I'll try not to repeat what Michael Nuwer and Sean Andrews said in
response to David's posting.
David wrote:> This whole discussion started with a post about
behavioral economics and the implications for N/C economics and its
assumptions of perfect competition, etc. I then pointed out the GMU
view (which is essentially Austrian) which also rejects the N/C
assumptions, is fascinated with behavioral economics, etc., but also
advocates free-market, anti-socialist policies.<
My impression is that both the GMU and Chicago schools start with
their conclusions and work backwards, coming up with different
rationalizations. (How else can we explain such phenomena as the Coase
"theorem"?)
I wish I had that luxury. But deviant economists such as myself
_always_ have to justify our thoughts to the power that be (to get
promotion, tenure, raises, etc.) No-one's going to give us endowed
chairs in "free enterprise" or invite us to preach to business
audiences in exchange for big fees. Since the dollar votes aren't in
our corner, we usually have to live up to higher standards than the
various "worship the market" crowds. It's not the self-styled
libertarians who catch the flack from businesspeople and state
legislators for violating the official party line. It's various
left-wing oddballs.
> To get to the point, and I think your response proves my point, you (and I
> assume most people on this list), don't really give a crap about methodology
> or theory.<
I do give a crap or two about methodology and theory. I usually get
accused of being "too theoretical."
However, I think that discussions of either method or theory without
specific empirical references (or discussions of method without
references to a specific theory) are very sterile, just as sterile as
pure empiricism. If Mike is right that the so-called Austrians
completely reject empirical testing or validation of their theories,
that suggests that they're willfully clinging to an extremely abstract
level of pure theory and methodology -- or even dogma. That makes
their work uninteresting.
>You don't reallly care about whether N/C assumptions are right or
wrong, good or bad, useful or nonuseful. You only care about such
assumptions to the extent they favor or disfavor policies you
support.<
I don't know how you know what I "really care about," especially based
on the evidence of one or two missives. Are you a mind-reader? Does
the Invisible Hand read my mind for you?
I care a lot about whether or not N/C assumptions are valid, but I
also know that it's possible to justify similar policies from more
than one perspective. (A lot of people who came before neoliberal
icons like Thatcher or Pinochet believed in "if you want to make an
omelet, you've got to break eggs" in practice -- but they had
different theories.) Further, in the the historical process, it's
really _what people do_ that counts more than _what they say_. This in
turn counts more than _what they think_.
Many of the "Austrian" assumptions are derived indirectly from Marx's
vision of competition. (Strangely, however, he never deified the
entrepreneur.) That suggests to my extremely biased eyes that their
assumptions are more valid that the static utopias or dystopias
described by the N/C school.
However, they seem to bring in other assumptions to undermine the
progress they'd made in breaking with the N/C school. Assumptions such
as that "entrepreneurs" have the incentive to undermine situations of
asymmetric or incorrect information. One step forward and one or two
steps back...
David has said:>>>>Of course, if the government passes laws that
restrict the ability to ration credit, redline, discriminate, we get a
housing bubble.<<<<
I wrote: >>> No, you don't seem to have studied the issue. The housing
bubble was driven more by (1) cheap credit (cf. Greenspan) and (2)
deregulation -- either in law or in practice -- of financial practices
(cf. Greenspan). The bankers' ability to ration credit, red-line, and
discrimination in loaning has not been reduced in recent years.<<<
David now writes:> The real estate bubble is a combination of a whole
lot of things.<
yes, that's why I used the phrase "more by" above.
>However, one contributing factor was the separation of loan
origination from loan collection. The originators had little interest
in whether or not the loan was ultimately repaid. Therefore, those
who were critical of the "discriminating" nature of the mortgage
banker got their wish.<
This is part of the general " financial deregulation" trend I referred
to, which essentially means "give the financial entrepreneurs what
they want." My usage is not just my own. It's the general usage in the
financial press and in government (which seems to follow the lead of
the financial press).
The mortgage lenders wanted to be able to lend with a minimum amount
of risk. So in the spirit of "given 'em what they want," somebody with
a reputation for being intelligent -- perhaps at the pro-industry
Fannie Mae, Freddie Mac, Ginnie Mae, or Connie Mack -- though up the
idea of bundling and securitizing mortgages and allowing the bankers
to sell them. This dispersed risk much more widely amongst the many
financial organizations, so that large number of companies got hit
when (some) mortgages went sour.
It also, as you say, meant that the "originators had little interest
in whether or not the loan was ultimately repaid." And of this meant
that the originators didn't care to discriminate. But that's different
from what I was talking about, i.e., stuff like being legally
prohibited from redlining (racist discrimination, etc.)
This reform also has nothing to do with banning credit rationing.
Rather, it undermined the incentive to ration credit _in general_.
What happened was not motivated by "those who were critical of the
"discriminating" nature of the mortgage banker" as much as by the
mortgage bankers themselves.
The fact that government-sponsored organizations (Fannie, etc.) were
involved is an excuse for some to say that this wasn't _true_
"deregulation." But in the financial history of the last 30 years or
so, "deregulation" has always meant "give the entrepreneurs what they
want" _including_ promises of government help. The Savings & Loan
sector was deregulated in the 1980s _and_ bailed out using taxpayer
dollars. (This combination implies moral hazard, of course.)
The US financial disasters of the last 30 years or so all arise from
the "give the financial entrepreneurs what they want" approach. It's
telling that the current one (and the one before that) was set up to a
significant degree by a hard-line free marketeer, Alan Greenspan (an
erstwhile follower of Ayn Rand).
Strictly speaking, the "libertarians" are right: "deregulation"
shouldn't be called "deregulation." It should be called "privatizing
profits and socializing risk" or something like that. A true
deregulation would get rid of not only limits on what financiers can
do but also bail-outs, deposit insurance, and
lender-of-the-last-resort activities. But that's silly.
me: >>> Even if the Public Choice (PC) critique of democracy were
valid, it denies the fact that _we are forced by the circumstances we
live in to engage in collective activities_. That is, the real world
cannot be broken into bite-size pieces so that individual choices can
deal with all issues. If the world that we live in is inherently
collective, how are we going to make decisions about matters that
affect us all?? The PC folks want to us markets to make the decision,
so that those with the most money rule the roost. I don't think
so.<<<
David: > PC does not deny that we engage in collective activities.
For goodness sake, Mancur Olson entiled his book "The Logic of
Collective Action." <
FWIW. Olson is not part of the usually-defined PC school associated
with GMU, Buchanan, etc. The free-rider problem is generally accepted,
though many see it as less important than Olson did.
>PC argues that there is no basis for the assumption that collective
decision-making through government will be more benevolent, beneficial
or less self-interested than collective decision-making through
markets, <
I thought I acknowledged that point, i.e., the PC critique of
democracy. ("Even if the Public Choice (PC) critique of democracy were
valid...") The problem of course, is that "collective decision-making
through markets" hands over all power to those with lots of money. (In
their Sci Fi masterpiece, THE SPACE MERCHANTS, at one point a legal
dispute threatens to be appealed all the way to the Chamber of
Commerce! It's a totally market-organized world.)
Further, "free markets" (whether of the Chicago-school or GMU-school
variety) cannot deal with external costs or provide public goods such
as the legal system (including its definition of property rights). If
we try to free-marketize the state, we'll return quickly to the good
old "nasty, brutish, and short" days of Hobbes.
Anyway, while the GMU types defend "imperfect markets," I defend
"imperfect democracy." Let's stipulate that democracy -- and
especially the gelded version of democracy we see in countries like
the U.S. -- produce all sorts of abominations that do not serve the
collective will of the citizenry, just as the PC school says. This
does not deny the fact that the only legitimate basis for state power
and for decisions being made for the collectivity is the collective
and democratically-decided consent of the governed.
One way of summarizing this point is to say that John Locke, James
Buchanan, and the like see (god given?) property rights as trumping
citizen's rights. I would agree with Jean-Jacques Rousseau that it
should go the other way, with citizenship rights trumping property
rights (or allowing them, depending on the democratic will). Of
course, I disagree with Rousseau on a lot of other things.
>and that the constitution of government decision-making should keep
that in mind.<
who said anything different? Was it Montesquieu or Alexander Hamilton
who first pointed out the importance of the constitution? haven't
political researchers agreed with this point for generations?
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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