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Bizarro-World Kirzner Awarded the 2014 Nobel Prize in Economics

October 13, 2014 in Economics

By Joseph Salerno

KONICA MINOLTA DIGITAL CAMERA

Here’s a real shocker:  The 2014 Nobel Prize in Economics was not awarded to Israel Kirzner, as many Austrians fervently hoped.  Instead the prize was given to Jean Tirole, a French engineer, mathematician and economist for advancing “The Science of Taming Powerful Firms,”  Tirole for all his brilliance is a garden variety neoclassical economist whose views on competition, efficiency and economic welfare are worlds apart from Kirzner’s.

Plus ça change, plus c’est la même chose.

Tirole won the prize for his work in devising new methods to improve regulation of industries dominated by a few large firms with “market power.”  Tirole uncritically accepts the long entrenched neoclassical view that “oligopolistic” firms commit the unpardonable sin against economic efficiency of being able to “influence the prices, volume and quality” of products in the markets in which they operate while planning production on the basis of expectations of each other’s decisions.   In other words they do not operate according to the assumptions of perfect competition under which each firm is infinitesimally small and unable to vary the price or quality dimensions of its product one iota from that of its equally teeeny-weeny competitors, whose actions it does not take account of in its own production decisions.

Compounding the ”market failure” of oligopoly is the fact that dominant  firms know more about the product that they are selling than the regulatory authority.   This is  a species of the  problem of “asymmetric information” in which each entrepreneur is, heaven forfend, more intimately familiar with the attributes of the product he is producing and selling than consumers of his product.

In any case, using game and contract theories, Tirole was able to contrive “a clever set of production contracts” between the regulator and dominant firms that solve the problem of asymmetric information while giving the firms an incentive to produce and cut costs while draining away “excessive profits—a bad thing for society. “

So, Tirole was awarded the Nobel prize for concocting complex technical solutions to what Austrians have long known and taught to be pseudo-problems for a dynamic market economy driven by rivalrous competition among entrepreneurs eager to earn profits by anticipating and serving ever-changing consumer demands.

Regarding oligopoly, Murray Rothbard in 1962 incisively clarified the phenomenon and showed that it was tractable to general economic analysis, which oligopoly theorists had long denied.  Furthermore, Rothbard demonstrated that game theory was inapplicable to oligopoly, at a time when game theory …read more

Source: MISES INSTITUTE

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Austrian Calls Central Bankers Incredible

October 13, 2014 in Economics

By Mark Thornton

Michael Pollaro writes in Forbes.com that the all-time high credibility that central bankers currently enjoy is about to change.

Central bank credibility is at all-time highs. As a consequence, we suggest, equities are near all-time highs too while gold is scraping multi-year lows. A change though may be in the offing with all three. Not today, nor tomorrow. But perhaps sooner than most think.

Here’s how we see it…

Pollaro shows that the monetary policy approach pursued by Keynesian central bankers is both wrong and dangerous.

We reject this unwavering belief in central banks and their policies, outright. As the Austrians teach, easy monetary policies sow the seeds of their own demise. Flooding the economy and financial markets with money (and credit) created out of thin air – thereby distorting interest rates and price signals and, in so doing, creating malinvestments – is no way to create sustainable, economic growth and ever rising equity prices. Sure, at first glance, the malinvestments and attendant booming equity prices look like genuine growth and wealth creation. But they are not. As we explored here, they are instead unsustainable bubbles that turn to bust when the growth in those money supply (and credit) footings decelerate; i.e., when the easy money abates.

Today we posit some questions we think every equity investor needs to answer. What if the Austrians are right? What if unconventional, all-in easy money policies do not produce sustainable, economic growth? Contrary to the expectations of nearly everyone, what if the next big event is in fact a bust? What will that mean to the equity markets going forward? And then, what will that say about the credibility of central banks?

Well, if the Austrians are right, as we wrote here, given the size of this monetary experiment, one can expect a pretty big swoon in equity prices if not an ugly crash. More important though is the very real possibility that a bust could put a dagger in central bank credibility, severely damaging if not destroying the belief that unconventional, all-in easy money policies can goose the economy and equity markets anywhere near as effectively as in the past. Maybe, in real terms, not at all. Truly a problematic situation the next time central banks step in to “save” us. This we think is especially true if a bust occurs right here in America. Consider this: The …read more

Source: MISES INSTITUTE

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Jean Tirole Wins Nobel Prize

October 13, 2014 in Economics

By Peter G. Klein

JEAN TIROLE

The Nobel committee has chosen Jean Tirole, a leader in game-theoretic industrial organization analysis, for the 2014 economics prize. As I discuss in more detail here, Tirole’s approach to IO is probably an improvement over the old structure-conduct-performance literature of the 1950s, but it still rests on the naive concepts of “monopoly” and “competition” that the Austrians have attacked since the 1940s. Monopoly is defined as “market power,” i.e., the ability to set price over marginal cost, and it taken for granted that the government’s job is to reduce market power to “maximize social welfare.” The Austrian notion of competition as process of dynamic rivalry over time does not figure prominently in this style of analysis, and government regulators are treated as benevolent, fully competent (if not always perfectly informed) agents who run around correcting for market failures.

Many of my Austrian friends are disappointed that Israel Kirzner did not win but, as I noted last week, he never really stood a chance. Game theory has become the dominant language not only for IO but also for public-sector economics, corporate finance, and other fields and it was inevitable that the Nobel committee pick Tirole or someone like him. My guess is that Oliver Williamson will be the last Austrian-friendly Nobel laureate, at least for a while.

…read more

Source: MISES INSTITUTE

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Scientific Progress Needs Entrepreneurial Progress

October 13, 2014 in Economics

By Matt McCaffrey

In our age of technological marvels, it’s easy to be in awe of science, and even to believe that science in and of itself is responsible for the high living standards enjoyed in some nations. Likewise, it’s all too easy to see poverty and economic stagnation as stemming from a lack of scientific progress, and conclude that to make the world a better place, all we need are more breakthroughs and inventions.

However, the recent explosion of interest in “science” tends to overlook what is maybe the most important fact about human progress: it doesn’t happen without entrepreneurial progress. In other words, scientific breakthroughs don’t actually increase most people’s welfare until entrepreneurs figure out how to make them do something practical, at prices consumers find reasonable. As Peter Klein points out, such was the case of the internet, which had little value until it was integrated into the market economy.

Given the popularity of celebrity scientists like Neil deGrasse Tyson, or of pages like “I f@&%ing love science,” it’s vital to stress the common-sense economics of scientific research. It’s when science enters our lives through the market that it bestows the greatest benefits on humanity. Whether it’s a basic invention or the most advanced physical science, entrepreneurs make the wonders of the scientific world into commonplace conditions of everyday life.

What science needs then is a guiding hand (hint: an invisible one), a means to assess the social worth of new knowledge and inventions. And that’s exactly what the market provides through the indispensable tool of economic calculation. Because their mission is to improve the lives of consumers, entrepreneurs are the standard-bearers of scientific progress, looking constantly to the frontiers of knowledge for new ways to increase human well-being.

…read more

Source: MISES INSTITUTE

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China Overtakes US

October 13, 2014 in Economics

By Mark Thornton

The IMF announced that the GDP of China has now exceeded the GDP of the USA. In this interview I explain some of the “back story” on this topic and also alert listeners of the implications of the current world currency war and looming economic crisis.

“In the US, the GDP growth has been driven largely through a process of large government deficits and the burgeoning national debt,” he said.

“An unprecedented radical monetary policy of keeping interest rates very low” also contributed to an unsustainable economic growth, Thornton told Press TV on Wednesday.

The American economist said China’s growth policies are also questionable and will not be sustainable in the future.

“They (China) have a lot of planned investment in infrastructure, housing, office space and the building of giant skyscrapers and they have a lot of inventory of all those products and under utilization of infrastructure investment,” he noted.

China remains the biggest foreign holder of US government debt, holding an estimated $1.27 trillion in US Treasury bonds.

The United States accuses China of lowering the price of its exports by manipulating its currency.

“Growth is a good thing, but in the case of China and the US, we have to question whether it’s natural, sustainable,” Thornton said.

…read more

Source: MISES INSTITUTE

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Why So Many Are Unemployed for So Long

October 13, 2014 in Economics

By Richard W. Rahn

Richard W. Rahn

If you pay people not to work, what do you think they will do?

In a new staff paper published by the New York Federal Reserve Bank titled “Unemployment Benefits and Unemployment in the Great Recession,” the researchers found “that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extension of unemployment-benefit eligibility.” The irony here is that President Obama and the congressional Democrats kept voting to extend the unemployment benefits, which had the effect of keeping unemployment far higher for a much longer time than if they had not done so.

Many of those who voted for the extension of unemployment benefits — up to 99 weeks — probably were under the mistaken belief that the increased spending by the unemployed would stimulate the economy. What they and even some of their economic advisers forgot is that a coin has two sides. The money to pay the unemployment benefits had to come from higher taxes on the employed; greater borrowing, which sucked potentially productive capital out of the economy; or money creation, which undermines the value of money for everyone. All of these are big economic downers. As the Fed researchers explained: “Our results lead us to expect that the stimulative effect of higher spending by the unemployed is largely offset by the dramatic negative effect on employment.”

If you pay people not to work, what do you think they will do?”

The artificially induced higher unemployment caused economic growth and total output to be significantly lower. The high unemployment and slow growth are major issues in the upcoming election — all working against the interest of the Democrats, who voted for this destructive policy.

Some Democrats voted for the extended unemployment benefits in the name of compassion for the unemployed without thinking through the consequences. As the researchers noted, those receiving unemployment benefits could afford to be more “picky” about what jobs they eventually chose to take, which added to wage pressure. The higher wage pressure caused employers to reduce the number of jobs they offered, thus causing fewer to be employed.

Jobs in the private sector are created by existing firms expanding or entrepreneurs creating new ventures and hence new jobs. Governments create impediments on job creation by doing such things as increasing taxes on labor, raising minimum wages above the full employment level, and increasing the …read more

Source: OP-EDS

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The Right Wing Screams for the Wambulance over Gay Marriage Ruling

October 13, 2014 in Economics

By Walter Olson

Walter Olson

When the Supreme Court last week declined to rule on lower court rulings striking down bans on same-sex marriage, the familiar cries from the right over judicial activism were just the start. Former Arkansas governor Mike Huckabee said he hoped state officials would defy the federal courts, and threatened to leave the Republican Party unless it did more to resist gay marriage. The dean of Liberty University’s law school foresaw the “end of western civilization.”

Then there was Matthew Franck at National Review, who described the series of marriage cases as “a slow-motion Dred Scott for the 21st century.”

That was a good way to get commentators’ attention. Dred Scott v. Sandford was the decision that 1) entrenched slavery and 2) set the nation on a path to Civil War. Slavery and the Civil War having been more horrible than most things happening in America lately, libertarian lawyer/author Timothy Sandefur has proposed that comparisons to Dred Scott should trigger American law’s version of the Internet’s “Godwin’s Law” under which whoever brings in Hitler has lost the argument.

Even as the ranks of culture warriors on the right diminish, their zeal seems to intensify.”

Following a storm of criticism, Franck dug in on the comparison in two further posts. It wasn’t, he said, that he’d meant to liken gay marriage to slavery—critics were unreasonable to suggest any such thing. No, he’d had in mind other parallels—parallels, to be sure, that critics soon assailed as arbitrary and flimsy in the extreme—of which the most interesting was his claim that the marriage rulings, like Dred Scott, pose a “comprehensive threat to republican government.”

Note what he’s asserting here. It’s one thing to object to a Supreme Court decision as restricting what laws the democratic process can make. That’s what Supreme Court decisions do, at least when they recognize constitutional rights that curtail government power. (Conservatives, like liberals, have their favorite Court decisions that do this, on topics that include freedom of education, gun liberty, and freedom of campaign speech.) It’s another thing to claim a given decision will make it impossible for republican government itself to function in the future in some sort of “comprehensive” way.

It happens that Dred Scott is one of the very few Supreme Court decisions you could describe without hyperbole as doing this, since in a nation closely divided between slave and free, it entrenched the slave power in a …read more

Source: OP-EDS