always wrong. Free market ideology is generally correct in that it creates the most wealth for most people, most of the time. However, it doesn't create all the wealth for all the people, all the time. Marxism is often wrong but Marx makes some very prescient and wise observations about capital. For example, he notes that "capital" isn't just plant and equipment or money, but is fungible, and expands or contracts based on confidence. This observation was totally correct when assessing the Global Financial Crisis, when runs were occurring, particularly in the cash and repo markets.

 

[HelenaHandbag]

Anybody on this thread with a degree in economics? No offense, just curious. Also any major countries at present practicing austrian economics?

I have an undergrad degree in economics. I have several books on Austrian economics. I started reading economic theory when I was 15 after I was introduced to libertarian economics in a high school economics class. A guy came in and gave a lecture on libertarian economics and told us about the books The Law and Economics in One Lesson and I was hooked. I was an Ayn Rand Objectivist at one time.

However, my views began to change in my 20s, and especially when I entered the financial industry and began investing for a living. The market didn't behave as the free market ideologues said it would behave. I began to realize that ideologues view the world as they want to see it, not as it is. I saw guys getting taken out because of a strict adherence to ideology (not just free market ideology, but others). Ideologues of all stripes will engage in confirmation bias to reinforce their own beliefs, regardless if they are correct or not. Questioning deeply held beliefs is very uncomfortable for humans, not just ideologues (and I'm no different). I came to the view that Austrians are just as ideological and intellectually inflexible as Marxists. Austrians and Marxists are different sides of the same coin (though Austrians are generally much more correct than Marxists).

Empiricism is a much more useful tool than ideology. Ideology is a trap that presumes the world works a certain way, then tries to discredit contrary evidence. The empiricist will change his beliefs in light of contrary evidence. The ideologue will retain his beliefs in spite of contrary evidence.

Of course, that doesn't mean ideology is always wrong. Free market ideology is generally correct in that it creates the most wealth for most people, most of the time. However, it doesn't create all the wealth for all the people, all the time. Marxism is often wrong but Marx makes some very prescient and wise observations about capital. For example, he notes that "capital" isn't just plant and equipment or money, but is fungible, and expands or contracts based on confidence. This observation was totally correct when assessing the Global Financial Crisis, when runs were occurring, particularly in the cash and repo markets.

But we have markets that are terribly manipulated, so how is it you can necessarily say that the contrary evidence is proof that the ideology is wrong?

Also, the notion that the market is going to create (or should create or whatever) wealth for all the people all the time presumes that the market is perfect, when it is stocked to the gills with imperfect people. Can perfection really be an option?

 

[william the wie]

Got to disagree Helen, strict Austrian Economics does not go beyond human action and its consequences without denying the consequences of say military action or psychopathic action or neurological disorder. But that makes for a complicated model so a cartoon of the model is used instead.

Another factor that is highly important is that the neurology of human action was very poorly understood when the early Austrians were putting together their theoretical platform. I would advise studying the more modern "libertarian" works on behavior and neurology by Steven Pinker, Dan Ariely and others. But short form the neurological basis of the Austrian school has been advancing a lot in the past few decades but is not yet popularized. To paraphrase Keynes, politicians are misled by the economic theory of their youth and those economists were misled by the behavioral theories of their youth.

 

[oldfart]

Anybody on this thread with a degree in economics? No offense, just curious. Also any major countries at present practicing austrian economics?

Although some don't post much, there are at least four posters with graduate degrees in economics who have taught university level economics on the board. We also have several finance grads with a pretty good grasp of economics. I'm more impressed by the quality of argument, familiarity with the literature, and knowledge of data sources and methodology than by anything else. After a while you get a pretty good feel for what a trained economist sounds like. Of course, there a lot of trained economists who get it wrong on any given issue, and a lot of folks interested in economics who learn as they participate in discussions and rarely embarrass themselves.

 

[Toro]

But we have markets that are terribly manipulated, so how is it you can necessarily say that the contrary evidence is proof that the ideology is wrong?

Also, the notion that the market is going to create (or should create or whatever) wealth for all the people all the time presumes that the market is perfect, when it is stocked to the gills with imperfect people. Can perfection really be an option?

The problem with that argument, though, is the same one Marxists pose. Ideological Marxists say that communism has never failed because it's never been tried. The communism that was implemented in the nations after WWII was not "real" communism as postulated by Marx, they say. In the absence of purity, it allows the ideologues an out.

But that's the problem with ideology. Ideologues apply their ideas to an ideal that has never existed. You can always find something that dilutes the purity of the theoretical argument. Fuck theory, I say.

What matters isn't purity. It's the fundamental driving force of the idea regardless of purity. So, for example, the United States has never been a pure capitalist society, but the fundamental underpinnings of the American economy has been capitalism. There has been enough capitalism to make the United States the richest, most powerful economy on earth. Likewise, pure communism never existed to the ivory-tower Marxist ideologues, but enough of it was tried for us to conclude that it fails.

The problem with ideologues is they refuse to acknowledge human behavior that obviates their elegant theories of how human behavior should be, not how it actually is. The argument for free markets is that individuals acting in their own self interest will act rationally to allocate capital. They won't act irrationally and/or wasteful in the same manner as the command economy. Generally, that is true, but it isn't always true. Free market ideologues assume it's always true. That's wrong.

Take a look at the Financial Crisis. Ideological conservatives argue with a straight face that the CRA was the cause of the crisis. The problem with this is, if true, free market capitalism is as fragile, unstable and inefficient as a command economy. How? If the market economy was as ruthlessly efficient as free market ideologues believe, then the market should recognized that government was distorting the market and adjusted accordingly. But what happened in real life? Private interests took the decline in credit standards through the CRA and not only ran with it but amplified by many multitudes. Of the top 25 subprime lenders leading up the Financial Crisis, 24 had nothing to do with the CRA. IOW, not only did private interests not adjust capital allocations to rationally adjust to equilibirum in the market, it took the market-distorting policies of the government, ran with it, and distorted the market by many magnitudes more than the government ever did.

Free market ideologues, like Marxist ideologues, make assumptions about human behavior that is consistent with their ideology but simply aren't true. That's why ideology is an intellectual trap.

 

[HelenaHandbag]

I understand all the stuff about ideological purity. I get that such purity only works until the moment you introduce a bunch of imperfect emotional humans into the equation.

But I'm not necessarily making an argument for perfection or purity, only that absent political meddling (like the CRA and bailouts), the market will reward the thrifty and cautious (US Bank) and punish the excessively greedy risk takers, often enough that the overall marketplace retains some significant amount of order.

To carry the water metaphor forward, blaming capitalism for the subprime and default swap meltdown is sort of like trying to blame water for flooding the valleys, when political engineers have built dams and aqueducts to try and make it run uphill. Indeed, this is more an argument as to how centrally planned economies fail, more so than an indictment of free capitalist markets.

Mine is not so much an argument for ideological purity or perfection, but a recognition that we have so much regulatory contamination of and political anarchy in the American marketplace, that blaming capitalism for all this mess is laughable. It also goes a long way to explaining why there are trillions of private dollars sitting on the sidelines.

Hope that clears up the point I was trying to make.

 

[Toro]

I understand all the stuff about ideological purity. I get that such purity only works until the moment you introduce a bunch of imperfect emotional humans into the equation.

But I'm not necessarily making an argument for perfection or purity, only that absent political meddling (like the CRA and bailouts), the market will reward the thrifty and cautious (US Bank) and punish the excessively greedy risk takers, often enough that the overall marketplace retains some significant amount of order.

To carry the water metaphor forward, blaming capitalism for the subprime and default swap meltdown is sort of like trying to blame water for flooding the valleys, when political engineers have built dams and aqueducts to try and make it run uphill. Indeed, this is more an argument as to how centrally planned economies fail, more so than an indictment of free capitalist markets.

Mine is not so much an argument for ideological purity or perfection, but a recognition that we have so much regulatory contamination of and political anarchy in the American marketplace, that blaming capitalism for all this mess is laughable. It also goes a long way to explaining why there are trillions of private dollars sitting on the sidelines.

Hope that clears up the point I was trying to make.

FTR, IMHO the primary culprit for the Financial Crisis is the Fed so I'm not blaming capitalism solely or even mainly. However, the incentives that are supposed to make capitalism work are also the same ones that exacerbated the crisis. That's where I take issue with the notion that capitalism will reward the thrifty and punish the risk takers. In fact, the risk takers were very well rewarded even after the system collapsed for reasons that had little to do with government. Assumptions were made about how capital would be allocated in the economy by the market which turned out to be very false because the incentives were so ridiculously perverted. That's what Greenspan meant when he testified in front of Congress that he was wrong in his assumptions that banks would act in their self-interest and not allow the banks to get as over-leveraged as they did. If capitalism everywhere and always worked, then Greenspan's assumptions would have been correct. But they weren't.

 

[HelenaHandbag]

I understand all the stuff about ideological purity. I get that such purity only works until the moment you introduce a bunch of imperfect emotional humans into the equation.

But I'm not necessarily making an argument for perfection or purity, only that absent political meddling (like the CRA and bailouts), the market will reward the thrifty and cautious (US Bank) and punish the excessively greedy risk takers, often enough that the overall marketplace retains some significant amount of order.

To carry the water metaphor forward, blaming capitalism for the subprime and default swap meltdown is sort of like trying to blame water for flooding the valleys, when political engineers have built dams and aqueducts to try and make it run uphill. Indeed, this is more an argument as to how centrally planned economies fail, more so than an indictment of free capitalist markets.

Mine is not so much an argument for ideological purity or perfection, but a recognition that we have so much regulatory contamination of and political anarchy in the American marketplace, that blaming capitalism for all this mess is laughable. It also goes a long way to explaining why there are trillions of private dollars sitting on the sidelines.

Hope that clears up the point I was trying to make.

FTR, IMHO the primary culprit for the Financial Crisis is the Fed so I'm not blaming capitalism solely or even mainly. However, the incentives that are supposed to make capitalism work are also the same ones that exacerbated the crisis. That's where I take issue with the notion that capitalism will reward the thrifty and punish the risk takers. In fact, the risk takers were very well rewarded even after the system collapsed for reasons that had little to do with government. Assumptions were made about how capital would be allocated in the economy by the market which turned out to be very false because the incentives were so ridiculously perverted. That's what Greenspan meant when he testified in front of Congress that he was wrong in his assumptions that banks would act in their self-interest and not allow the banks to get as over-leveraged as they did. If capitalism everywhere and always worked, then Greenspan's assumptions would have been correct. But they weren't.

Perverted by whom?

 

[oldfart]

Anybody on this thread with a degree in economics? No offense, just curious. Also any major countries at present practicing austrian economics?

I have an undergrad degree in economics. I have several books on Austrian economics. I started reading economic theory when I was 15 after I was introduced to libertarian economics in a high school economics class. A guy came in and gave a lecture on libertarian economics and told us about the books The Law and Economics in One Lesson and I was hooked. I was an Ayn Rand Objectivist at one time.

We were all young and stupid once. I supported Goldwater in 64 because I thought LBJ was going to get us into a land war in Asia.

However, my views began to change in my 20s, and especially when I entered the financial industry and began investing for a living. The market didn't behave as the free market ideologues said it would behave. I began to realize that ideologues view the world as they want to see it, not as it is. I saw guys getting taken out because of a strict adherence to ideology (not just free market ideology, but others). Ideologues of all stripes will engage in confirmation bias to reinforce their own beliefs, regardless if they are correct or not. Questioning deeply held beliefs is very uncomfortable for humans, not just ideologues (and I'm no different). I came to the view that Austrians are just as ideological and intellectually inflexible as Marxists. Austrians and Marxists are different sides of the same coin (though Austrians are generally much more correct than Marxists).

I went directly from graduate school to teaching. My private sector career began when I realized teaching at a liberal arts college involved a vow of poverty. IMHO both the Austrians and Marxists are more political economy than economics; and I agree with your reasoning that that makes both of them bad schools of economics due to ideological rigidity. The Austrians did develop from a decent background (Bohm-Bawerk and Menger) but took a wrong turn soon after that. As an economist, Marx was an excellent sociologist.

Empiricism is a much more useful tool than ideology. Ideology is a trap that presumes the world works a certain way, then tries to discredit contrary evidence. The empiricist will change his beliefs in light of contrary evidence. The ideologue will retain his beliefs in spite of contrary evidence.

This is the wrong turn the Austrian School took. Economics is a behavioral science at its core. Any attempt to derive it from first principals is doomed. Any economic explanation has to have three legs: economic theory (a good story explaining how people behave), historical analysis (we have been in this shit before), and data analysis and methodology (there has got to be a pony in there somewhere). Take away any one and you get garbage economics.

Of course, that doesn't mean ideology is always wrong. Free market ideology is generally correct in that it creates the most wealth for most people, most of the time. However, it doesn't create all the wealth for all the people, all the time. Marxism is often wrong but Marx makes some very prescient and wise observations about capital. For example, he notes that "capital" isn't just plant and equipment or money, but is fungible, and expands or contracts based on confidence. This observation was totally correct when assessing the Global Financial Crisis, when runs were occurring, particularly in the cash and repo markets.

I would disagree. The unfettered free market model has a consistent tendency to aggregations of power, and economic and social instability, punctuated by violent revolutions. Keynes was right when he argued that the state should intervene in the economy because otherwise the free market will end up giving us a choice between Hitler and Stalin (and he meant it literally). At its core, Keynesian economics is an attempt to preserve the ruling class from the forseeable results of its own misbehavior. In a nutshell, that's the same position as Uncle Milty.

There will never be an economy that tries the Austrian approach because the Austrian approach discards empiricism as its founding principle and given a choice of governing or remaining ideologically pure, will never govern. It is an ideology for the permanent opposition. No amount of austerity is ever enough, nor any amount of deregulation. When these remedies are tried and fail, Austrians always scream that they simply were not carried far enough. Thus Austrian policies can never get a "fair" test, and can never be disproven. They are true by definition, and like all tautologies therefore have no predictive value which can be tested. To be fair, a parallel line of reasoning could be applied to Marxists. That doesn't make either one of them economics.

 

[oldfart]

I understand all the stuff about ideological purity. I get that such purity only works until the moment you introduce a bunch of imperfect emotional humans into the equation.

But I'm not necessarily making an argument for perfection or purity, only that absent political meddling (like the CRA and bailouts), the market will reward the thrifty and cautious (US Bank) and punish the excessively greedy risk takers, often enough that the overall marketplace retains some significant amount of order.

To carry the water metaphor forward, blaming capitalism for the subprime and default swap meltdown is sort of like trying to blame water for flooding the valleys, when political engineers have built dams and aqueducts to try and make it run uphill. Indeed, this is more an argument as to how centrally planned economies fail, more so than an indictment of free capitalist markets.

Mine is not so much an argument for ideological purity or perfection, but a recognition that we have so much regulatory contamination of and political anarchy in the American marketplace, that blaming capitalism for all this mess is laughable. It also goes a long way to explaining why there are trillions of private dollars sitting on the sidelines.

Hope that clears up the point I was trying to make.

FTR, IMHO the primary culprit for the Financial Crisis is the Fed so I'm not blaming capitalism solely or even mainly. However, the incentives that are supposed to make capitalism work are also the same ones that exacerbated the crisis. That's where I take issue with the notion that capitalism will reward the thrifty and punish the risk takers. In fact, the risk takers were very well rewarded even after the system collapsed for reasons that had little to do with government. Assumptions were made about how capital would be allocated in the economy by the market which turned out to be very false because the incentives were so ridiculously perverted. That's what Greenspan meant when he testified in front of Congress that he was wrong in his assumptions that banks would act in their self-interest and not allow the banks to get as over-leveraged as they did. If capitalism everywhere and always worked, then Greenspan's assumptions would have been correct. But they weren't.

I would note that political power and economic power have become intertwined to an extent that they reinforce each other far more than seen in most periods of history. This has turned out to be highly unstable, and as noted the incentive system has become perverted. The best investment a corporation can ever make is in a few Congressmen. Regulatory capture is the holy grail of every monopolistic market (which is most of them). We need both political reform and reform of corporate governance, and either one without the other is doomed to failure.

 

[expat_panama]

... supply siders have won so convincingly that both sides of the political aisle in the US subscribe to it...

Ah --and the definition of a 'supply sider' is whatever it is that's convinced both sides.

Lovely fantasy having nothing to do with real people, and by 'real people' we're talking actual flesh and blood human beings with names and addresses. The term "loopy loony bonkers left nut" is a pejorative that I could use to describe an imaginary enemy --and start a fight at the same time-- but it's an enemy that doesn't exist in real life because nobody but nobody belongs to the "Loopy Loony Bonkers Left Nut Club". Likewise in real life there are no "advocates of trickle down economics" and there are no "supply-siders" outside the perverted delusional imaginations of the extreme left.

On the other hand there are real life communists, Marxists, socialists and you can follow the links to see who they are and what they've believed over the years and you can also see how those beliefs have in fact become public policy in the U.S. OK so real life is a lot of work --that's why so many people just throw up their hands and stick to fantasy...

 

[Toro]

Perverted by whom?

By the market. It's all over Wall Street. The risk/reward is enormously skewed towards reward. Most people want to do what's right, but they are incentivized in the near term. If you are a trader or an executive, all you need are a few good years and you can walk away forever as a rich person. The theory is that executives won't jeopardize their firm, at least consistently. But IRL, they will if they are rewarded handsomely enough. Stan O'Neil, former CEO of Merrill, walked away with $200 million though his decisions led to the destruction of his firm. (Merrill would have gone under had it not been bought by Bank of America.) Even though the executives of Bear Stearns saw their fortunes wiped out, Jimmy Cayne was still worth $50 million after his firm collapsed.

 

[Toro]

I would note that political power and economic power have become intertwined to an extent that they reinforce each other far more than seen in most periods of history. This has turned out to be highly unstable, and as noted the incentive system has become perverted. The best investment a corporation can ever make is in a few Congressmen. Regulatory capture is the holy grail of every monopolistic market (which is most of them). We need both political reform and reform of corporate governance, and either one without the other is doomed to failure.

Absolutely true.

 

[william the wie]

I would note that political power and economic power have become intertwined to an extent that they reinforce each other far more than seen in most periods of history. This has turned out to be highly unstable, and as noted the incentive system has become perverted. The best investment a corporation can ever make is in a few Congressmen. Regulatory capture is the holy grail of every monopolistic market (which is most of them). We need both political reform and reform of corporate governance, and either one without the other is doomed to failure.

Absolutely true.

But also if you look at where this view is most strongly held and by who it appears to be the big lie on steroids.

Are there any stronger or more corrupt advocates of this position than Obama, Reid and Pelosi?

In a blast from the past how about Frank-Dodd?

I would suggest that a reading of classical history would be in order or at least Machiavelli. Aristotle was too philosophical to poison Alexander to avoid execution for embezzlement despite the fact that Alexander died of the symptoms of the poison that Aristotle's admitted accomplices were convicted and executed for providing.

The shining armor of vegan, animal-rights advocate, teetotaler, anti-tobacco and champion of selected minority rights Adolph Hitler also springs to mind.

This is always the argument of the corrupt and I am surprised that you two buy it.

 

[HelenaHandbag]

Perverted by whom?

By the market. It's all over Wall Street. The risk/reward is enormously skewed towards reward. Most people want to do what's right, but they are incentivized in the near term. If you are a trader or an executive, all you need are a few good years and you can walk away forever as a rich person. The theory is that executives won't jeopardize their firm, at least consistently. But IRL, they will if they are rewarded handsomely enough. Stan O'Neil, former CEO of Merrill, walked away with $200 million though his decisions led to the destruction of his firm. (Merrill would have gone under had it not been bought by Bank of America.) Even though the executives of Bear Stearns saw their fortunes wiped out, Jimmy Cayne was still worth $50 million after his firm collapsed.

The market is a straw man, just like a corporation. The straw man does nothing without people acting.

Certain people did certain things, from without or within the framework of the market, which made such perversions possible.

Who are these people and what did they do to pervert the marketplace?

 

[Bombur]

... supply siders have won so convincingly that both sides of the political aisle in the US subscribe to it...

Ah --and the definition of a 'supply sider' is whatever it is that's convinced both sides.

Lovely fantasy having nothing to do with real people, and by 'real people' we're talking actual flesh and blood human beings with names and addresses. The term "loopy loony bonkers left nut" is a pejorative that I could use to describe an imaginary enemy --and start a fight at the same time-- but it's an enemy that doesn't exist in real life because nobody but nobody belongs to the "Loopy Loony Bonkers Left Nut Club". Likewise in real life there are no "advocates of trickle down economics" and there are no "supply-siders" outside the perverted delusional imaginations of the extreme left.

On the other hand there are real life communists, Marxists, socialists and you can follow the links to see who they are and what they've believed over the years and you can also see how those beliefs have in fact become public policy in the U.S. OK so real life is a lot of work --that's why so many people just throw up their hands and stick to fantasy...

 

[oldfart]

I would note that political power and economic power have become intertwined to an extent that they reinforce each other far more than seen in most periods of history. This has turned out to be highly unstable, and as noted the incentive system has become perverted. The best investment a corporation can ever make is in a few Congressmen. Regulatory capture is the holy grail of every monopolistic market (which is most of them). We need both political reform and reform of corporate governance, and either one without the other is doomed to failure.

Absolutely true.

But also if you look at where this view is most strongly held and by who it appears to be the big lie on steroids.

Are there any stronger or more corrupt advocates of this position than Obama, Reid and Pelosi?

In a blast from the past how about Frank-Dodd?

I would suggest that a reading of classical history would be in order or at least Machiavelli. Aristotle was too philosophical to poison Alexander to avoid execution for embezzlement despite the fact that Alexander died of the symptoms of the poison that Aristotle's admitted accomplices were convicted and executed for providing.

The shining armor of vegan, animal-rights advocate, teetotaler, anti-tobacco and champion of selected minority rights Adolph Hitler also springs to mind.

This is always the argument of the corrupt and I am surprised that you two buy it.

How's the koolaid taste, Willie?

 

[william the wie]

You never read Arrian or Plutarch? How about Machiavelli

 

[expat_panama]

...Who are these people and what did they do to pervert the marketplace?

Asking for real life names, places, & dates in conversations with the tinfoil crowd seems to be a real conversation stopper. This whole thread had the appearance of beginning with the idea that participation in the market came with an understanding of economics (imho a no-brainer) but our anti-business colleagues here seem to need to resort to mindless attacks on either some vague enemy or on anyone here personally questioning their logic.

The fact they've chucked reason brings to mind a quote from Thomas Paine-- "Arguing with those who have renounced reason is like giving medicine to the dead."

 

[Agit8r]

When the Washington Administration had to bail out Wall Street for the first time, those most responsible for the panic ended up in jail. We need to have laws in place that provide harsh punishment upon the bad actors in modern times as well.

Educate Yourself - William Duer and the Crash of 1792