Knowing and Making

Scott Sumner has got me spotting supply and demand mistakes all over the place. This post combines that theme with the question of ' the price of anarchy ', outlined by Gravity and Levity last week. Niall Ferguson has blended both of them into a particular detail of his FT article on "lucky" Barack Obama . It would take a long time to critique the whole article, but here's the salient point: Iraq is likely to become more unstable as US troop levels are reduced. Now on the surface, that sounds obviously correct. But how about if we turn it around to make the real causality clear: US troop levels are being reduced as Iraq becomes more stable. The thing about supply and demand, like any equilibrium system, is that any change tends to create a pressure to counteract itself. In this case, the reduced "supply" of anarchy has increased its price, thus reducing the production returns on its complementary good, the US Army. Thus the army's supply curve shif...

Another article (this time by Niall Ferguson, of whom more later) on the too-much-debt theory. The subtitle is: "Governments cling to the delusion that a crisis of excess debt can be solved by creating more debt". Well, this isn't a crisis of excess debt. To the extent that credit problems are responsible for the recession, it is a reduction  in the availability of credit that has triggered it. Ferguson may think that companies and individuals owe too much. But who do they owe it to? Er, other companies and individuals! He doesn't present much evidence for the "too much" theory, except an assertion: The Western world is suffering a crisis of excessive indebtedness. Governments, corporations and households are groaning under unprecedented debt burdens. Average household debt has reached 141% of disposable income in the United States and 177% in Britain. Worst of all are the banks. Some of the best-known names in American and European finance have liabilities...