Knowing and Making

I've had a go at Allister Heath in this blog before. Looking back , I realise that it was on the same subject as today's post: quantitative easing. As I read his column in City AM today, I wondered: when I disagree with someone this much, and yet he is so sure of himself, should I question my beliefs? So I questioned them, and read the column again, and realised: no, 90% of macroeconomists are right, and Allister Heath is wrong. Heath argues with conviction that the Federal Reserve's "hubris" will cause inflation without helping the economic recovery. It's a version of the Austrian story: the economy must undergo a necessary recalculation, restructuring, reallocation of resources, before a recovery can happen. Stimulus will just paper over the cracks and maintain the distortions in the economy. There are reasonable arguments that this may be true of fiscal stimulus (though on balance, I don't agree with them). But monetary stimulus (including QE) can h...

Another example of how Austrian economics is nearly right but, at the last minute, gets it all wrong. This article from Peter Boettke on Coordination Problem makes an insightful distinction between order and complexity in two different dimensions. He says: I often use a 2 x 2 matrix to communicate to students the different schools of thought in economics. The rows reflect the problem situation we are find ourselves in (simple or complex), the columns reflect the outcome of our interactions (order or disorder). Neoclassical economics is found in the simple/order cell; Keynesian and market failure theory is found in the complex/disorder cell; Marxism and critics of economics are found in the simple/disorder cell. What does that leave? The complex/order cell and that is the intellectual home of the Classical economists such as Smith-Say, the Austrian school from Menger to Mises to Kirzner, and the New Institutional school of Alchian, Buchanan, Coase, Demsetz, North, Olson, Ostrom,...

In case you were worried, I have not been intimidated by Kartik Athreya's " Economics is Hard " into closing down my blog. I've just been so busy doing stuff and going to things that I haven't had time to write any of it up. Soon, though. Tomorrow, I hope. Meanwhile, a couple of thoughts here and in the next posting: There's an interesting discussion on nominal wage stickiness  between Scott Sumner and Bryan Caplan. Scott, as usual, has some good insights into the question: are sticky wages the primary cause of recessions? To save you reading it all, the answer is yes. This debate exposes a question of economic modelling which I've considered recently. Is the individual transaction the best level to model economic exchange? As a rational agent with no mental processing costs, it is more economically efficient to treat each single exchange as a new decision and re-optimise your choices. But it's not very realistic. Agents who require time to...