Red Alert

The Turning Point (III): The Keynesian Resurgence

Posted by on March 25th, 2010

In  the wake of the global financial crisis, the Washington Consensus is dead.

Keynes, however, is alive and well.

Keynesian fiscal intervention helped avoid a second Great Depression in 2008-9, just as it rescued economies from the first one in 1929-35.

Not surprisingly, there has been an explosion of recent writing on the Keynesian Resurgence.

From the Financial Times’ Martin Wolf and IMF Chief Economist Olivier Blanchard to Noel laureate economists Paul Krugman and Joseph Stiglitz, Dani Rodrik and Robert Reich, lessons are being drawn from the crash to answer the question: “what next?”

I am currently reading Paul Krugman’s ‘Return of Depression Economics” and will blog on this shortly. Robert Skidelski’s “Keynes: The Return of the Master” is emerging as a “must read” for social democrats, alongside Wilkinson and Pickett’s “The Spirit Level“.

Here is a quick taste of some common themes that emerge:

  • Neoclassical economics cannot prevent major cyclical crashes crashes and asset bubbles. Its theoretical underpinnings look increasingly shaky. Global financial re-regulation is urgent.
  • The inequality of wealth and income flowing from trickle down economics has been bad for everybody: more equal societies empirically do better. Reducing inequality has a strong economic payoff.
  • Active government is more necessary than ever in the wake of the crash, but will have to be smart and cost effective.  It will learn from both the post-War Keynesian period and the neoclassical consensus that followed it, and be different from both.
  • Counter-cyclical fiscal policy makes sense, and there is potential to automate some of the stabilisers to build the balance and resilience of markets.

Contrast this to the current National government: still preaching trickle down tax cuts for the richest few; ignoring the growing inequality and sense of despair among the many; hidebound by the ideas of an era that has already passed; bereft of leadership as it stares in the rear view missor of focus group entrails and last month’s polls.

The world is changing fast. New Zealand deserves new thinking. Fast.

101 Responses to “The Turning Point (III): The Keynesian Resurgence”

  1. Andrew says:

    beat spud to this one :)

  2. David, you say: “Keynesian fiscal intervention helped avoid a second Great Depression in 2008-9, just as it rescued economies from the first one in 1929-35.

    If you believe either one of those two things, then I have a central bank I can sell you.

    First off, Keynesian fiscal intervention did not rescue economies from the Great Depression.

    In fact, as Steven Kates from Australia’s Productivity Commission demonstrates, it was those economies that implemented “classical” solutions that recovered first.
    And it was those who implemented Keynes’s ‘spend-and-hope’ programme who exited last, if at all.

    Read: The Dangerous Return to Keynesian Economics

    Second, if you think that printing billions of dollars has “rescued” anything, or done anything other than leave us on an unsustainable precipice between hyperstagflation and hyperstagdeflation, then I really do despair for this country should you get near the levers of power.

  3. Mark Hubbard says:

    Of course this explains a lot, by which I mean the mess New Zealand, and the world, is in.

    After you’ve finished reading Peter’s link, I reckon the best way you can ‘serve New Zealand’ is to take a week off making rules and regulations, and read every article in the Mises Bailout Reader. Then see if you still want to be an apprentice of Keynesian destruction.

    In fact, start with this one: ‘Economic Depressions:
    Their Cause and Cure’ by Rothbard.


    For 30 years, our nation’s economists have adopted the view of the business cycle held by the late British economist, John Maynard Keynes, who created the Keynesian, or the “New,” Economics in his book, The General Theory of Employment, Interest, and Money, published in 1936. Beneath their diagrams, mathematics, and inchoate jargon, the attitude of Keynesians toward booms and bust is simplicity, even naivete, itself. …

    For the record: your lack of knowledge of the causes and progression of the Great Depression is disturbing.

  4. Tracey says:

    I’m trying to keep up and follow these discussions because ther eis a large gap in my knowledge here. I do think it is great that a former Cabinet Minister and Shadow Finance spokesman, even involves himself in this kind of discussion. While what David is saying clearly scares some, at least he is saying it, it is in the public domain and can be challenged.

  5. Falafulu Fisi says:

    David Cunliffe,

    You must read the following article from Prof. Steve Keen and I hope that policymakers such as yourself will take something (useful) home from the article. Policymakers (politicians) must consume facts and reject nonsense such as neoclassical economics and Keynesian framework. The reason for this is that you lot will devise economic policies and put into law that will affect ordinary people. You need to move beyond bullsh*t Keynesian framework, because it is a false theory and unworkable.

    The Creative Destruction of G8 Economics

    I know that you read and try to adhere to mainstream economists who are still dominant today’s society from global financial institutions to government policy advisers, etc, but that doesn’t mean that their theory is correct. As one econo-physicist Prof. Joe McCauley (from Physics Department at University of Houston), I quoted on the other thread (part-2) said, the sooner the current economic theories are thrown out from the curriculum in economic schools, the society as a whole would be much better.

    PS : Prof. Keen is one of today’s modernist or post-Keynesian economist that has his research interest crossed into the domain of complex system theory or CST for short( CST is the main domain of statistical mechanic physicists). He works alongside physicists in his research which also includes collaboration with other experts in CST.

  6. David Cunliffe says:

    @Trcey – I certainly didn’t write this to avoid controversy, but to stimulate debate.

    @Peter Cresswell, @Mark Hubbard and @Falafulu -you can rest easy that I am very aware of the limits of Keynesain thought – I may even blog on some of that. But it is also undeniable in my view:
    1 that without strong govt actions the recent recession would have been worse
    2 that this is causing a major rethink in macroeconomics
    3 some of the old sacred cows are being questioned and
    4 we should take the best of both the neoliberal and Keynesain schools and adapt them to New Zealand’s needs in the new era.

    Accordingly I welcome the debate.

  7. Jeremy says:

    Just a thought David. For predicting bubbles, Name someone who did not predict the dot com crash? In fact it got to the point that the strategy was to get money in % out quick, hopefully before the crash, take original investment out and gamble with the free money. Hence the reason it did not spread (banks & mutual funds were only risking free money) and why no one much was upset at loosing the money (they knew the risk and tried to play with free money).
    Now imagine your fund manager said they spread the risk but did not, this is where the knowledge you have does not tie up with the reality, this was why subprime spread through the institutions & whole market. Many people on the ground also saw subprime coming, but few realized how embedded they were in the market.

    Personally I would be looking hardest at the Mutual funds/institutional funds, including kiwisaver. Also re their influence on other business factors, closures/wages/conditions etc, the old Shareholder/Director/Manager/Employee fight.

  8. David Cunliffe says:

    @Jeremy. I think I get your first point, but surely the problem with the latest crash was that risk was both mispriced and magnified through derivatives.

    On you second point, I’d be interested to see you expand on the risks around Kiwisaver and other institutional funds.

    I am in Japan today (typing this on my blackberry in a taxi!) looking at their economy c/- the Japanese Govt. They have some big issues to deal with but a strength is the high level of domestic savings – it is almost too high – the opposite problem to NZ. Kiwisaver and NZSF were two ways to start to deal with that. We need to do more not less to strengthen savings.

  9. Spud says:

    @Andrew LOL 😀 Yep, I’m pretty snowed under this week 😀

  10. Falafulu Fisi says:

    Dr. Nassim Taleb (also a complex system theorist) had appealed to the King of Sweden a few years back to scrap the Nobel Prize for economics, because the current economic theories are unworkable and even dangerous. Dr Taleb mentioned this (his appeal to the Swedish King) on the following video interview:

    Nassim Taleb reveals that he is in talks with the King of Sweden to get the Nobel prize scrapped on account of “the damage done to society by incompetent economists”

    Mathematic is not the problem as some do think (as seen in the video link above). It is the wrong formulations of the theories that are the problem. If one starts with a wrong set of axioms in the formulations of his/her theory, of course he/she will end up with a wrong conclusion/result. Econometric is highly axiomatic driven (deductive), not data-driven. The data is massage to fit (i.e., force fit) to the theory. On the other hand, data-driven (inductive) disciplines as econophysics/adaptive-complex-dynamical-system let the data reveal the facts and models are then formulated.

    Physics had suffered the same thing in the past in formulating wrong theories. Neil Bohr was praised for coming up with the hydrogen atomic theory in the early last century that was so successful in predicting the emission spectrum of hydrogen-like atoms (i.e., single electron atom/ion). When the Bohr model was applied to other atoms in the periodic table (atoms/ions with more than one electron), the theory failed completely. Bohr then spent almost a decade revising/improving the math of his theory to see if it was any better but still failed. It was a failure of his axioms rather than failure of the math. His mistake was that he treated the electron as a point particle that revolves around the nucleus in a Newtonian manner, i.e., a flat mini-solar system (like the sun & its planets around it – a flat plane). In reality, atoms’ electrons are not arranged in a flat-plane such as Bohr had thought but they arrange themselves around the nucleus in spherical manner.

    Math can’t be blamed since Complex system theory, statistical mechanic physics and nonlinear dynamics are heavily mathematical, and tests of the models from these disciplines have reproduced the observed economic stylized facts in the real world. This is something that neoclassical (axiomatic driven) economics has never been able to do. This only confirms that neoclassical (axiomatic driven) economics (& theories) are bollocks, but also it shows that researchers that do model an economics system as an adaptive complex system phenomena is closer to the true underlying mechanisms that drive an economy.

    Anyway, I totally agree with Taleb’s view here. Economics cannot be on par with other academic disciplines such as Medicine, Chemistry, Physics, etc…, which Mr. Alfred Nobel himself intended the prize for. I myself can’t accept that Economics Nobel laureates such as Merton, Krugman, Engle, etc, are somehow on par with intellectual greats as Einstein, Feynman, Heisenberg and many others.

    Finally, I think that it would be better for John Key and the National Party to talk to someone like Dr. Taleb rather than talking to neoclassical & mainstream economists that are being partly blamed for the recent economic/financial crisis. In fact the UK Tories’ are interested in Nassim Taleb’s Black Swan work (BBC interview).

    The world (including NZ) needs revolutionary thinkers like Taleb and not one from the pro-neoclassical economics camp.

  11. Falafulu Fisi says:

    The first video on the following page is the correct link to Taleb’s view on scrapping Economics Nobel Prize.

  12. Falafulu Fisi says:

    The correct link is here.

    Admin, please delete the previous message, because I forgot to include the correct link.

  13. Mark Hubbard says:

    My problem is, David, I currently work eleven and a half hour days to pay for your first or business class air fares to Japan, so I don’t really have time for this – and pity I’m getting nothing of value whatsoever with your junket in Japan. I’m going to leave most of your questions to Peter Cresswell, whom I’m sure will relish the challenge, although I will make some points in passing. But I will save most of my energy for a rant at the end.

    Your points, all of them in error, and indicating you’ve not read any of the links I, Peter or Falafulu have posted.

    1 that without strong govt actions the recent recession would have been worse

    No. It was precisely ‘strong government actions’ that caused this whole crisis, not lack of regulation of the banking sector. Subprime started from the two biggest welfare agencies in the USA going beserk with mortgage lending under specific government mandate, that is Freddie Mae and Fannie Mac – read the articles on these two institutions in my previous post link to the Mises Bailout Reader. Both organisations that had their roots in the New Deal, and the program of government spending under Roosevelt that extended the deleterious effects of the Great Depression by up to a decade, a depression caused, note, by the first American interventionist president to force the Big State into, and distort, the free market, namely Hoover.

    From this , the fiat money system, central banks confusing market interest signals, and the inflationary pumping of a money supply by politicians, a money supply no longer bound by an objective standard such as the gold standard, in all this lay the roots of the current ongoing crisis. That is, central government. That is, you!

    And the fix to all this is to get you, get governments, out of the economy. Just as in the past freedom and that much abused word now, ‘progress’, was advanced by separating State and religion, so the next step is to separate State and the economy.

    Please put on your in-flight reading respected economist Frederich Hayek’s work The Road to Serfdom. In that he wisely demonstrated how boom and bust, market dysfunction, was caused by government meddling in free markets, however the dysfunction ironically leads to government calls for more meddling and distortion (your point [4]) to fix the problems with their previous meddling, and so on and so on until we individuals, who want only our freedom, all become serfs of the Nanny State. And how right he was. (And please read the Mises bailout reader).

    My favourite quotation of last year was from economist Vernon Smith:

    At the heart of economics is a scientific mystery: How is it that the pricing system accomplishes the world’s work without anyone being in charge? Like language, on one invented it. None of us could have invented it, and its operation depends in no way on anyone’s comprehension or understanding of it. Somehow, it is a product of culture; yet in important ways, the pricing system is what makes culture possible. Smash it in the command economy and it rises as a Phoenix with a thousand heads, as the command system becomes shot through with bribery, favors, barter and underground exchange. Indeed, these latter elements may prevent the command system from collapsing. No law and no police force can stop it, for the police may become as large a part of the problem as of the solution. The pricing system–How is order produced from freedom of choice?–is a scientific mystery as deep, fundamental, and inspiring as that of the expanding universe or the forces that bind matter. For to understand it is to understand something about how the human species got from hunting-gathering through the agricultural and industrial revolutions to a state of affluence that allows us to ask questions about the expanding universe, the weak and strong forces that bind particles and the nature of the pricing system, itself.

    And you speak as if this current crisis is over. It probably has barely started yet, with the contagion of sovereign debt built through the Wests’ insane stimulus programs and bailout of crony capitalism set to unleash a whole new round of mayhem, starting in the heart of socialist Europe, and ending in the US. Note the ‘surprise’ from the US bond market this morning: no one wants ten year US debt with an ever increasing risk margin anymore, and why would they, successive governments have broken them, just as Michael Cullen has attempted to break our own economy. In the US, still losing jobs to recession, their interest rates will go up, and their currency will collapse over the next five years.

    Where do you think that all leaves us?

    And all this at the hands of a set of ideas promulgated by a man called Keynes, and lapped up by busy bodies in government because his ideas always meant Big Nanny State governments.

    2 that this is causing a major rethink in macroeconomics

    In light of what I have said, such as?

    3 some of the old sacred cows are being questioned

    That governments need to get out of free markets?

    That the fiat money system founded on fractional banking and central banks is insane and little more than a ponzi scheme?

    That if you pay people to have children you will give birth to unloved children, and then violence in the streets?

    And on and on and on.

    4 we should take the best of both the neoliberal and Keynesain schools and adapt them to New Zealand’s needs in the new era.

    Yeah right, lets have a Tui. There’s no Third Way for you to inch a salary package out of. Throughout the history of mankind, not one, repeat, not one central planner has managed what you suggest. Centrally planned economies have all ended in human strife and suffering, and slavedom of the productive until they resist and throw off the shackles. What makes you think your brand of central planning will achieve better results?

    No central planner can beat the market, and markets will always punish central planners who try: look around you in the West today. Another quotation regarding the Credit Crunch:

    Mervyn King, Governor of the Bank of England, complained recently that he lacked the powers required to fulfil his new statutory role of ensuring stability in the banking system. A more powerful Bank of England would do a better job. He is wrong. The economy would benefit from a weaker Bank of England, stripped of its principal power: namely, the power to set interest rates. …. No one should be allowed to set interest rates. According to Friedrich von Hayek and other advocates of the Austrian theory of the business cycle, it is this interference with interest rates and the money supply that causes an unsustainable combination of consumption and investment – a boom that inevitably leads to a bust. Conventional wisdom contends that the current recession was caused by the free-market zealotry of recent economic policy and by excessively low interest rates. It is an absurd view, given that interest rates are not determined by market forces. Interest rates are manipulated by central banks with a government-mandated monopoly in the issuance of money. Some of those still defending free markets protest that, contrary to popular opinion, banks were heavily regulated before the financial crisis. So they were. But this is quibbling. The role of central banks means that, at its core, we did not have a free market financial system. We had a command economy. Command economies do not fail because the central planning agencies lack the powers required to bring about the best outcomes. They fail because, without market prices, nobody has the information required to adapt the allocation of scarce resources to the demand for them.

    Quest Columnist: Strip the Bank of England of its Powers – Jamie Whyte

    Now to your statement in the following post: We need to do more not less to strengthen savings.

    Then stop taxing people to the extent Labour and National governments do. Give individuals back the freedom to save their own earnings, their own effort, and stop government trying to run every minute and aspect of peoples lives. I don’t think you have any idea how freedom loving people like myself, in love with the humanist classical liberal ethic that ‘has’ made the West the best civilisation humanity has seen, but which parties like Labour have set wantonly about destroying … how people like me are furious with our (incompetent) overseers, you, David, arrogantly taking away our freedoms to pander to the lowest common denominators which your damned out of control welfare state, and it’s culture of violence, has forced upon our lives.

    You’re probably a nice bloke, but I honestly hate everything you and your life and liberty hating party and collectivist, Nanny State philosophy stand for. In NZ currently there are 1.75 million of us stupid saps in the private sector paying the parasitic lifestyles of 1.75 million state bureaucrats, beneficiaries and retirees. The only group in this I have any respect for is that latter. But when you, Michael Cullen and Clark were creating this offensive statistic, what were you thinking! Where did you possibly think such a society could end up! You’ve created the ultimate compassionless and cruel society, children born on welfare to pay the p bill, and now you force me, the slave, to pay for it when I have utterly no form of agreement with it.

    Forget the economics, I don’t think you will ever understand how free market capitalism is the only system that supports individual freedom, and that every planned economy is founded necessarily on a controlled and planned society and thus a slave people. To implement the policies that you do, to meddle and distort free markets as you do in the course of what you think as social justice, yet which is anything but, you have no notion of what freedom means, and thus why the West once was so great. The only thing you can do that will ever satisfy me, is to let me off this insane bus you’re driving direct to the next Gulag, which will be me in retirement enclave protected by razor wire and a huge police force to deal with the rampant, violent youth your policies have created: I want to pay for every service I use, the quid pro quo is you stop the bus and let me off it. Give me my freedom from you.

    One final quotation regarding the current financial crisis:

    “…genuine capitalism was abandoned long ago in favor of a mixed economy – an unstable combination of economic freedom and economic coercion by government. Today’s crisis, like the 1970s stagflation before it and the Great Depression before it, took place under, and is growing under, a mixed economy – not a free market.
    It is the result of the Government systematically manipulating the market to promote “stability” and “home ownership” – by a massive increase in the Government-controlled money supply, a massive decrease in government-controlled interest rates, an artificial increase in lending by multitrillion-dollar Government agencies, an enormous leveraging sanctioned by government reserve requirements, a “too big to fail” policy, the use of mortgage-bubble-backed securities in every area of the economy endorsed by government approved rating agencies, and years of top economic officials denying there was a housing bubble and promising to keep the good times rolling.
    Today’s events are not unexpected consequences of laissez-faire that Rand, Mises, and others failed to anticipate-they are expected consequences of the mixed economy that they explained decades ago…”

    May Keynes rot. Enjoy the sushi.

  14. Jeremy says:

    David – Very basic as getting late, but I see a system where people remain uneducated about investments and finance. Therefore they hand over money to a person they do not know because he has an institutions name behind him. They dont know the right questions to ask or diligence to perform (mispriced risk = low diligence/education).

    This man takes the money and buys stocks etc, maybe with trading strategy thrown in to top up returns, but his instructions are simple – Keep returns higher than competing funds (ie better marketing and more customers), but if you loose money you will be sacked.
    The money then follows trendy industries, chasing short term returns, and floats in and out as these instructions dictate. No concern is given to staff or business health.
    Direct contrast to those corporates who invest soley in single or related industries, and seek to reinvigorate/add value to get higher riskier returns. They back themselves.

    Directors look for money from capital markets, so will try to short term boost the balance sheet to attract the mutual funds, with the added benefit that the fund manager will not ask questions about business, just the figures. SO these directors justify large bonuses and can move or get two jobs etc but also structure business to protect themselves in times of stress, (no accountability).

    The managers do what told by directors and cover their arse, and if they are good at smoozing will get promotions and not sacked in recession. Employees have to fight to even get a cost of living allowance, let alone fair share.

    Kiwisaver I believe has come in too late, and as far as I know does not have self directed IRA type (as US). Personally I’m not in because I dont believe I can get money out pre retirement, and until I give up smoking I have doubts I’ll make it.

  15. SPC says:

    This reminds of the saying that the winners write history, or is that re-write history. Of course anyone preaching an economic theory has to show how it explains economic history, to show that it is the truth about economics. There is no truth about economics (some admit that, when explaining the difficulty in making correct forecasts). But they will still try and claim that economic history shows that their theory is best. Thus of course the intense focus on what the right economic theory was in relation to coming out of the Great Depression. Monetarists have challenged the old Keynesian school and latter day variants of that counter-Keynesian revolution are on that same old anti-government refrain (anti government money supply, anti-government fiscal stimulous).

    It’s just an attempt to undermine confidence in government and increase the sense that the public can get no economic security from government (this leaves economic matters unregulated and free of government intervention, thus those with the means rort the system and do very well) – thus the survival of the fittest concept. Always packaged as pure capitalism, as if it was anti-establishment, when it is certainly not that just maintaining the unrestrained privilege of capitalism – free of government.

  16. Jeremy says:

    Mark stopped reading half way but
    An often ignored fact is that the command economies outperformed the free market right up to the 1970s and came through the oil crisis better than the free market. It was the human suffering and being military states (Hmm US take note) that bankrupted them. Both systems can work in an ideal world with proper checks and balances. Interesting how the free market claimed victory in the 80s and now are all predicting that they will be outperformed by China??

  17. Jeremy says:

    And no the kenysian thoery did not resolve the depression, It was the war spend up 10x higher than the new deal. Hmmm

  18. Draco T Bastard says:

    An often ignored fact is that the command economies outperformed the free market right up to the 1970s and came through the oil crisis better than the free market.

    The Brash 2025 Taskforce pointed out that NZs per capita income had been outstripped by Taiwan, Slovenia and South Korea and then recommended less regulation. All three of those countries are highly regulated especially in regards to labour. All three have huge amounts of government investment in the market. Taiwan is now one of the biggest micro-electronic producers in the world due to massive government investment. Hell, even the massive technology discoveries of the US in the 1950s and 1960s came from government directives and finance.

    If we were honest about it we would have to accept the evidence that all economic activity starts with the government (I actually prefer to use the word society there but government works as long as it’s understood that government is the representatives/administration of the society) and not private enterprise.

  19. Huginn says:

    The question is:
    In the wake of the global financial crisis, the Washington Consensus is dead.
    Keynes, however, is alive and well.d

    This assumes that The Washington Consensus is radically different from the Keynesian model. But if you look at the fundamental world view, there isn’t much to pick between them.
    They both set out from what could loosely be described as a ‘Cartesian’ position which assumes objective rationality.

    The Washington Consensus gets it from Rational Decision Theory which sees the world as a self equilibrating machine which can be mathematically modeled in the same way that they imagined the laws of physics could be.

    Keynes also sees the economy as some sort of machine that can be ‘pump primed’. Hence the Keynesian preoccupation with econometric analysis.

    They both share a view of the world as a mechanistic whole with constituent parts. The difference is that Keynes’s machine sticks occasionally and needs a little help to get it going again.

    If the challenge to the Washington Consensus (WC) is as big a paradigmatic shift as I think it is, then the objections to the WC also hold for the Keynesian model.

    There has been much discussion of the Austrian School in this post which is interesting because the Austrian world view is very different to that of the WC and of Keynes.

    The Austrians see the world as parts interacting with parts (more Kantian).
    Hence George Soros’s distinction between the financial system and the real economy. They’re different systems. They interact with each other. There’s absolutely no reason to believe that anything will ‘equilibrate’.

    Economic agents are ‘subjectively’ rational. We can only see things from where we are – we can never get an ‘objective’ view. Austrians are very interested in the exchange of information as a prerequisite for economic activity.

    The Austrian objection to Keynes is that if government is just another agent, albeit one with the potential to dominate, then Keynesian econometric tools gives government the means to dominate completely.

    Ironically, the libertarian Austrians have a much more realistic argument for the existence and function of the public sector (certainly than the WC Rational Choice Theorists) because the parts to parts model acknowledges that market failure occurs eg through imperfect information.

    They were certainly much more interested in modeling imperfect market behavior. They also happily assumed that our preferences as individuals are different to our preferences as collectives (think Von Neumann & Morgenstern).

    This means that the Austrians are much more comfortable with political behavior in sectors of the economy subject to imperfect information than Rational Choice theorists who can’t place it in their scheme of the world and see it as anathema (think of what Rodney Hide is doing with Auckland).

    If this ‘Turning Point’ is a shift from the whole-and-constituent-parts view to a parts-to-parts view, as I suspect it is, then the consequences will be very far reaching.

    If it’s WC to Keynesian pump priming, then it’s just more of the same.

  20. Tracey says:

    Mark – am enjoying your contributions but do you have to start with a complaint about how we are all paying for the trip to Japan when David made it VERY clear Japan is paying for the trip?

  21. Falafulu Fisi says:

    Economists on this thread may be interested in the following pre-print (to appear in Statistical Mechanics journal) where a sub-section of it covers finance/economic stylized facts. Skip/avoid the equations & mathematical derivation bits, but concentrate on the descriptive parts, which still makes readable to non-expert.

    This article aims at reviewing recent empirical and theoretical developments usually grouped under the term
    Econophysics. Since its name was coined in 1995 by merging the words “Economics” and “Physics”, this new
    interdisciplinary field has grown in various directions: theoretical macroeconomics (wealth distributions),
    microstructure of financial markets (order book modeling), econometrics of financial bubbles and crashes.
    We give a brief introduction in the first part and begin with discussing interactions between Physics, Mathematics,
    Economics and Finance that led to the emergence of Econophysics in the second part. Then the
    third part is dedicated to empirical studies revealing statistical properties of financial time series. We begin
    the presentation with the widely acknowledged “stylized facts” describing the distribution of the returns of
    financial assets: fat-tails, volatility clustering, etc. Then we show that some of these properties are directly
    linked to the way “time” is taken into account, and present some new remarks on this account. We continue
    with the statistical properties observed on order books in financial markets. For the sake of illustrations in
    this review, (nearly) all the stated facts are reproduced using our own high-frequency financial database.
    Contributions to the study of correlations of assets such as random matrix theory and graph theory are
    finally presented in this part. The fourth part of our review deals with models in Econophysics through the
    point of view of agent-based modeling. Using previous work originally presented in the fields of behavioural
    finance and market microstructure theory, econophysicists have developed agent-based models of orderdriven
    markets that are extensively reviewed here. We then turn to models of wealth distribution where
    an agent-based approach also prevails: kinetic theory models, and continue with game theory models and
    review the now classic minority games. We end this review by providing an outlook on possible directions
    of research.

    Download : Econophysics: Empirical facts and agent-based models

    Huggin, Austrian Economics is closer to economic complex system theory (CST) & econo-physics than neoclassical economics, because CST dynamics as self-organization & self-emergent (Prof. Steve Keen touched on this in his article I linked to in my previous post above) do lead to spontaneous order & harmony in the system.

  22. Mark Hubbard says:

    Mark – am enjoying your contributions but do you have to start with a complaint about how we are all paying for the trip to Japan when David made it VERY clear Japan is paying for the trip?

    I’m paying his wage when he’s there, Tracy. And how many bureaucratic hours behind this trip?

    An often ignored fact is that the command economies outperformed the free market right up to the 1970s and came through the oil crisis better than the free market. It was the human suffering and being military states (Hmm US take note) that bankrupted them.

    But don’t you see, Jeremy, you can’t separate economics from philosophy. The human suffering was part and parcel of the planned, command economy, the planned, command necessarily slave society, you can’t separate them.

    And as for which was most successful – begging the question would you have wanted to live in the USSR -which economies have survived, and which all imploded on themselves dramatically? Plus I don’t accept what you say about the 1970’s either, as the seeds of collapse were already sown in the authoritarian mechanism. And there was no transparency in the command economies in terms of information, of course, because they were police state societes with no freedom of information, speech, association … just big slave camps in reality.

    and now are all predicting that they will be outperformed by China??

    And how has China done this? Answer: by converting large parts of its economy over to crony capitalism. Though there is still plenty of central planning there, making disastrous decisions, ghost towns and such like, that will come back to bite them viciously in the end.

  23. Mark Hubbard says:

    One more thing, Japan, it’s a cot case with lower GDP now than 1992, effectively, even if not technically, a recession of over twenty years. And why? Disastrous government spending and meddling in their markets, that is, ‘strong government actions’. And you’ve gone there to learn? What exactly?

    Read this:


    The Japanese government on Wednesday pushed a record 92.3 trillion yen ($1 trillion) budget through Parliament aimed at stimulating growth in the long-stagnant economy. It means another round of spending and adding to Tokyo’s already substantial public debt.

    In January, the ratings agency Standard & Poor’s cut its outlook for Japan’s sovereign rating, saying that Mr. Hatoyama appeared to have no plan to start containing the country’s spiraling debt.

    Japan’s fiscal spending is often doled out to pork-barrel public works projects, like dams on virtually every major river and mountainous roads to nowhere.

    And as even the Statist Bernard Hickey points out:

    Meanwhile the Japanese government is blasting ahead with more spending and borrowing. It passed another massive budget overnight in another attempt to restart an economy in recession for 20 years after the collapse of its property bubble in the late 1980s. Worryingly, the new Democratic Party government has also abandoned plans to privatise Japan’s mammoth postal banking system, which was a key mechanism for funneling private savings into government spending through endless bond issues.

    It seems the previous government’s enthusiasm for trying to fix this Post bank sclerosis problem made a bunch of pensioners grumpy. They vote and, lo and behold, they have decided to avoid taking the pain now and are passing it on to younger generations. Sound familiar?

    I fear, as we all should, what you’re going to learn and bring back from the failed government experiment in Japan, David. Hop on the plane home please, just sit on your hands in the Beehive, have your lunch, and do us a favour, do absolutely nothing. Please. And give me my freedom back, I am not your keeper.

  24. Dylan says:

    Wait so if the multi billion dollar stimulus packages injected into the economy by the state (in numerous countries) didn’t save us from the recession what did?

  25. Mark Hubbard says:

    Final post :)

    I said my piece above about the arrogance of thinking you can plan the path between neoliberal and Keynesain schools, despite the fact that every single central planning experiment such as this in the past has failed, net result, human suffering.

    As someone said above, yes, I am advocating the Austrian School, and why not, that school is the only one that predicted the nature and causes of the current crisis, and gave the solutions, including get rid of Keynesian socialism. It is the only school that, really, promotes laissez-faire capitalism as the only foundation of the humanist, classical liberal ethic, vis a vis, personal freedom. One of the luminaries of that school was Ludwig von Mises, so some direct quotations from him are warranted.

    In addition to my comments above, and against your foolhardy we should take the best of both the neoliberal and Keynesain schools and adapt them to New Zealand’s needs in the new era. I give you:

    There is simply no other choice than this: either to abstain from interference in the free play of the market, or to delegate the entire management of production and distribution to the government. Either capitalism or socialism: there exists no middle way.


    The salesman thanks the customer for patronizing his shop and asks him to come again. But the socialists say: Be grateful to Hitler, render thanks to Stalin; be nice and submissive, then the great man will be kind to you later too.


    A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism: is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.

    And of course, for you particularly:

    If one rejects laissez faire on account of mans fallibility and moral weakness, one must for the same reason also reject every kind of government action.


    Capitalism means free enterprise, sovereignty of the consumers in economic matters, and sovereignty of the voters in political matters. Socialism means full government control of every sphere of the individuals life and the unrestricted supremacy of the government in its capacity as central board of production management.

  26. Mark Hubbard says:

    Wait so if the multi billion dollar stimulus packages injected into the economy by the state (in numerous countries) didn’t save us from the recession what did?

    We’re not out of it yet, Dylan, not by any means. See my first post. All that governments have done, is, without mandate, assume the huge malinvestment debt from that portion of the crony capitalist system that should never have been bailed out, and transferred that to the taxpayer, thus, and read the news, the huge problem now of sovereign debt, starting in Europe.

    In Greece they’ve gone to austerity – low spending high taxation – thus they now have civil unrest. And that is only the start.

    The level of sovereign debt, including most certainly in the US, is at such a level that taxation can’t pay it, or at least, the level of taxation that will be needed will wipe out the middle classes, and thus social cohesion. So what’s left: printing money, the very act that got us into this. Note if this doesn’t ultimately cause hyperinflation, and thus the destruction of yet more savings, that can only be because the new money supply created is simply replacing that which has been destroyed, and think what that was: it was peoples savings. Throughout the West there was a whole generation that thought they were going to retire over the next few years, who have found that they can’t now, their savings destroyed by governments meddling in markets.

    And now there is a pincer movement. Governments are broke, so to sell their debt – in absences of more and more taxation – they have to pay higher and higher premiums, for example, yesterdays 10 year govt bond market in America, and this raises the interest rates for all, mortgages and business, to inflict further recession, and from there just a vicious cycle.

    The West has to move to laissez-faire, get rid of the Nanny States which are destroying us, and back to sound money, of course.

    But I’ll leave further discussion up to the economists.

  27. Tracey says:

    I know I am being simple, as I said this topic is one I am grappling with, but do laissez- faire principles really hold up? In relation to the environment (polluting) etc ethics, I guess I mean. Do we have proof of self regulation really working?

  28. Tracey says:

    George Soros, philanthropist and financier, pioneered the introduction of the Danish mortgage finance system in Mexico with the support of then Treasury Secretary Paul O’Neill. He now participates in a joint venture with the Danish financial system to help countries use this approach.

    By George Soros

    Treasury Secretary Geithner testified Tuesday on a long-term plan to reform Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) now in limbo. But we don’t have to wait for years to reform the mortgage system — there’s a better approach that could be introduced right away.

    The business model of Fannie Mae and Freddie Mac is fundamentally unsound. These public-private partnerships are supposed to serve the public interest as well as the interest of shareholders. But the interests were never properly defined and reconciled.

    Managements’ own interests were more closely allied with the shareholders. They had an incentive to lobby Congress — both for expanding homeownership and for protecting and exploiting their government-sponsored duopoly status.

    The GSEs gradually extended their activities from insuring and securitizing mortgages into building highly leveraged portfolios of securities, taking advantage of their implicit government backstop. The GSEs profited from the growth, without bearing the risk of collapse: Heads we win, tails you lose.

    The GSEs already had a checkered history, riddled with accounting irregularities. Eventually, they blew up — at an enormous loss to the taxpayer, which some estimate will exceed $400 billion.

    Early in the century, private enterprise had started eating into the government-guaranteed mortgage market. Borrowers once served by Federal Housing Administration loans turned to subprime and alt A mortgages.

    These “non-agency” mortgage securities gained increasing market share. They were sliced and diced, repackaged into CDOs and CDOs squared.

    Geographic diversification was supposed to reduce risk. But the originate-to-distribute model of securitization actually increased risk by creating a severe agency problem: Agents were more concerned with earning fees than protecting the quality of the mortgages. The housing bubble ended with a crash — and the government was forced to take over the GSEs.

    With the private sector largely incapacitated, the GSEs and FHA became virtually the only source of mortgage financing. So we are in the paradoxical situation where a fundamentally unsound business model holds a quasi-monopolistic position. This cannot last.

    What needs to be done is clear: The GSEs’ mortgage insurance function must be separated from the mortgage financing.

    The former, mortgage insurance, is the legitimate function of a government agency — especially when the private sector has collapsed. It should be run as a government agency.

    But mortgage financing should revert to the private sector. This would get rid of a business model that has failed.

    There is a proven mortgage financing system already up and running. The Danish model has been in use, continuously, since the aftermath of the Great Fire of Copenhagen in 1795. It has not prevented housing bubbles from developing, but it has never broken down. And it proved its worth again in 2008.

    In the Danish system, homeowners do not borrow from either a mortgage originator or a GSE. They borrow from the bond market, through a mortgage credit intermediary. Every mortgage is balanced by an equivalent amount of an identical, and openly traded, bond. This is called The Principle of Balance (POB).

    In the United States, mortgage securities are separated at birth from the borrower. Thereafter, they lead separate lives. But in the POB system, the link between homeowner and security is never broken.

    Mortgage Credit Intermediaries, or MCIs, operate the POB system. They help homeowners understand and navigate the process. Most important, MCIs bear the credit risk of the mortgages – they remain “on the hook” in the event of delinquency or default.

    In Denmark, these mortgages are not insured by a government agency. This would have to be modified in America. Given the current demoralized state of the market, a government agency would have to guarantee mortgages, but the MCIs would be required to keep “skin in the game” with a stake of, say, the top 10 percent.

    A key benefit of the POB system is that it offers performing homeowners the opportunity to buy back their loans when interest rates rise. If the price of the associated mortgage bond drops, the homeowner can buy the equivalent face value of bonds at a discount, and use it to redeem the existing home mortgage loan.

    The homeowner’s ability to lower his mortgage liability reduces the chance that he will be underwater when home prices fall due to a rise in interest rates.

    This helps forestall foreclosure crises. And it would have a valuable counter-cyclical effect: Homeowners repurchasing mortgages help moderate upward pressure on interest rates. By contrast, the current system tends to exacerbate upward pressure by lengthening duration, a likely near-term prospect.

    This system would have many other advantages over the system that has now collapsed here.

    It would eliminate the agency problem that was the primary cause of failure. It would separate the credit risk from the interest rate risk. It would be completely transparent. And it would be open: the duopolistic position of the GSEs would disappear.

    What would remain is a government agency offering mortgage insurance to all qualified MCIs, without competing with them.

    How to get there from here? Do it in steps.

    The first is to introduce mortgage securities based on the Principle of Balance. This could, and should, be done by the GSEs now, with the government regulator setting clear and conservative standards. No legislation is required.

    The second step is to open up the process so that all qualified MCIs can issue POB bonds. To make this market work, this does mean new legislation requiring that MCIs maintain skin in the game for any federally guaranteed mortgage.

    After that, the GSEs could be phased out from their role as MCIs, and the guarantee function hived off to a government agency. Eventually, the GSEs would be liquidated, as their portfolios run off.

    Legislation would also be required to extend the POB system to areas that government insurance does not cover.

    In fact, legislation authorizing “covered bonds” is now making its way through Congress.

    But it should better take into account the lessons of the last crisis — and begin the introduction of the Danish model. This should be part of the financial reform package.

    We could start rebuilding a stronger mortgage finance system along these lines now.”

  29. Dylan says:

    Mark Hubbard

    I would just like to remind you of the fact that police state and controlled economy are two entirely different things. Just as the free market and free speech/democracy are two entirely different things.

    The controlled economy turned the USSR into a world superpower in a few decades, up from some of the worlds most poor and downtrodden countries.

    The question is, does that incredible success have anything to do with the social and political restrictions the people of the USSR had to suffer with, i.e were those restrictions simply complimentary to the ideologies they had as to how society should be run or were they a fundamental part to their success

    were those restrictions worth the again undeniable increases in standard of living they all enjoyed (WHEN COMPARED TO PRE 1917 EASTERN EUROPE, to compare them only to the status enjoyed by the western world would be ethnocentric, they were simply in an overall worse situation than us, less fertile soil, less overall wealth to deal with, more corrupt management of wealth before 1917)

    and would it be possible, in absolutely any circumstance, for the people of the countries of the USSR to ever enjoy the same economic AND social freedoms of the western world?

    Mark there are alot of problems with your argument against state intervention, firstly you are comparing keynesian economics to it’s extreme, keynesian economics does not mean controlled economy it simply means maintaining a reasonable balance between public and private management.

    Secondly this argument you talk about that state meddling in the free market CAUSING boom and bust… it’s absolutely delusional. A child could see the correlation between state intervention and market recovery after the trough of the buisness cycle occuring countless times throughout history.

    Also are you aware that through Ronald Reagans term as president in which the term Reaganomics was coined to bunch together all his policies of economic deregulation, public debt tripled from $900 billion to $2.8 trillion?

    Also I would like to point some of the more bizzare consequences that come from deregulation… alot of windows open up for cheating and swindling, a great example of this being Enron, one of Americas most successful companies that bore from deregulation that turned out to be nothing more than a financial fantasy playground.

    Anyway I don’t want to get too seriously into this your comments raise way too much thought to put into this blog. In fact I think they would even be provocative to a generally free market supporting economic, you make some very bold statements that are quite ignorant of countless contrary examples played throughout history. I think this is a proper conversation to be had elsewhere and I would love to debate this with you in a chatroom somewhere or something.

  30. Mark Hubbard says:

    Re my comments on sovereign debt above, Hickey’s latest post:

    including news that France’s President Sarkozy has agreed to a German plan to send Greece to the IMF for a budget bailout.

    This ends months of agreement among the Eurozone countries that Euro zone countries would contribute to any bailout. This has driven the euro sharply lower overnight. The New Zealand dollar rose to a 2 year high vs the euro and a record high versus the pound. The NZ dollar rose to a 3 month high vs the TWI This is bad news for our exporters

    Meanwhile, US interest rates rose overnight on fears about blowouts in government debt. The bond vigilantes are back in charge. This meant the 10 year US bond yield rose to 3.9% from 3.6% after the US government sold US$118 bln of bonds in less than a week.

    Financial markets should brace for trouble as bond yields start rising after 3 years of falling.

    Dylan: The controlled economy turned the USSR into a world superpower in a few decades

    On the top of tens of millions of bodies – Stalin alone was responsible for the deaths of 60 million of ‘his’ proletariat.

    You cannot separate philosophy and economics.

    you are comparing keynesian economics to it’s extreme

    I have answered to that: please read my von Mises quotes above.

    Tracy: the biggest polluters of the planet thus far, have been the command economies.

  31. Mark Hubbard says:

    Dylan, this argument you talk about that state meddling in the free market CAUSING boom and bust… it’s absolutely delusional.

    Read me carefully. I never said there were no corrections in laissez-faire markets, of course there are, but note the differences to what we have now.

    For the latest crash, it was governments who created the asset bubbles that imploded, not only created them but fed and fed them for a decade. Thus, a much bigger problem, by a huge magnitude, was created, and therefore, bigger harmful consequences.

    Worse, laissez-faire markets are able to correct quickly because the malinvestments are liquidated. Whereas, which has happened, in our case governments actually propped up these malinvestments – so the market learned no market lessons to change to more prudent behaviour next time – by transferring the malinvestments to the taxpayer, which has solved none of the underlying problems. Instead, now a greater sovereign debt problem, and more harm. The irony being, per Hayek’s already mentioned Road to Serfdom, we come out of this with even bigger Nanny States with their loathsome noses stuck into every aspect of our lives where they have no right to be in a free society. The proof of this is David’s own comments on this thread. He thinks politicians have to employ the solutions, lets meddle some more: whereas the economic and philosophical solution is to get these busy bodies out of our economies and our lives.

    As a lesson from history, it was in this self-same government meddling in the form of Roosevelt’s New Deal that extended the bad consequences of the Great Depression by up to a decade. Again, I refer you to the articles in the Mises Bailout Reader, on the link I gave in my first post.

  32. Tracey says:

    Ignorant question again, can someone point me to pure laissez faire economies in existence right now?

  33. Mark Hubbard says:

    Tracey: none. That’s why the world is a mess, and none of us live in freedom. I’m afraid by their very natures, politicians can’t take it upon themselves to get out of the way, and let us have the small governments or minarchies that would be classical liberal societies, and that would be productive, fulfilling places to live.

  34. Tracey says:

    Ah. Mark, are you a Libertarianz?

  35. Tracey says:

    So while it might be a solution, we don’t know because it has never moved from theory to implementation? I am not saying that is a reason for not doing something, far from it.

  36. Mark Hubbard says:

    Ah. Mark, are you a Libertarianz?

    Yes. The only party in New Zealand that stands on a platform of freedom.

    But don’t let this stop you replying David. I’d be very interested in your thoughts on my posts, and on Peter’s and Falafulu’s, plus on the Austrian School of Economics, and how Keynes got his theory so tragically wrong. And how it is you can be pushing a demonstrably failed economic theory as part of your politics?

    (And really, Japan, what do you possibly hope to learn from there, other than how to create a crippling load of debt and pork barrel politics)?

  37. Richard McGrath says:

    Tracey, there are no countries living under a pure laissez-faire system. Nor are we likely to see any in our lifetime. Hong Kong comes about as close as any country to total freedom. Consequently, their per capita income is one of the highest around.

    Mr Cunliffe, I can give you an example of where hands-off government pulled a country out of economic depression: the United States in 1920 under President Warren Harding. His response to a sharp economic downturn was to play cards, womanise and let the market correct itself. Which it did. In less than 12 months. Compared to Hoover and then Roosevelt whose interference turned the 1929 downturn into the Great Depression for nearly ten years.

  38. Greg Davis says:

    Mr Cunliffe,

    You really don’t know much about what you speak. And Krugman is a dangerous fool.

    I sincerely suggest you take up some of the reading suggestions offered you here.

  39. David Cunliffe says:

    @Mark Hubbard Just for the record none of your taxes are contributing to this study tour to Japan – the Japanese are fudning it (and I cover the incidentals privately). I would have thought understanding the economc situation of the world’s second largest economy and a major regional trading partner (with whom we seek an FTA) was a worthwhile investment.

    @Greg Davis. Professor paul Krugman of Princeton Univeresity is a Nobel Laureate in Economics.

    Off to meetings so a quick general observation – isn’t it intereting how mention of a Keynesian resurgence stimulates a debate among the Austrian School devotees out there.

  40. Greg Davis says:

    “isn’t it intereting how mention of a Keynesian resurgence stimulates a debate among the Austrian School devotees out there.”

    Like a monkey poking a stick in a hive of intelligent bees.

  41. Huginn says:

    @ Tracey
    Absolutely no doubt in my mind that laissez faire is the best market structure for sectors of the economy where property rights are well defined, costs and benefits are contained entirely within the transaction, there are no inter-temporal complications and all parties are fully and transparently informed.

    Our problem is with sectors where these conditions don’t hold reliably eg health, education, security, infrastructure.

    Laissez faire fails here because the decisions that we make as individuals are different and sub-optimal to the decisions that we make collectively and because these activities resist monetisation; supply and demand for these can’t be calibrated in dollar amount along a continuous gradient. These are information gaps where we have to find other ways to decide who gets what, and when.

    This is the site for political behavior; it’s no accident that we are discussing this on a political party blog.

    And it’s only if we’re very careful and very lucky that we get governance.

  42. Tracey says:

    Richard & Mark, to a certain extent there is safety in relying on an untried theory to challenge tried and failed theories? Realistically what would cost in time and money to become the exact system you advocate.

  43. Mark Hubbard says:

    I would have thought understanding the economic situation of the world’s second largest economy and a major regional trading partner (with whom we seek an FTA) was a worthwhile investment.

    Not if they’re doing it all wrong, evidenced by a 20 year recession, and from your comments, regardless, you’re looking likely to agree with their big state spending solutions which have got them into so much trouble :)

    Just for the record none of your taxes are contributing to this study tour to Japan – the Japanese are funding it

    Again, so their solution is to spend their own taxpayer money on flying in politicians who have nothing to do with them to, um, what again? Better they saved their money, or at least flew in an Austrian.

    And so you’re on a salary holiday then?

    As for the Keynesian resurgence, I’d not actually noticed he’d ever been away, unfortunately, because that’s why the world economy is in chaos. Price stability: got to love it.

    I’ve corrected your spelling, because I know you’re in a hurry. Have you tried the whale sushi yet? 😉

  44. Tracey says:

    I guess I labour (no pun intended) under the apprehension that with govt intervention the weakest are cared for, and under laissez faire we rely on the goodness of people to look after the week. It’s hard to know whether that goodness will increase in a non government interference system. Iguess one question to ask to resolve this is ; what are your (plural) ethics? Why would you be more inclined to act out of fairness (whatever that is) when you dont have to, (that is there is no govt sanction if you dont – let’s call taxation a sanction)than when you do have to.

    rightly or wrongly I read once that for earners in higher brackets to become philanthropic required a drop in top tax to approx 25%…

  45. Mark Hubbard says:

    Realistically what would cost in time and money to become the exact system you advocate.

    Nothing. It’s a complete saving. Why would it cost anything? It’s the current system that exists on spending tax payer money and racking up debt that your children and grandchildren are going to have to go into serfdom to pay.

  46. Tracey says:

    Then I am more stupid than I thought. We wake up tomorrow with your system, no cost, no time lag, no fallout…

  47. Mark Hubbard says:

    and under laissez faire we rely on the goodness of people to look after the week.

    The coldest, most compassionless entity you’ll ever have to deal with is the Nanny State, whose modus operandi, incidentally, over the last nine years, has been to destroy the family and bonds of natural love and affection through welfare.

  48. Mark Hubbard says:

    no time lag, no fallout

    No. It took what, five or six generations to create this cruel mess, it would be unrealistic to think it could be fixed within another two. Though this is me speaking, not necessarily Libz policy. But from day 1 we’d be stripping ugly old Nanny State down to essentials, that is, to protect the individual from the non-initiation of force, and handing peoples lives back to them, and some quite big cheques it would have to be imagined.

  49. Huginn says:

    @ Greg Davis

    “isn’t it interesting how mention of a Keynesian resurgence stimulates a debate among the Austrian School devotees out there.”

    Like a monkey poking a stick in a hive of intelligent bees.

    ha ha ha

    An Austrian economist can legitimately say that Don Brash and Rodney Hide (neo-classical) have more in common with Karl Marx (classical) than Carl Menger.

    And when neo-classicists claim a genealogical lineage from Hayek, an Austrian economist can observe that that man they say is their Daddy cannot possibly be their Daddy because if his blood ran in their veins, they wouldn’t be so stupid.


  50. Mark Hubbard says:

    Laissez faire fails here because the decisions that we make as individuals are different and sub-optimal to the decisions that we make collectively and because these activities resist monetisation; supply and demand for these can’t be calibrated in dollar amount along a continuous gradient. These are information gaps where we have to find other ways to decide who gets what, and when.

    You couldn’t be further from the truth here. But I’ve covered this, read by quotations above on the working on free markets and pricing, and the disasters of central planners. Again:

    Command economies do not fail because the central planning agencies lack the powers required to bring about the best outcomes. They fail because, without market prices, nobody has the information required to adapt the allocation of scarce resources to the demand for them.

    Quest Columnist: Strip the Bank of England of its Powers – Jamie Whyte

    And read the Vernon Smith quotation right up the top somewhere.

    As for ‘who gets what and when': what are you talking about? What gives you the right to redistribute what I earn according to your whim? You have no right, despite you say this with the pomposity of a typical central planner. Leave me with my effort, leave me alone altogether, otherwise you’ve taken my freedom.