Traffic Part II: Congestion Charges in London

Nearly 1 million people enter Central London between 7:00am and 10:00am. 85% of these trips are made by public transport and 12% by private transport (pre-congestion charge). Transport for London states that the goals in implementation of the congestion charge were four-fold. These objectives were: (i) to reduce congestion in Central London; (ii) to make improvements to bus services; (iii) to improve journey time consistency; (iv) to distribute goods and services more efficiently. It also served to decrease pollution, accidents, increase passengers per car, and increase both bicycle and pedestrian safety.

London’s program works as follows. Motorists driving in Central London between 7:00am and 6:30pm are required to pay £10. Exceptions are granted to certain groups including motorcycles, taxis, disabled vehicles, alternative fuel vehicles, emergency vehicles and buses. In addition, local residents receive a 90% discount. Enforcement is a major concern to policy-makers. Video cameras around the city record license plate numbers and match it with the list of paid vehicles. Fines levied range from £40-$120 if not paid.

Costs and Inefficiencies

The two most standard criticisms of congestion pricing schemes are well examined by Evans (1992). The first is that congestion pricing may redistribute welfare from road users to the rest of the community. Additionally the benefit from congestion pricing may not be Kaldor-Hicks efficient in that the net benefit may not be enough to compensate those harmed by the policy. Evans concedes that should some portion of the revenue raised by the charges be used to improve road infrastructure, that a net welfare gain could (and likely would) result. The second criticism is that the implementation of congestion pricing would set up “perverse incentives for governments.” Evans argues that because governments are monopoly suppliers of roads, congestion pricing allows the possibility of monopoly exploitation. This problem could be eliminated by transferring a lump-sum payment, a function of previous revenue raised by the charge, to all registered drivers in and around the congested area.

There are several areas in which the London congestion pricing scheme can be considered inefficient. First, the fee is levied irrespective of how many miles the vehicle drives in Central London. Because a driver pays a lump-sum upfront, the marginal cost of driving within the concerned area is equal to what it would be without a congestion charge once inside the congestion zone. An addition problem is the lack of flexibility in terms of both location and time. It would be more efficient to vary the charged amount based on the time and location of the vehicle. As the goal is to reduce inefficient driving, it would be desirable to target trouble areas and times more effectively.

The high overhead costs of the system were criticized heavily before IBM took over administration in late 2009. The government had originally chosen the London based Capita Group to administer the system despite Capita’s inferiority in comparison with international companies. A comparison between Capita Group and a similar system administered in Stockholm shows Capita to be more expensive and to have a higher failure rate than their Scandinavian counterparts. Some studies suggest that almost half of the revenue gained by the program were spent on Transportation for London costs and payment to Capita Group. The accuracy of the Capita system was regularly questioned initially but failure rates showed a clear decline.

A 2005 Guardian article noted that foreign registered vehicles incurred 65,534 penalty charges from 2003 to 2005. However, due to a combination of driver ignorance and cross-border enforcement problems, only 1,993 of the 65,534 culprits paid (roughly 3%). This means that Transport for London is owed £9.5 million for those two years alone. This problem identifies both equality and efficiency issues with the system. In order to be most effective, the system must be able to collect debts from foreign cars or the congestion charge will not be applicable to them. Additionally, it is undesirable to have one segment of the population that is not responsible for the charge as this places an undue burden on the remainder of the population.

A 2007 econometric analysis found evidence to suggest that the congestion charge harmed retail businesses in London. The estimation shows with clear statistical significance that the congestion charge was responsible for decreases in retail sales (defined as stores selling clothing and furniture) even after controlling for seasonality, tourism, sales, several consumer price indices, and underground closures (notably the central line).  The developed model suggests the congestion charge caused a 5.5% decrease from expected retail sales. Frustratingly, the model does not include gas prices as an explanatory variable. This omission should clearly call the results into question. Exclusion of gas prices may result in an upward bias of the estimation of the influence of the congestion charge on the decision to drive. Additionally, broadening the dataset to include businesses outside of the paper’s narrow definition may mitigate the negative effects shown by the model. For example, London delivery businesses reported delivery times dropped by 50%. Only 9% of Central London Business owners reported a negative impact from the charge. Further, when the charge was only £5, a savings of 17 minutes per employee earning average London wages would break even before other benefits are considered.

Traffic – Part I

The desire to reduce heavy automobile congestion in and around urban areas is obvious to both economists and the public. From the perspective of the laymen, time spent in traffic is uncomfortable and wasteful. The economist notes the enormous externalities and inefficiencies caused by congestion. For decades economists have advocated the implementation of a pricing system capable of increasing efficiency. In the 2000s several major municipalities implemented a congestion pricing system. Over the next few days, Its The Stupid Economy will review the major literature on traffic and congestion charging. We will first examine the arguments against a congestion charging system and in the following days will examine the arguments in favor.

At the most basic level, the rationale for variable pricing designed to create efficiency can be traced to the general form of a problem identified by Thomas Malthus. Malthus noted that a population growth rate outpacing that of a necessary resource would result in general misery. In the case of congestion, increases in demand for road use vastly outpace growth in capacity. In many urban areas road capacity is effectively fixed due simply to space constraints. The result is inefficient consumption of road space, known to the public simply as “traffic.” Further, road use is heavily dependent upon day and time; use during “rush hour” periods is excessive while other times have major capacity surpluses. This rush hour problem has led to massive inefficiency. In 2009, Americans spent 4.8 billion hours in standstill or near standstill traffic, wasting 3.9 billion gallons of fuel, and costing an estimated $115 billion dollars. Given this massive inefficiency, it is reasonable to assume that a more efficient outcome is possible.

Chinese Counterfeiters take the Next Step

China has long been famous for counterfeit merchandise. Its output of knock-off electronics, bags, watches and clothes is unparalleled. In general, knock-offs are sold for far cheaper than the genuine product. Partially this is the result of the location of the sale. It doesn’t seem likely that a man selling Harry Potter DVDs on a street corner is legitimate. To solve this problem and increase their profits, counterfeiters have recently begun exploring an intriguing strategy: counterfeit the whole store. A fake Apple store has been discovered by an American abroad in China.

It’s an Apple store!

Or is it?

RP and I went inside and poked around. They looked like Apple products. It looked like an Apple store. It had the classic Apple store winding staircase and weird upstairs sitting area. The employees were even wearing those blue t-shirts with the chunky Apple name tags around their necks.

…we struck up some conversation with these salespeople who, hand to God, all genuinely think they work for Apple. I tried to imagine the training that they went to when they were hired, in which they were pitched some big speech about how they were working for this innovative, global company – when really they’re just filling the pockets of some shyster living in a prefab mansion outside the city by standing around a fake store disinterestedly selling what may or may not be actual Apple products that fell off the back of a truck somewhere.

Read the rest of the story here.

Keynesian Consumption Revisited

It is an unfortunate fact that an instance of simplicity within an otherwise complicated subject matter often results in an overly distilled summary with unwarranted focus on the simplest element. This regrettable fact is worsened when the element of simplicity is an explicitly given equation surrounded by dense text. Such is the case with Keynes’s discussion of consumption in his General Theory. Much of what is dubbed the “Keynesian Consumption Function” appears to be a perverse oversimplification of Keynes’s actual thoughts on consumption. As commonly conceived, Keynesian consumption takes the form:

C=C₀ + C_y (Y-t)

Where C is consumption, C₀ is the consumption rate if disposable income (Y-t) is equal to 0, and C_y is the marginal propensity to consume less than 1 but greater than 0.

This function implies that changes in disposable income are reflected immediately by changes in consumption if the marginal propensity to consume remains constant. Predictions generated by the function appear to be too extreme. There is no difference between changes in consumption resulting from temporary changes in income and permanent changes. First, the function seemingly ignores the role of consumer preferences. Second, it suggests the consumer has no ability to form expectations about future income or at least does not consider such expectations. Third, it does not allow for consumer borrowing and saving.

Given the extreme predictions suggested by this rudimentary consumption model, it is no wonder modern Macroeconomic textbooks mark its dismissal with nothing except “such predictions seem too extreme.” So can we dispense with the Keynesian notion of consumption? Not yet. The model is however, far from an accurate representation of Keynes’s ideas on consumption. Indeed, the above equation ignores numerous assumptions and qualifications that make predictions generated by Keynes’s consumption function much more reasonable.

In the history of thought, it is often the case that the theorist ousting or questioning the dominant theory is the one who is in fact defining the ousted theory as history and textbooks will remember it. The ousting of Keynes’s consumption theory is no different.

The problem with this is that many issues Keynes raises, especially relating to the factors of the propensity to consume are ignored. Friedman notes “Keynes took it for granted that current consumption expenditure is a highly dependable and stable function of current income.” Friedman has overemphasized Keynes’s belief in the stability of the relationship between income and consumption. It is important to note that Keynes fully acknowledged influences on consumption other than present income. These other influences included changes in windfall gains, the rate of time-discounting as represented by the interest rate, fiscal policy, and expected future income (though he did not believe expectations to be a major concern).

Remarkably when consideration is given to what Keynes actually wrote rather than what is misattributed to him, Keynesian consumption begins to look an awful lot like Friedman’s Permanent Income Hypothesis. One place where Friedman is in unacknowledged agreement with Keynes is the relative unimportance of temporary changes in income in determining consumption. Directly contradicting the simplified version of “his” consumption function, Keynes highlights that short-term changes in income do not result in expenditure changes or if adjustment does occur, it will occur imperfectly. In this sense, he disagrees less with Friedman’s interpretation of consumption than with the caricaturized view often alleged to be his own.

Further Keynes gave several reasons an individual would choose to refrain from consumption. These include an individual’s desire to (i) amass reserve contingency savings, (ii) provide for anticipated future consumption based on the household’s place in the life-cycle, (iii) to enjoy a larger real consumption at a later date, (iv) to provide for gradually increasing consumption expenditures, (v) to enjoy the independence and power wealth provides, (vi) to carry out business endeavors, (vii) to bequeath a fortune, or (viii) to satisfy an inclination towards miserliness. Inclusion of these features would act to significantly dampen fluctuations in consumption expenditures.

My aim here is neither to dismiss the importance of the Permanent Income Hypothesis nor to disparage Milton Friedman. I am also not suggesting that economics revert back to Keynesian consumption. The point is simply point out that criticism of Keynes’s views on consumption should be based on what he wrote.

Flaws in Libertarian Thought: Part II

To followers of Locke, we enter into a social contract with our government to escape the state of nature. We agree to submit to political authority under will of the majority. If the government breaks the contract by violating our fundamental rights or violating our trust we have the right to replace it.

There are two forms of consent: explicit and tacit.

Explicit consent is basically a declaration that you accept the beliefs or the legitimacy of the government. For example, in the citizenship ceremony in the USA, you swear an Oath. That is explicit consent.

Tacit consent is basically living under the government. By living under the government, obeying its laws, enjoying any benefits of the society (whether protection of property, safety etc.) indicates your consent to the legitimacy of the government. This includes people who were born in the USA or immigrants who are not officially part of the community.

But is this all BS? There is another school of thought originating in David Hume that criticizes this whole idea of a contract.

To Hume and his later utilitarian offspring, a right act maximizes the well-being for the greatest number of people (there are many variations, but this is the most basic). A state does not gain legitimacy because of social contract, it gains legitimacy because of its use–it aggregates well-being of all members.

So here’s how Hume criticizes Locke and the contract theories.

Empirical Problems of Contract theories:

1. People don’t themselves understand their political obligation to be contractual based. They obey out of CUSTOM AND HABIT.
2. The present generation has not contracted.
   1. David Hume says, “But the contract, on which government is founded, is said to be the original contract; and consequently may be supposed too old to fall under the knowledge of the present generation. If the agreement, by which savage men first associated and conjoined their force, be here meant, this is acknowledged to be real,; but being so ancient, and being obliterated by a thousand changes of government and princes, it cannot now be supposed to retain any authority.
3. Election of rulers is elections done by a small number of people.
   1. Think about it. When the US constitution was drafted, how many people were even represented? Definitely not all the slaves or people without property. Or think about now, barely anyone votes, and not everyone who wants to vote can vote.

Now a person who believes in tacit consent would use it to answer Hume’s 2^nd criticism. Hume responds with two more points.

1. People do not understand it as tacit consent. They think there’s NO OTHER CHOICE than to live under the rule of a government.
2. And if people do understand that it is a choice, they really cannot leave the society.
   1. Hume says, “Can we seriously say, that a poor peasant or artisan has a free choice to leave his country, when he knows no foreign language or manners, and lives from day to day, by the small wages which he acquires?
   2. Hume raises the oft-cited example of a ship that is set out to sea. That is the truth of tacit consent. You can ditch this ship, but you are jumping into the ocean.

Normative Problems:

1. Contract theories assume that people have more knowledge and ability than they actually have.
   1. Hume says, “Reason, history, and experience shew us, that all political societies have had an origin much less accurate and regular; and were one to choose a period of time, when the people’s consent was the least regarded in public transactions, it would be precisely on the establishment of a new government.”
2. Many original contracts are invalid, and are given legitimacy by contract theories
   1. Hume says, “When an artful and bold man is placed at the head of an army or faction, it is often easy for him, by employing, sometimes violence, sometimes false pretences, to establish his dominion over a people a hundred times more numerous than his partisans. He allows no such open communication, that his enemies can know, with certainty, their number or force. He gives them no leisure to assemble together in a body to oppose him. Even all those, who are the instruments of his usurpation, may wish his fall; but their ignorance of each other’s intentions keeps them in awe, and is the sole cause of his security. By such arts as these, many governments have been established; and this is tall the original contract, which they have to boast of.

Utility:

We keep our promises because it promotes public utility. The real basis of legitimacy of government or the state is the utility.

Why are Hume’s points important? Besides the fact that he inspired future thinkers like Bentham and Mill who also rejected the idea of a social contract, he represents the crux of the flaw in libertarian philosophy. Libertarian philosophy likes to cite Utilitarians like Mill and Contractarians like Locke, often together. Although they might all agree that absolute government is bad and a limited government that protects negative rights is the best, utilitarianism and contractarianism cannot be used together because they clash fundamentally. This is the flaw that I really want Libertarians to work out.

The Future of the IMF

Even before the news about the arrest of IMF chief Dominique Strauss-Kahn, there has been mounting concern about the future of the institution. Consequently, we turn to one of my favorite historical arguments relating to the IMF’s role in development, the highly contested Structural Adjustment Programs (SAPs) and it’s effect on the Mozambique cashew nut industry in 2000.

The debate was in the high profile lime light through the NY Times and Washington Post’s articles in 2000. The NY Times ran a series of opinion segments airing the debate between Paul Krugman and Center for Economic and Policy Research’s former senior policy analyst Robert Naiman. Naiman ran an article claiming the detriments of the SAP policies of the IMF and it’s coercive restrictions on third world development, focusing on the cashew industry as the example. The Washignton Post article that adds an emotional connection the American public with an interview with a former cashew nut factory worker supported this opinion. Krugman refutes the “anti-globalist” view in his Op-Ed piece, focusing on the sound motivations of the IMF to protect the best interests of the ¼ of the entire nation’s impoverished farmers who were being suppressed by state monopolies and decreasing sale prices.

Who’s right? Is it Naiman, claiming the failure was a motivation for MNC and international companies to capitalize at the African expense, or Krugman’s idea that the failure was the unwillingness to accept the motivations of the IMF and the correct implementation of policy measures to protect farmers, not state monopolies?

The IMF envisioned the entire adjustment program to span from 1993 to 2008, a period of 15 years. The program however, was already being criticized as a failure by 1995, a full 13 years before the projected effects to finalize. To put that in perspective, that is the equivalent of an umpire in baseball calling a pitch a ball 52 feet before it gets to the plate. The determinants for premature views of failure are of great debate. The most convincing comes from the geographical economist’s viewpoint that the lack of infrastructure drove trade to be simply unavailable to the masses. And yet, the argument will persist between the anti-capitalists and the IMF and World Bank supporters. It is as staged and clear-cut as the Republican and Democratic debates over solely ideological issues such as gay marriage and abortion: just as unproductive, but just as loud.

What can be productive from the IMF SAP arguments are the lessons learned about why SAP programs can fail, to weed out the layers of development burdens, and getting closer to the roots For example, farmers in Mozambique rarely saw their profits because of the middleman’s exploitation of the transportation of capital and goods. So maybe now policies can be redirected to creating more of a direct link between farmers and the trade centers. Evidence of rooted problems can be used to elevate any ideological argument, but where they are truly productive is in solving where the limited funds should be directed in an economy needing short-term solutions and long-term growth.

Why do People Believe Conspiracies?

Who believes in conspiracies? And what purpose do they serve? Founder of Skeptics Magazine Michael Shermer answered these questions on a MSNBC segment relating to the Osama Bin Laden pictures. In the interview (posted below) he explains the human instincts of belief and connecting events. He points to the disproportion of cause and result of the event to fume the heightened questioning. How can the death of millions be comforted by the simple operation 10 years later in a raid of a suburban property in Pakistan? The disproportion stems the mind to seek alternative motivations and linkages behind the events, as a means to soothe the heartache from the first direct issue (9/11) or to settle the paranoia of living under blankets of superiority. His analysis on “why people believe ridiculous things” has followed the paranoia and formation of these conspiracies in such a small amount of time.

Now, we wonder so what? What effect do these questionings have on society, and what is the purpose? More abstractly, how productive are these towards the greater good of society? To answer these we look to the individual. The individual will satisfy personal struggles with events by formulating alterative reasoning. Groups will form as a safe haven to voice and solidify these concerns, leading to the popularity. Groups can link up to other conspiracy motives that link between historical events, such as the killing of JFK and Princess Diana. The links through history underlie the global paranoia of dominance and superior threats to the individual control on their own lives. So from a simple human reaction to an event, as Michael Shermer analyses, we can get the defiance of millions to the current world order.

But how productive are these links? And how can the questioning be stopped? Shermer suggests a release of the photos will satisfy many who are on the fence, but with the current availability of the Internet, it is doubtful they will comfort many. As seen with the release of the Obama birth certificate, it did not provide satisfaction for many, but instead another questioning opportunity (Photoshop). So by supplying the photos, will we be comforting or indulging in conspiracies?

People will question the events of others in a desperate need to hold onto control of their own lives when they feel threatened or lead unintentionally. The global questioning that can snowball from an individual’s innate reaction can provide the motivations for many radical anticapitalist movements, potential threats to the wellbeing of many individuals worldwide. Conspiracies are productive in settling individual struggles in a habitual psychological sense. However, when brought to a global scale, they can be detriments to the lives of many.

Formation of Conspiracies

Over the past week, conspiracy theorists have taken the Osama Bin Laden death story by storm. These theories vary in degree of believed conspiratorial motives, ranging from political to illuminati plotting. Here is the list the Guardian had released a list detailing the major theories circulating over the past week, listed below.

• Bin Laden was a US agent, and was killed to stop this becoming public knowledge. “The west has been very pleased with Bin Laden’s operations in recent years,” said Javad Jahangirzadeh, a member of the Iranian security and foreign policy committee. “Now the west was forced to kill him in order to prevent a possible leak of information he had, information more precious than gold.”

Source: Javad Jahangirzadeh

• His body had been frozen for several years, claimed US talkshow host Alex Jones, and was kept on ice by American officials for use as a potential propaganda tool. Jones said he was told by an unnamed White House official in 2002 that Bin Laden was “frozen – literally frozen – and that he would be rolled out in the future at some date”.

Source: The Alex Jones Show

• The US pretended he was killed in Pakistan as a pretext to invade the country. “Bin Laden has been killed somewhere else,” one former military source allegedly told Ausaf, the Urdu daily. “But since the US intends to extend the Afghan war into Pakistan, and accuse Pakistan, and obtain a permit for its military’s entry into the country, it has devised the [assassination] scenario.”

Source: Ausaf

• Al-Qaida‘s number two, Ayman al-Zawahiri, led the US to Bin Laden in order to place the terrorist group under Egyptian cotrol. “Egyptians have wanted to control the organisation since its inception,” an unnamed source allegedly told Saudi newspaper al-Watan, “but found their best chance after Bin Laden became ill in mid-2004″. It was Zawahiri and the leadership group, the source added, who then convinced Bin Laden to move to Abbottabad.

• Bin Laden knew where al-Qaida’s secret nuclear bomb was kept, and was killed to prevent him from leaking its location. Barack Obama, rightwing commentator Glenn Beck argued, wants to keep its whereabouts out of public knowledge.

Source: The Glenn Beck Show

• The royal couple delayed their honeymoon to avoid a clash with the assassination. “Clearly,” Professor Anthony Glees told a British tabloid, “wherever they would be going, they would be outside the ring of steel that the authorities could provide for them in the UK.”

Source: Professor Anthony Glees, University of Buckingham

• Bin Laden died of natural causes in 2001. His list of ailments included: a lung condition, hepatitis C, diabetes, low blood pressure and a wound to the foot

Source: whatreallyhappened.com

• Barack Obama invented Bin Laden’s death to boost his re-election campaign ahead of next year’s election

Source: Fox News presenter Andrew Napolitano, via Media Matters for America

• Bin Laden is alive and being held in a secret location while the US interrogates him about al-Qaida’s nuclear arsenal. “Is it possible that Osama bin Laden has been ghosted out of his compound, and we’re seeing a show at this point?” asked the rightwing commentator Glenn Beck.

Source: The Glenn Beck Show

• Barack Obama timed the announcement so news of Bin Laden’s death would nudge Donald Trump’s Celebrity Apprentice off the air to punish the entrepreneur for his impudent birth certificate questions

Source: Live Science

• The deaths of Bin Laden and Adolf Hitler were both announced on 1 May, suggesting they were sacrificed by the Illuminati to mark the secret order’s second holiest holiday.

Source: Mystery of the Iniquity

Questioning Macro Theory

When I took macroeconomics sophomore year, I never questioned the orthodox macro thinking. The reason I did so well was because I played the dummy and never thought too deeply about what I learned.

My class, on the other hand, was extremely contentious. Fellow students found the macro logic counter-intuitive and so many had trouble even grasping the macro concepts. I would sit in lecture with my friend Toots, and we would just laugh at how many questions the students had.

But behind my façade, I did question. I spent my spare time reading Adam Smith, and Milton Friedman, Joseph Schumpeter, and even the granddaddy of macroeconomics (John Maynard Keynes). Keynesian macroeconomics never ever sold me.

Today, I stumbled around and found this article:

http://mises.org/daily/5216/Six-Fundamental-Errors-of-the-Current-Orthodoxy

Robert Higgs summarizes the Keynesian fallacies very well, and I think this article is a starting point for anyone not happy with Keynesian economics and the neoclassical response.

Criticism #1: Aggregation

Y = C + I + G + (X-M)

Higgs says it best, “This way of compressing diverse, economy-wide transactions into single variables has the effect of suppressing recognition of the complex relationships and differences within each of the aggregates.”

So to a Keynesian, spending 1 Billion dollars on tanks (the G) is the same as spending 1 Billion to fund NIH (the G also).

No wonder Keynesians think WWII got us out of the depression.

And, this aggregation is only of final goods. So of course we don’t look at the computer chip inside the computer (because that’s an intermediate good), we don’t look at services to one another to make the computer, we don’t look at the raw materials used etc. Aggregating everything into an aggregate supply and an aggregate demand neglects what “gets produced, when, where, and how.”

Maybe that’s why the US produces more and more services and has a huge trade imbalance.

Criticism #2: Relative Prices

“In this framework, there is only one price, which is called “the price level” and represents a weighted average of all the money prices at which the economy’s countless actual goods and services are sold.”

So changes in relative prices get averaged out in the aggregate.

Here’s the key:

“So if the economy expands along certain lines, but not along others, and the configuration of relative prices has changed, the vulgar Keynesians know that “aggregate demand” and “aggregate supply” have risen, but they have no idea why or in what manner they have risen.”

So if there is high unemployment in the law profession, just have them all work at Starbucks. As long as the aggregate demand and aggregate supply goes up.

And this point is essential when you look at official unemployment figures. The official unemployment figures do not count part-time workers trying to go full-time, discouraged workers (people like college graduates who have given up finding a job, and are either back in their parent’s house or “taking a gap year”), and workers who are working at jobs that are below their qualification (archeology majors working at Starbucks). If you count all of these people, unemployment is above 20%.

The next three points are very inter-related:

Criticism # 3: The rate of interest

“The vulgar Keynesian does not understand what the rate of interest really is. He fails to comprehend that it is a crucial relative price — namely, the price of goods available now relative to goods available in the future. Remember, he does not think in terms of relative prices at all, so it is entirely natural that he fails to recognize how the rate of interest affects the choice between current consumption and saving — that is, acting so as to make possible more future consumption by not consuming current income. In a free market, a reduction in the rate of interest reflects a desire to shift more consumption from the present to the future.”

Therefore, the Keynesian would say, keep the interest rates artificially low with a central bank. It does not matter what kind of investment it spurs.

Criticism #4: Capital and Its Structure

“In his framework of analysis, it matters not whether firms invest in new telephones or new hydroelectric dams: capital is capital is capital.”

“Because the vulgar Keynesian is blind to these microdistortions and to the need for their correction in the wake of an artificially induced boom, he fails to see any need for the bankruptcies and unemployment that necessarily attend a substantial economic restructuring. He supposes: if only the government stepped in and used its own deficit spending to make up for the reduced private investment and consumption spending, then business would be restored to profitability and workers reemployed without any economic restructuring.”

Criticism #5: Malinvestments and Money Pumping

“With their great, simple faith in the efficacy of government spending as a macroeconomic balance wheel, vulgar Keynesians disregard malinvestment, past and future, and support government spending in excess of the government’s revenues, the difference being covered by borrowing.”

And with these three Keynesian fallacies you can understand why the government inflated bubbles and then bailed out dying industries. Kinda like the housing crisis?

Criticism #6: Regime Uncertainty

“The vulgar Keynesian does not understand that extreme policy activism may work against economic prosperity by creating what I call “regime uncertainty,” a pervasive uncertainty about the very nature of the impending economic order, especially about how the government will treat private-property rights in the future (Higgs 1997). This kind of uncertainty especially discourages investors from putting money into long-term projects. Such investment, which almost disappeared after 1929, did not recover fully until after World War II.”

There is a reason why businesses like gridlock in US Congress. Only then do they have a span of certainty (that the government won’t change existing policy) to make plans of expansion. A business’s worst nightmare is having the taxation and regulations change on them while they are in the midst of an expansion or restructuring.

I hope Richard Higgs covers some of the doubts that I’m sure many of you had when you took intro to macroeconomics. Keep reading and don’t accept the misguided ideas of academia!!

The Price of Knowledge

Businesses today regularly rely on technology to minimize mistakes. It’s hard to argue that in general technology hasn’t been a benefit to businesses. However, recently a price war of absurd proportions reminded us that in the end, poorly designed technology will give poor results and that technology is simply a tool.

UC Berkeley evolutionary biologist Michael Eisen noticed something odd about the price of a seminal work on fly biology entitled The Making of a Fly. Listed on Amazon as roughly $35 used, Michael was surprised when he saw the price of a new copy of the book (which is out of print): $1,730,045.91 (not including the $3.99 cost of shipping).

As it turns out, the 2 sellers were using computerized pricing algorithms to set their respective prices. So by April 18th, the price of Bordeebook’s copy listed at $23,698,655.93. So does the price indicate a spectacular failing of something resembling a modified version of the Turing Test of artificial intelligence?