Economists Abandoning Theory for Empirical Work Already Being Done by Non-Economists

Economists Abandoning Theory for Empirical Work Already Being Done by Non-Economists

08/01/2019Ryan McMaken

Economists don't appear very interested in economics nowadays.

Indeed, they mostly seem interested in muscling in on other disciplines.

Consider, for example, this profile on Harvard economist Raj Chetty published in May by Vox. The article acts as is Chetty has done something revolutionary in the social sciences by processing large amounts of data to examine human behavior.

For example, the Vox author breathlessly notes that in Chetty's class:

There’s little discussion of supply and demand curves, of producer or consumer surplus, or other elementary concepts introduced in classes like Ec 10. There is no textbook, only a set of empirical papers.

More specifically:

He [Chetty] used huge amounts of IRS tax data to map inequality of opportunity in the US down to the neighborhood, and to show that black boys in particular enjoy less upward mobility than white boys.

But here's the thing: people have been doing this sort of thing for years. They're called sociologists.

Similarly, we're supposed to be impressed that the new "empirical economists" are using data to examine the psychological roots of human behavior. They call it "behavioral economics," but they haven't developed anything new. They're just doing the work of psychologists, and then calling it "economics."

And then there's the field called "developmental economics." which is just trying to recreate the work that's been done for years by political scientists.

I should note that I don't so much have a problem with overlap in these disciplines. In fact, that's a good thing. What is silly is that every time the economists decided to start doing sociology or psychology, they then tell themselves (and others) that they're doing something "revolutionary."

That, of course, is the whole tone of the Vox piece. Isn't it amazing that people are examining data to look at income!"

No, it's really not.

In fact, some of the most heated debates over household income occur among sociologists, not economists.

Take for example, the debate over Juliet Schor's book The Overworked American: The Unexpected Decline of Leisure from 1992. For years, scholars debated whether or not she was right, and whether or not people really are working more than they used to. (She was probably wrong.)

Nonetheless, we can see that the debate over work was largely driven by sociologists in recent decades.

Similarly, for data on trends in family size and living arrangement — something with huge implications for standards of living — we find much of the work being done by Steven Ruggles, a history professor and scholar of "population studies."

And then, of course, there are the criminologists. This topic has important implications for economics, given the supposed connection between crime and income, and the effects crime has on one's standard of living. But the empirical work in this area is rarely done by economists. It's done by political scientists and historians.

This isn't to say that economists are never involved in this sort of thing. Claudia Goldin, for example, has looked at issues surrounding family incomes for decades.

But economic history is all these alleged new "empirical economists" are doing. Looking at the upward mobility of black boys, as Chetty is doing, is just economic history. There's nothing wrong with doing economic history. It's a perfectly legit field. But doing that sort of work doesn't make Chetty special. (And the sheer size of the data-sets doesn't make him special either. All these social science fields have been moving more and more in the direction of large-scale data mining.)

But there's also nothing new about it, and nothing that warrants a gushing piece about the new page economics is supposedly turning by doing what sociologists have already been doing for decades.

In fact, the more economists go all-in on trying to copy the work done by other fields, the more they ignore what's actually important about economics, which is theoretical economics devoted to understanding core issues like business cycles, entrepreneurship, and value. By ignoring these issues, economists only make themselves more irrelevant. Were economists to devote themselves to better understanding and spreading good economic theory, they'd be in a position to interpret and and analyze the empirical work done by others. After all, empirical work is only as good as the theory used to understand it.

But it doesn't look like economists are much interested in that sort of thing. They just want to hop on the empirical bandwagon.  Meanwhile, economists seem to think they discovered all this sort of thing the day before yesterday. This is just the sort of obliviousness we should expect from academic departments, and it helps demonstrate much of what's increasingly wrong with economists in the first place.

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“The Northman”: Synthesizing Hollywood Historians with Reality

05/07/2022Sam Branthoover

Starring Alexander Skarsgård, the recently released film “The Northman” portrays Viking life in stunning and vivid detail. The historical accuracy is said to be unprecedented; Robert Eggers, director of The Northman and other historical tales (The Witch, The Lighthouse), emphasizes his employment of Viking experts to achieve such an accuracy. The film indubitably meets contemporary historians’ expectations; but for economists of the Austrian persuasion, the film provides an excellent example of the fallacious and often contradicting interpretations historians provide for historical phenomena.

At its core, the film balances two commonly-propagated tropes about Vikings: their brutal and animal-like nature, and their trust-based society of egalitarianism. How can one reconcile these views? On one hand, Vikings are rapacious misanthropes that plunder and torture with abnormal barbarity; on another, they live by oaths and reputation. Egger’s “The Northman” excellently displays this dichotomy; in the beginning of the film, we witness the Vikings “going berserker” before raiding a Slavic village, murdering and violating all they can.

In contrast, much of the film is about fulfilling oaths and attaining/maintaining “honor”; in a later scene, the protagonist hands a gold piece to an unknown Viking sailor, who are to bring the protagonist’s dazzling bride-to-be on a months-long sea journey to Orkney in recompense. How are the Vikings that violate any woman they find also entrusted with ensuring safe passage for a beautiful woman, of whom they have no consequences of disturbing once past the bay line? This is not an oversight of the scriptwriter (though one may imagine his or her own puzzled look), but one of contemporary interpretations of Vikings.

Pete Leeson has extensive literature on the economics of pirates. Using rational choice theory (and much supplementary data), he accurately deduces that pirates did not plunder and murder solely to quench their own depravity, but because doing so was wealth-maximizing for securing early surrenders. When merchant ships would spot the jolly roger, they predicted facing rapacious blood-fiends, and moreover that their lack of immediate surrender would result in excruciating torture and execution.

As Leeson notes, it behooved pirates to emphasize a favor for torture and a high discount rate (high time preference) to secure plunder with as little cost as possible. Contemporary historians failed to reconcile pirates’ brutality with their crafting of, and adherence to contracts of private governance; rational choice theory, however, gives us a clearer picture.

Vikings likely have a similar explanation. “Going berserker” and torturing victims brutally both imply a high discount rate, and further reinforces that retaliation would be met with severe consequences. Both serve the purpose of securing plunder and victory with little cost. Berserker roughly translates to “bare-shirted” or “bear-shirted;” note that although going berserker is a “state of mind,” they are denoted by physical appearance, almost as if they are signaling ferocity to enemies and not actually manifesting the spirit of a wild beast.

 If Vikings truly entered an altered state of mind granting them superhuman abilities that clouded their judgement (thus giving them a high discount rate), why would they take so much care to signal this to enemies? Deliberate signaling is contradictory to the frenzied disposition they exhibited, akin to pirates’ perceived temperament.

As the historians and archeologists advising Eggers’ film indicate, there is also surprisingly little historical text or archeological finds that give us any glimpse of the religious rituals which shaped Norsemen’s barbaric mindset. In an interview regarding his film, Eggers discusses how they crafted the set regarding the “scene where Berserkers need to transform human beings into beasts through shamanic ritual”:

“The academic consensus was that Vikings didn’t have special clothing for rituals. But the academic consensus is also that rituals involved splattering blood over everybody. I said to the archeologist Neil Price, ‘So, like, everyone was just walking around covered in blood all the time?’ And he was like, ‘Wow, I never considered that.’ So, based around a lot of other ideas we saw in sagas and archeology, we did invent the ceremonial clothing for rituals. That was total invention.”

Interestingly, we don’t know how Vikings became berserker; the “ritual” is completely unknown, save for the fact that blood was supposedly splattered on everybody. Therefore, it could be equally true that no ritual ever existed. It seems modern historians have interpreted this part of Viking lore with the same scrutiny as recently-raided 9th century Slavic villagers: completely accepting what the Vikings wanted their prey to believe. Remember that Leeson confronted a similar issue: contemporary historians interpreting pirates to be exactly what the marauders wanted their prey to believe of them.

Dissimilar from Leeson’s work, we do not have any early data on Vikings; record-keeping at the time was understandably scant. For comparison, the golden age of Vikings took place from 793–1066 AD; the “Domesday Book”, widely considered to be one of the first attempts at actual record-keeping, was written in 1086 AD. Without supplementary data and trustworthy sources, we may only deduce what we can with rational choice theory.

However, contemporary historians also lack sources. They use accounts written centuries after-the-fact (by the posterity of Vikings’ victims, nonetheless), and completely accept their retellings as truth. But, it is unlikely that Vikings could organize raiding expeditions alone if they were truly the carnal beasts one reads about in the sagas. Had they been so, merely transacting would be unfathomably difficult as commitment issues would stall parties’ enthusiasm. Without transaction, it is hard to imagine any society existing.

“The Northman”, a splendid (but gory) tale, was expertly informed by contemporary historians and archeologists; as such, the film excellently displays the flaw in common academic interpretations of Vikings. Logically, I would not go anywhere near an individual that violates and murders for sport, and I would certainly not transact with them; individuals in history would have likely thought the same, because they are equally rational beings.

To assume otherwise when interpreting historical phenomena is fallacious methodology, but it is common practice in contemporary academia. Economists are often accused of “economic imperialism” when applying methodology to non-market behavior; we must continue to do so until other social sciences begin to adequately interpret human behavior.

 Sam acknowledges Janna Lu for her wonderful editing help and encouragement.

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Powell’s Soft Landing

05/06/2022Robert Aro

It’s happening. The Federal Reserve raised the Fed’s Fund Rate to 1.0% and announced their plan to shrink the balance sheet. In the Q & A that followed, Powell shared his thoughts on the possibility of recession and what he thinks about the decision to reduce the nearly $9 trillion balance sheet.

When asked why the balance sheet reduction will commence on June 1, Chair Powell responded, (excusing for his grammar):

So why June 1, it was just pick a date, you know, and that happens to be that happened to be the date that we picked. It was nothing magic about it. You know, it's not going to have any macroeconomic significance over time. We just picked that.

He reassured reporters:

I wouldn't read anything into it. In terms of the effect, I mean, I would just stress how uncertain the effect is of shrinking the balance sheet.

Certainly, much can and should be read into this. Their plan is to reduce holdings of US Treasuries and Mortgage-Backed Securities by $47.5 billion each month, from June to August, and then beginning September to reduce by up to $95 billion a month.

This must not be taken lightly, since reducing the money supply has various effects on interest rates, interest expense, asset valuations, lending activity, as well as both consumer and entrepreneurial decision making. To say the effect is “uncertain,” shows Powell is either willfully ignoring both history, reality and Austrian economics, or simply doesn’t understand.

Surely, he must be concerned for the future since the topic of recession came out throughout his press engagement. The Chair believes:

Now, I would say I think we have a good chance to have a soft or softish landing or outcome, if you will.

The term “soft landing” gets used a lot, yet no one has ever described what exactly constitutes a soft landing. We can infer it to mean little economic pain or hardship, or avoidance of a recession, but it would be nice if the public were provided more detail.

As far as the Fed sees, the future shouldn’t be too bad. In his own words:

So it's a strong economy and nothing about it suggests that it's close to or vulnerable to a recession.

He continued to praise the strength of the economy and labor market. Even going as far to say that: “Businesses can't find the people to hire,” using this as proof of a strong jobs market.

At last, some references to Paul Volcker were made.  One reporter asked if the Fed would:

…have the courage to endure recessions to bring inflation down if that were the only way necessary?

Powell didn’t provide a firm yes response, but referred to the possibility of “restrictive” policies instead:

So I think it's certainly possible that we'll need to move policy to levels that we see as restrictive as opposed to just neutral… If we do conclude that we need to do that, then we won't hesitate to do it.

Much can be taken away from Powell’s press conference, especially how the Fed doesn’t appear overly concerned about the inevitable bust it set in motion. However, it’s the word “courage” that really stands out. To assign a heroic trait to members of the Fed doesn’t really fit. Not because some, if not all of the Board of Governors are multi-millionaires, but because not one of them will ever be held accountable for any adverse consequences caused by their policies.

It’s difficult to find anything heroic because central planners have little to nothing to lose; when things turn for the worst and a recession follows, at best the Fed might claim it was a policy error or blame something else, but that would be the extent of their suffering.

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We Can Learn from Disney's Private Property Initiatives Even If We Learn the Wrong Lessons from the Company's Politics

05/04/2022Connor Mortell

I recently wrote a piece explaining that there is a libertarian case for taking away Disney’s Florida privileges. However, I am writing this to stress that while strategically that is the appropriate approach, we must not throw out the baby with the bathwater.

Granting Disney these special privileges but not to organizations that may have been more amenable to the ideas of liberty is most certainly one step forward and two steps back, but nonetheless the one step forward does warrant some analysis. During its time with these privileges, Disney served as a valuable case study for the concept of a private city.

Part of Disney’s responsibilities in exchange for self-governance was that it was now responsible for its own security. We as Austrians regularly point to the theories of Rothbard and Hoppe as they pertain to the privatization of security, but Disney has given much more concrete evidence of the possibility.

Disney’s private security has permanent Emergency Operations centers, utilizing the same system as law enforcement agencies, and extensive two-way radio systems with more than 1,200 “cast members” employed in security operations. Disney achieves this almost invisibly as the security members are trained to blend in and seem as if they have appeared out of nowhere when they are needed.

Additionally, Disney achieves this at a lower cost than government security. The average police officer is paid between $27 and $32 per hour. Meanwhile, at Disney, the average security guard is paid between $11 and $17 an hour. 

However, as Austrians we can recognize that that’s probably much more indicative of the natural price discovered through exchange. And despite paying so much less, Disney maintains equivalent security - if not better security - than just about anywhere else in the world.

Its security team additionally benefits from the fact that Disney has the strictest borders in the country - private borders. This fits exactly in line with what Hoppe has described of private cities:

No one is against immigration and immigrants per se. But immigration must be by invitation only.

And Hoppe goes on to say:

In a fully privatized libertarian order, there exists no such thing as a right to free immigration. Private property implies borders and the owner’s right to exclude at will.

This is exactly the position in which we find Disney. Disney’s borders had little to no discrimination. All that is required to receive the invitation that Hoppe insisted private borders is a payment of a little over one hundred dollars. With it came not only admission through the border but access to all the amenities their private city had to offer.

But from a security standpoint, Disney was able to screen every single resident (employee) and visitor of its private city. In their screening they even retrieve fingerprints, names, and contact information. This also allowed for more peaceful security at Disney because rather than having to resort to violence like a government security officer would, Disney security has the ability to simply remove from the premises those who had breached their rules.

For the sake of brevity, we cannot analyze every single benefit of the private city that is Disney World, but it is worth noting that it was not even close to limited to the benefits of private security enhanced by private borders. Disney’s famous Monorail served as just one of their private city’s answers to public transportation.

Disney has been responsible for its own sanitation and is - while not perfect - indisputably cleaner than any city of its size. Disney has its own fire department that has been exceedingly successful. Disney’s hurricane preparedness programs have led to it being named a StormReady® community. All this coupled with dozens of other examples that made Disney’s private community either competitive with or significantly better than any government run city.

Again, I stress that Florida was right to take away these privileges as they only catered to those who were enemies of further privatization and thus likely to detract from these benefits spreading. As a result, these benefits are not helpful in the long term when they are only allocated to organizations like Disney. However, I reiterate that we must not throw the baby out with the bath water as it is so important that we learn from and use the invaluable case study that is Disney and its private city.

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Self-Interest Isn’t What It Seems: An Austrian Response to Socialism’s Broken Promises

A standard trope in socialist circles is that the poor and downtrodden refuse to vote their economic interests. See, e.g., Thomas’s Frank’s “What’s the Matter with Kansas? How Conservatives Won the Heart of America. This theory is used to justify various anti-democratic schemes to “protect” the vulnerable from themselves. If, after all, the poor aren’t voting their interests, then why can’t we achieve Pareto-optimal interventions on their behalf? 

Indeed, doesn’t this fact generally disprove all economic theory? You can’t very well argue that people are rational when it’s so “obvious” that they aren’t, right?

The problem, of course, with such theories is that they ignore risk. Even if socialism works exactly as advertised, even if all of its “failures” were solely the result of the fact that it hasn’t been “tried,” so what? The mere fact that socialism has failed in the past proves that socialism is risky, and risky investments must be assessed differently. 

It’s all well and good to say that a particular stock doubled just as predicted, but that doesn’t prove the would-be investor made a mistake; we’d have to consider the risk before we could assess the wisdom – or foolishness – of the decision not to invest.

Why then should the poor and downtrodden refuse to vote for socialism – even assuming for the sake of argument that socialism would work to improve their lives? It’s perfectly rational for a person living on the edge to be more risk adverse than the wealth; after all, who’s more likely to starve under socialism (if it fails)? 

Likewise, it’s perfectly rational for a person living on the edge to feel the burdens of failure will fall on them disproportionately; after all, who is more likely to form the firing squads and its victims? Who’s more likely to be in front as well as behind those rifles? Since the vulnerable are more vulnerable, it’s perfectly rational for them to fear socialism more than those who have the resources to protect themselves or flee.

Another more subtle, but important point: who is more likely to have actual personal negative experience with government than the vulnerable? The rich are less likely to have negative experiences with government and, when they do, they interact through superior counsel. The person who lost their car to parking tickets is far, far more likely to mistrust government than the person who can afford to park in a garage or pay their tickets when they don’t; therefore, it’s perfectly rational for the former to mistrust socialism more than the latter.

Note that I haven’t made any fancy assumptions about risk preferences or cognitive biases; rather, I’ve made some simple straightforward assumptions: people who are less able to bear risk are more risk adverse, and people who have suffered losses in a particular investment are less likely to repeat that same investment. Nothing fancy, and – yet – it accounts for all the observed behavior.

Now to be clear, I don’t think that socialists can deliver what they promise, but there’s nothing irrational about the skepticism of the vulnerable. To the contrary, it suggests that they prioritize their own personal experience above academic proclamations, which is the most rational preference imaginable.

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It’s Only a Day Away

05/03/2022Robert Aro

Tomorrow the Federal Reserve's two-week blackout period will be lifted and Chair Jerome Powell is set to address the world. Strangely enough, yet not surprisingly, some mainstream economists and Wall Street analysts agree with the Fed that everything will be fine and a recession in the near future will be avoided.

To recap, CNBC notes that:

Expectations for a 50 basis point move in May rose to 97.6%, according to the CME Group’s FedWatch Tool.

Noting the long road ahead should take the Fed Funds Rate to 2.75%, which is a rate that hasn’t been seen since 2008, during the time of the Great Recession and national housing crisis.

In addition to discussing rates, the Fed’s March meeting indicated:

…the Fed eventually will allow $95 billion of proceeds from maturing bonds to roll off each month.

By listening to the meeting minutes and general comments, our central planner's outlook becomes clear. CNBC reports several telling quotes by the Fed Chair:

Powell noted that the other than pernicious inflation, the U.S. economy is “very strong” otherwise. He characterized the labor market as “extremely tight, historically so.”

He also addressed the possibility of a recession:

“Our goal is to use our tools to get demand and supply back in synch, so that inflation moves down and does so without a slowdown that amounts to a recession,” Powell said.

Between 50 bps rate hikes and increasing rates in the bond market, coupled with the potential to reduce the balance sheet by $95 billion a month, the Fed should be worried. The “very strong” U.S. economy that Powell cites could just be a mirage, and a Malicious Monetary Turnaround lays waiting on the horizon. This could inflict unfathomable capital destruction and market havoc; exacerbated when the Central Bank decides to first halt, then reverse its easy money stance.

In the future, some may call it a policy error, an oversight, or blame a Black Swan. Undoubtedly there will be much talk about how no one saw this coming, especially when mainstream outlets like CNBC start announcing unfavorable stats, such as negative growth:

Gross domestic product unexpectedly declined at a 1.4% annualized pace in the first quarter, marking an abrupt reversal for an economy coming off its best performance since 1984…

Then follow up with expert assurances in the same article, like this:

“This is noise; not signal. The economy is not falling into recession,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. 

Then again with this:

…recession expectations on Wall Street remain low…

And again with:

While economists still largely expect the U.S. to skirt an outright recession…

And just in case anyone had their doubts that 2022 would be a difficult year:

Deutsche Bank sees the chance of a “significant recession” hitting the economy in late 2023 and early 2024, the result of a Fed that will have to tighten much more to tamp down inflation than forecasters currently anticipate.

What should be clear, is that when one of the largest media networks in the world, a chief economist, Wall Street, mainstream economists and even Deutsche Bank don’t seem too concerned, then this is not noise, it’s a signal. The boom-bust cycle is nothing new, and Fed induced market crashes, bursting of bubbles, and recessions come part and parcel with central banking.

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The Passive Behemoths Have Yet to Awaken: You don't Want to be in Markets when Vanguard, BlackRock, and State Street Flip from Bid to Ask.

05/02/2022Liam Cosgrove

The go-to bullish indicators highlighted by pundits these days are the high levels of sidelined mutual fund cash and the AAII investor sentiment survey hitting its highest bearish reading since 2009:

Traditionally, these signals suggest that most of the carnage is priced into markets, indicating that it might be time to buy. However, these data sets only illustrate ACTIVE investor sentiment. Given that passive funds, by definition, do not strategically manage their cash levels nor do index fund patrons pay $40 per year to participate in the AAII survey, these figures give us little insight into the passive investing world. In stark contrast, Vanguard has reported net inflows to their passive vehicles of $400 million for the month of March (i.e. one behemoth is still buying). More evidence that passive investors remain all-in can be found in the lack of redemptions world-wide:

While the markets have seen considerable selling in certain sectors as active managers have rebalanced their weightings, capital is not being withdrawn from markets at any meaningful scale. These are strategic moves by fund managers, not necessity-driven liquidations. If they were, one could expect them to originate from two places: low-income earners paying their bills and/or margin calls. 

Considering most active wealth managers require a minimum investment of $50,000 while an index fund account with BlackRock only requires $1,000, it’s easy to see why low-to-middle-income earners opt for a passive plan. These investors add up, with total passive assets having overtaken active’s share in the $11.6 trillion US equity funds market, “driven largely by the growth of funds tracking the S&P 500”, according to Bloomberg (i.e. the S&P may be hit hardest in a true recession).

As the cost of living continues to rise and monetary tightening leads to higher mortgages, credit card APRs, and layoffs as zombie companies scramble to service their increasingly costly debt, it will be the low-income-index-fund-buyers who initiate mass redemptions out of necessity to fund their daily lives. This will flip the Big Three passive funds (or the “Giant Robot” as legendary short-seller Bill Fleckenstein refers to them) from bid to ask.

Passive capital flows dangerously close to negative territory (not including April which is beginning to see negative flows).

Those familiar with the work of Simplify Asset’s Michael Green into the effects of passive investing on equity markets will know: The Big Three are non-discretionary. When cash is flowing in, they hit buy. When it’s flowing out, they hit sell. Green believes passive’s distortions contribute to the more volatile price swings that have occurred during market downturns in recent decades.

He provided me with a research paper claiming the rise of passive has created “substantially more inelastic aggregate demand curves for individual stocks,” meaning equity prices have become more sensitive to relatively smaller shifts in demand. This, combined with the jarring reversal of the most accommodative monetary policy the world has ever seen, could result in devastation for markets. And the data indicate these behemoths are just barely waking up. With unemployment that can't go much lower and ominously depleting levels of personal savings, this is a powder keg set to blow:

Personal savings hit lows not seen since Dec 2013 while full employment continues to justify Fed tightening.

A few bonus thoughts: consider the now commonplace compensation trend by which executives of public companies are paid in stock that they then borrow against to fund expenditures. At what price level will we see executive-level margin calls and mass selling by the .001%-ers? This could be why many individual names are already down 70-80%.

It seems there are several phenomena that have acted as market boons in the past decade or so, which are now primed to reverse. Still, I suspect active managers will be “buying the dip” in the coming weeks (as Warren Buffet just did), and this ironically may give the Fed more confidence in tightening.

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Inflation Is Just the Beginning. А Few Words about how the State Multiplies Risks.

04/29/2022Paul Tolmachev

The current extraordinary inflation and actually started stagflation is the result of a tremendous macroeconomic mistake of the state economic policy of developed countries and, first of all, the USA. A huge part of the respected academic and expert economic community has kept the U.S. and European governments from making such a mistake - but, as we see, in vain.

The government's mistake is not new: the attempt to moderate multifactorial market processes and form "conditional behavior" of agents for the illusory purpose of leveling the negative phases of economic cycles. This is the cornerstone of every leftist doctrine, from Keynes and Marx to pseudoscientific concepts like modern monetary theory (MMT).

The deep motives of such actions are determined by the electoral interests of the electoral elite and are described quite adequately by the Theory of Electoral Cycles. The essence of the error - in the expansion of state paternalism and hypertrophied macroeconomic stimulation of processes in an open market economy.

Against the backdrop of obvious supply-side disruptions associated with covid constraints - cascading supply chain breakdowns and declining labor, the state has decided to stimulate directive-blocked demand in unprecedented amounts. Such actions, even without taking into account other extraordinary exogenous and endogenous factors, look like absolute absurdity and a road to collapse.

Stimulation of demand by the state was implemented through a combination of fiscal and monetary interventionism. Direct payments to the population led to inflation of exchange-traded assets. Support for loss-making and inefficient enterprises to save jobs and the adoption of huge infrastructure programs were combined with maximum monetary easing through zero-funding rates and large-scale programs of direct injections of liquidity into the banking system through the redemption of public debt.

The result of such pumping demand on the background of obviously problematic supply was a cascading deterioration of the situation. The consumer intension, limited by covid lock-ups and a lack of output, was disintegrated by extra-injections of actually free and unsecured liquidity that is, by another state monetary leverage. This led to a sharp imbalance in the price relationship between supply and demand, with the growth of final consumer prices on the background of explosive post-consumer demand and supply unable to meet it.

The deplorable state of production, in addition to negative covidual logistical externalities, was intensified by a sharp decline in labor force and inability to fill vacancies - labor employment declined sharply due to imbalances in households' disposable incomes, liabilities and savings. This naturally increased wage inflation, which, together with other factors of production inflation, such as logistical gaps and shortages of components, contributed to a sharp rise in producer prices.

The final and extremely significant factor in production inflation has been the rise in commodity prices, primarily energy prices. This process has three main causes: a) asset inflation, partly artificial and created by the government, b) geopolitical tensions in Eastern Europe, d) the forcing of the green agenda and the compression of traditional energy sources without sufficient development of alternative sources.

The growth of exchange-traded assets, particularly commodities, is a consequence of excess liquidity in a troubled economy, with financial agents and investors absorbing liquidity in exchange-traded assets as a more reliable and promising investment segment than the real sector. Geopolitical tensions, or rather problems in countries that are key exporters of energy and agricultural commodities, are also a consequence of the Western economies' conciliatory and irresponsible policy towards resource autocracies, consisting in an increased dependence on their raw material exports.

The forcing of the energy transition against the background of a tougher ideological conflict between the two socio-political poles, with insufficient funding and development of alternative energy sources has led to vulnerabilities in the energy supply of some Western economies, primarily members of the European Union.

As a result of the complex of all the factors and sequences mentioned above, globalization is torn in different parts of the cycle, and this is not a short-term process. This also means that the agenda of economic security and economic sovereignty will supersede the agenda of efficiency growth. The disruption of global production and logistics interactions and the clustering of production and logistics exchanges will inevitably lead to significant shifts in economies and growth rates. That means inflationary pressures and lower effective growth rates, i.e. stagflation.

Monetary tightening in such an environment is incapable of sanitizing the economy for a new growth cycle. This is a systemic shift where previous measures do not work in their usual mode: monetary tightening will certainly deflate consumer activity, but the structural problems on the supply side will only be exacerbated by this monetary tightening.

At the same time a decrease in efficiency is inevitable, as fiscal stimulus in the form of social and infrastructure programs have already been adopted and the effect of squeezing business by the state - both through fiscal tightening and through direct expansion of state business - will reduce opportunities for private business, especially against the background of rising costs of funding, which will affect the quality of economic development and the rate of long-term growth.

The political electoral interests of the power elites under conditions of geopolitical aggravation, growth of risks and uncertainties, dictate to them the obvious but vicious goals - short-term efficiency in exchange for long-term development. As we know, short-term efficiency is possible only through a simplified and somewhat complicated action, which is directive state expansion.

The problem of this policy is very clear: the free market and its self-regulating mechanisms are not compatible with crude exogenous regulatory political interference. It is state intervention that multiplies the risks and negative effects of market cycles, it is state intervention that expands their volatility, it is state intervention that generates the effect of spiral reproduction of economic inefficiencies: the previous mistake can only be corrected by the next, even bigger mistake.

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Washington's Hysterical Response to the China-Solomon Islands Agreement

Washington D.C., home of the monumental overreaction, is at it again, this time threatening China and the Solomon Islands over a security agreement negotiated between the two.

Forget the fact that 99 percent of Americans couldn’t point out the Solomon Islands on a map, or that we have dozens of military bases and installations in the region, some our Australian allies say we may need to preemptively invade – that according to David Llewellyn-Smith. 

The truth is there is no justification for assuming US and Australian prerogatives trump those of all other states. Trade between China and the island nation is almost 100 times that between the US and the Solomons. Thousands of Chinese live or work in the Solomon Islands, and Chinese capital and businesses have proliferated in the past two decades. Though it isn’t reported in the mainstream western media, anti-Chinese riots on the islands have periodically resulted in the destruction of Chinese business and attacks on its citizens – most recently in 2021.

It is worth pausing here to reflect on how Washington might have reacted under similar circumstances. It seems unlikely its actions would have stopped with diplomatic complaints and an eventually negotiated arrangement for a Chinese police presence to protect its citizens and their property.

More likely, an aircraft carrier battle group would have been dispatched and the matter settled unilaterally.

Apart from the fact Washington’s intemperate response is likely to alienate key regional fence-sitters like the Philippines, India, and Indonesia, it also lays bare the obvious emptiness of U.S. and western rhetoric about the right of states to choose their own security policies and the inviolability of borders.

Grumbling in the developing world, including among the other BRICS countries, about the U.S. provoking Russia into a rational if unreasonable response to threats to its security are growing – something even mainstream hawkish outlets like the Economist acknowledge. Seeking to draw more black and white lines over distant security concerns is likely to continue this trend of alienating states clearly seeking non-alignment in Cold War Two.

As usual, in its reaction to the Solomon Islands’ agreement with Beijing, Washington is damaging America’s foreign relations and our national security, misconstruing the nature of the agreement and stoking domestic anti-Chinese sentiment. Of course, many Americans died in retaking the islands from the Japanese during the Second World War. And their sacrifice was tremendous, but that isn’t why Washington is acting belligerent.

Just as in the case of Ukraine, so-called “Great Power Competition,” a euphemism for the strong fighting over which of the weak each will lord it over, is to blame for this new threat to global security. Meanwhile, “whataboutism” is a rhetorical device meant to prevent our critically thinking about these policies or their context.

But these insane policies have to stop. Confrontation everywhere, anywhere, for anything and everything, with no sense of proportion is going to lead only to disaster both at home and abroad. We should not, as long-time hawk Robert Kagen suggests in Foreign Affairs, fight the Russians and Chinese over anything and everything; but rather, as Eliot A Cohen recommends, by returning to history, to statecraft, to accepting other states can be permitted to act without oversight from Washington. 

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Realism, Liberalism, and Constructivism: A Primer on International Relations Theory

04/26/2022Scott Duryea

University of Chicago professor John Mearsheimer gave a lecture to a group of university alumni in 2014 entitled “Why is Ukraine the West’s Fault,” essentially predicting the Russo-Ukrainian war. The lecture has over 24 million views. Even though he’s been accused of pro-Putin sympathies, Mearsheimer approached the topic of NATO encroachment and Russian security concerns from a dispassionate perspective, using international relations theory to see the situation from the Russian side. 

Much how Misesians search for the “regularity in the concatenation and succession of events,” international relations theory tries to observe regularities in the way states behave. By understanding the operation of the international system of states, strategists and policymakers can generalize and hopefully predict global events, like incursions. Just like in economics, theory models empirical reality. For IR scholars, that reality is the relationships among states in the international system. Ultimately, the field of international relations offers three broad lenses through which observers can view the world: realism, liberalism, and constructivism.

Realism

John Mearsheimer is among the foremost experts in international relations who view the world through a realist lens. Realism focuses on the absence of an overarching global government that can harness the behavior of state and non-state actors. In other words, the world lives under a state of international anarchy. As a result, states pursue security above other concerns. Distrust of other states means that they can only truly rely on themselves to protect their national interests, a principle known as self-help.

Thucydides’ History of the Peloponnesian War in the fifth century BCE first formulated the basic assumptions of realism. First, the state is the primary actor in international politics. Second, the state is a unitary actor. Third, the state is a rational actor: it weighs costs and benefits, seeking to maximize utility in the decisions it makes. Fourth, the state focuses on security from both foreign and domestic threats. To the methodological individualist, these assumptions that states take on the characteristics of subjective and acting human beings seem exaggerated. As the state can be defined as that institution that enjoys the monopoly on the legitimate use of violence within a given territory, it stands to reason that states would also project that violence outward in the name of self-preservation.

Hans Morgenthau and Kenneth Waltz applied realism to the modern international state system, which began after the Peace of Westphalia in 1648. Morgenthau (1948) argued that states struggle against each other for both military and economic power, leading to an acute focus on relative—rather than absolute—gains compared to other states. A feature of this struggle for relative gains is the security dilemma, a situation in which one country responds to an increase in the capabilities of another country with a counter increase in capabilities. A tit-for-tat increase in capabilities ensues, leading all sides into a state of tension where no side has an incentive to back down.

Kenneth Waltz (1979) developed neorealism, also known as structural realism, positing that the structure of the international system explains international politics better than any inherent and universal characteristic of states. His Theory of International Politics theorizes that the distribution of power in the world determines peace and war. In particular, the world can be unipolar, bipolar, or multipolar. Bipolarity and multipolarity represent more distributed balances of power than the current “unipolar moment” that the United States enjoys today. It is an open question—and one that theorists actively debate over—whether unipolarity, bipolarity, or multipolarity leads to greater global peace.

Liberalism

Liberalism states are more cooperative, challenging the realist assumption that states are primarily in conflict with one another. Through trade, treaties, norms, diplomacy, and international institutions, states emphasize peaceful transaction over zero-sum power projection. Although this IR theory of liberalism derives from Enlightenment thinkers, it is not a prescriptive ideology like classical liberalism. Remember that IR theories try to formulate a generalized model about how states operate in the international system. Accordingly, IR liberalism views states as rational individuals are, cooperating and transacting for mutual benefit. 

Mutual benefits can accrue when states create institutions to enforce rules that govern behavior, to allow states to communicate, and to mediate disputes. Collective security arrangements provide security guarantees to member states if one should be aggressed against by an outside actor. This collective defense provides an initial deterrent to would-be aggressors. Likewise, liberals do not ignore security as a concern. Rather, they see cooperation as an observable way that states reckon with international anarchy.

A modern variant of liberalism is neoliberal institutionalism, which argues that states cooperate most of the time through what Robert Keohane and Joseph Nye (1977) termed complex interdependence. States interact through multiple channels, in addition to formal diplomacy, and have a range of issues through which agreement can be derived. Military force then moves increasingly farther down the preference scale of states the more they interact and depend on each other. Repeated interaction among states helps them find common interests and reduces their incentive to exploit each other’s weaknesses through military force. International governmental organizations, or IGOs, facilitate these interactions to generate mutual benefit.

Constructivism

A third and less unified theory of international relations called constructivism focuses on norms and identities for explanations of global politics. States derive their identities from individuals, cultures, and norms and thus view international anarchy to be interpreted differently by each state. Consequently, states with opposing identities might have divergent interests in international politics.

Alexander Wendt (1992) stated that “anarchy is what states make of it,” expressing the common postmodernist critique of reality as being socially constructed. States view the world in terms of their elites’ beliefs, identities, and social norms. Where realists will point to states as being primarily security-oriented, constructivists will counter that security, and national interests for that matter, has no single objective meaning that can be applied to all states. In addition, what constitutes as an identity or norm evolves over time, rendering blanket assumptions of state behavior inert.

The power of ideas is important to constructivists. Diffusion of ideas, culture, and language through internationalization, socialization, or hybridity become ways in which identities can be shaped. Constructivism does not contribute an overarching theory about states, as realism and liberalism attempt to do, and it is often thought to be more of a critical theory like Marxism or feminism. Its value in interpreting international politics is in recommending to analysts that they should study the individual cultures, histories, values, and norms each country carries with it to the international scene.

Applying These Perspectives to the Real World

The most visible international event currently is the Russo-Ukrainian War. Russia was powerless to halt the NATO enlargements of 1999 and 2004, which incorporated many of the former Soviet and Soviet-bloc countries of Eastern Europe and the Baltic Sea coast. NATO moved into Russia’s historical sphere of influence and abutted Russia’s western border. NATO sought further encroachment: in 2008, it declared its support for eventual Georgian and Ukrainian accession to the alliance. Vladimir Putin pushed back, calling it a direct threat to Russia. Like NATO, the European Union simultaneously sought eastern integration with its Eastern Partnership proposal to bring Ukraine gradually into its economic orbit. 

Ukrainian domestic politics further exacerbated the tensions. American-backed protests in 2014 culminated in the ouster of Ukrainian president Viktor Yanukovych and the installing of a pro-Western regime in Kyiv. Shortly after, pro-Russian Ukrainians and ethnic Russians in Crimea occupied government buildings, and Russia annexed the peninsula after a secession referendum. NATO war games in the Baltic, American arming and training of Ukrainian troops, and an evolving de facto integration of Ukraine into NATO and the EU sphere of influence preceded a Russian invasion of Ukraine in late February 2022.

Realists, liberals, and constructivists view this situation in different ways. Realists center their analysis on the security interests of states and power distribution. Western influence created a security threat to Russia and a relative power imbalance in favor of the West. Russia’s actions reflect a protection against Western encroachment to protect its security interests. 

Liberals emphasize domestic politics and the role of international institutions in the conflict. The coup in 2014 that brought into power a pro-Western government prompted Russia to undertake actions that would destabilize the country and pull Ukraine back into its trade orbit. A pro-Western population within Ukraine saw in NATO and the EU a way to advance their interests, reducing Ukrainian economic dependence on Russia.

Constructivists look more at diverging identities in the conflict. The attraction of pro-democratic Western identity stood in stark contrast to the authoritarianism of Putin’s Russia. Patriotic rhetoric from the Kremlin emphasized Russian identity and justified Crimean annexation as a reterritorialization of a historical Russian land.

International relations scholars view these main theories as both complementary and distinct ways of looking at the world. While staunch realists like Mearsheimer predicted the Russian reaction to NATO encroachment, many observers view these theories as tools in a toolbox of perspectives to consider when interpreting world events. Accordingly, it is important to understand that IR theories provide lenses for interpretation rather than a set of public policies that should be pursued. In other words, IR theory is value-free, seeking to understand how the world works. This outlook stands in contrast to ideologies of domestic politics or foreign policy, which are methods for achieving ends.

Foreign policy prescriptions may, however, follow from viewing the world through one of these theories. Offensive realism argues that international anarchy requires states to seek opportunities constantly to improve their relative power positions against other states. Defensive realism sees this strategy as misguided. Instead, states should enact foreign policies of restraint to avoid provoking other countries into belligerence. Liberals generally see economic interdependence, democracy, and international institutions as peacebuilding. As a result, liberals seek to expand democracy, trade relations, and international institutions on the global system and among other countries. They see liberal values as mutually beneficial for the United States as well as the target countries. Some, however, like Woodrow Wilson, George W. Bush, or Hillary Clinton, might like to impose these institutions and relationships by force. Like IR theory generally, these approaches can overlap and do not correspond to ideologies on the political spectrum or compass. IR theory is to foreign policy as economic theory is to economic policy. Both try to understand the world as it is and then derive policy that would best achieve ends sought. 

Bibliography

Koehane, Robert O. and Joseph S. Nye. Power and Interdependence: World Politics in Transition. Boston: Little, Brown and Company, 1977.

Morgenthau, Hans J. Politics Among Nations: The Struggle for Power and Peace. New York: Alfred A. Knopf, 1948.

Waltz, Kenneth N. Theory of International Politics. Boston: McGraw-Hill, 1979.

Wendt, Alexander. “Anarchy is What States Make of It: The Social Construction of Power Politics.” International Organization 46, no. 2 (Spring 1992): 391-425.

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The Scott Horton Show: McMaken on Capitalism and Peace

04/26/2022Ryan McMaken

In this interview with Scott Horton, Scott talks with Ryan McMaken about free markets and free trade. They begin with a discussion about the role of the Mises Institute in the push for sound money. Scott then asks McMaken about the nuances of debating capitalism vs. socialism while living under a mixed economy. They then discuss the changing role of the United States in the world. McMaken believes a “rules-based international order” existed after the fall of the USSR but that the US destroyed it by invading Iraq in 2003. McMaken argues that the best path forward is a commitment to the classical liberal ideals of free markets at home and nonintervention abroad (32 minutes).

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