In his 1963 Presidential Address to the Southern Economic Association, later published as “What Should Economists Do?”, James Buchanan called for “economists to modify their thought processes, to look at the same phenomena through ‘another window,’ to use Nietzsche’s appropriate metaphor. I want them to concentrate on ‘exchange’ rather than on ‘choice’” (1964, p. 217). The notion that economic theory is a “window” is a very appropriate metaphor, particularly when economists come to different conclusions from observing the same phenomenon. Thus, alternative conceptualizations of economic theory serve as different “windows” from which the economists draws different conclusions about the world, particularly how markets work. Just as Buchanan often used this metaphor from Nietzsche, I wish to adopt it here to draw an important distinction between “price theory” and “microeconomics,” which are often conflated. Although the distinction may seem to be one of semantics, in these posts I will explain and illustrate the subtle differences between the two which have important implications about what we “see” when markets operate, and the extent to which we conclude whether markets “work” or “fail.” Just as the same individual will observe different aspects of the same automobile traffic from different windows of a building, we draw different conclusions about a particular market based simply on whether we are looking from the window of “price theory” or “microeconomics.” What is the distinction between the two? As Buchanan suggested above, “price theory” is primarily about the study of how individuals pursue their separate goals through exchange, which in turn create exchange ratios (i.e. market prices) as by-products of their purposive behavior. Such market prices, in turn, guide individuals in their consumption and production decision-making. Human choice is not absent in price theory; rather, it is a necessary subset of price theory, though not sufficient, for understanding the invisible hand processes that generate social order. Nor does price theory imply that markets allocate resources instantaneously according to omniscient human actors. Rather, a price-theoretic approach to economic theory is one in which there is an indirect link between a human agent and the tendency towards equilibrium, one in which market outcomes are not directly reducible to the individuals that constitute a market. That is, prices emerge from the act of exchange between individuals engaging in open-ended choice under a world of uncertainty, but not of human design. However, once emerged, prices then become guides for future action. Thus, whether markets “work” or “fail” does not depend on the behavioral characteristics of individuals, but whether institutions secure and enforce the ability for individuals to exchange (i.e. private property). A “market failure” in this respect is not a failure of markets to “work” but a failure to establish the conditions for a market to exist, unleashing future profit opportunities to establish such conditions. Moreover, it is not enough for prices to reflect full and available information quickly, as suggested by the efficient market hypothesis; real-world market prices are not sufficient statistics to approximate an allocation of resources consistent with equilibrium. Rather, market prices must translate the tacit and dispersed knowledge of millions of individuals into publicly held information correctly (see Boettke 2012, 2018). As the famed value investor, Howard Marks, makes this point, market prices are “efficient” in “the sense of ‘speedy, quick to incorporate information,’ not ‘right’.” (2011, p. 8).  Thus, although not immediately obvious by its epithet, price theory crucially depends on the study of non-price competition. As Harold Demsetz argues, “[m]arket processes work neither instantaneously nor with full knowledge, so perfect competition hardly exhausts the many ways in which self-interest is pursued. Competing through product quality, contractual arrangements, and institutional innovation, and through tactical quickness and alertness, all become meaningful” (1982, p. 18). Price theory, properly understood, is a window from which to understand how individuals are able to learn how to cooperate with one another without command under a division of labor. Such “cooperation”, counterintuitively, is manifested in a peaceful and cooperative form of cooperation: productive specialization and exchange. Tomorrow, I will consider how this theoretical “window” compares to microeconomics.   Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and a Program Director of Academic and Student Programs at the Mercatus Center at George Mason University. (0 COMMENTS)

I am no movie critic but I was, for once, greatly pleased to see “Everything, Everywhere, All At Once” showered by the Academy awards. The movie didn’t have much of a circulation in Italy and stayed in theatres very briefly, though I suppose it’ll make a comeback after the Oscars. I watched it after reading two highly positive (and entertaining reviews), Jack Butler’s on National Review and Kurt Loder’s on Reason. Writes Loder: This is a movie without an ounce of cynicism in its narrative bones. (On the other hand, those in search of timeless human truths might wish there were more here than “You have to be kind” and “We can do whatever we want, nothing matters.”) And Butler: All of this is undergirded by a genuine and heartfelt emotional core. The film explores not merely the comedic or the kinetic implications of multiple realities but also the philosophical ones. The consequences of paths not taken, the contingencies that have brought us to the moments we inhabit, how to make sense of a world that can seem to lack meaning — through the lens of the multiverse, Everything Everywhere All at Once shines a light on our own reality, raising questions about our own lives and humbly attempting to supply its own answers. Are they complete? Is the film’s moral vision totally satisfying? Maybe not, but that’s an unfair standard. The production budget was 25 million, and the movie grossed 100 million at the box-office. It is a very small production for a sci-fi/action movie. “Wakanda Forever” cost ten times as much (and grossed over 800 million). I found “Everything, Everywhere, All At Once” uplifting for two reasons. First, I watched “Doctor Strange in the Multiverse of Madness” a little before and thought nothing particularly interesting could come out of the multiverse idea, which turned out to be on a dead track, at least in the hands of Marvel’s screenwriters. Well, “Everything, Everywhere, All At Once” proved me wrong. But, second and more importantly, because I sometimes have the impression that our creativity is somehow drained: that the best Hollywood can do is scraping the barrel of Marvel’s characters, created in the 1960s or 1970s, to come up with some new movie. While there is no shortage of entertainment supplies (movies, TV series, et cetera), there is little which is new, that really goes beyond adding little touches of technology or refurbishing old stories in more contemporary fashion. I liked “Everything, Everywhere, All At Once” less than Butler and Loder (I’ve a few ounces of cynicism in my blood) but I thought it was something that shows great creative powers. I don’t want to sing the praises of David vs Goliath in movie making. Small is not always good. But to keep the flame of creativity on I suspect we need, in movie making too, brave challengers, that tend to be outsiders and hence inevitably smaller. This is a good example. (0 COMMENTS)

  Michele Gelfand, Professor of Psychology at the University of Maryland, focuses much of her time on cross-cultural psychology. She is interested in the differences among cultures and norms, and how they develop through time. In this episode, she and EconTalk host Russ Roberts engage in a timely discussion, perfect for our current situation in America: a rift between the two extremes of loose and tight cultures. Careful study done by Gelfand has shown that there exists a good balance between the two, but determining the balance is the challenge. Gelfand views this discussion in the public sphere as vital to keeping the American project going. Professor Gelfand sits down with Roberts to discuss her thoughts and her new book Rule Makers, Rule Breakers.   Questions for further thought and conversation: 1- Gelfand notes that loose cultures are really good at thinking and drafting ideas, but not necessarily at implementing them. To what extent can this idea be compared to Thomas Sowell’s concept of constrained versus unconstrained visions?   2- What types of businesses are more likely to have a tight culture? A loose culture? How does Professor Gelfand measure tightness and looseness?   3- According to Professor Gelfand, how does threat or danger act as a predictor of tightness in culture, and for what reasons?   4- Professor Gelfand argues that the type of culture is often tied into how expertise is viewed. With respect to how expertise is viewed, how do tight and loose cultures compare?   5- Russ Roberts challenges Professor Gelfand for not distinguishing between government-imposed tightness and self-imposed tightness. How does Professor Gelfand defend her position? (0 COMMENTS)

Back in the late 1970s, economists began exploring the “time inconsistency problem” in monetary policy. In the long run, we are better off if central bankers maintain a low inflation rate (or NGDP growth rate.) But in the short run, the economy may do better with a more expansionary policy. The negative consequences of that expansionary policy will be mostly borne by future policymakers.It turns out that the time inconsistency problem in central banking is somewhat overrated. Central banks often succeed in keeping inflation low for long periods of time (but not recently.)In fact, the time inconsistency problem is far worse for banking regulation. Political and economic managers like President Biden, Janet Yellen, and Jay Powell would very strongly prefer that a financial crisis not occur on their watch.There’s a common but understandable misconception that there is a sort of tradeoff involving financial stability and moral hazard. People assume that we can have financial stability with moral hazard, or we can have financial instability with a regime free of moral hazard. I cannot emphasize enough that this is a false assumption! Policies that lead to moral hazard (government deposit insurance, TBTF, bailouts, etc.), cause more financial instability in the long run.  There’s no trade-off to exploit here.  We don’t buy a more stable financial system with bailouts.  We encourage more risk taking.  So then why does the federal government keep bailing out financial actors that made bad decisions? Here’s where the time inconsistency problem comes into play.  While bailouts make for a more unstable financial system by encouraging ever-greater risk taking, in the short run they do reduce financial instability.  And it seems as though President Biden, Janet Yellen, Jay Powell and the other key policymakers favor steps that would make for less financial instability over the next 5 years, even if they would make for more financial instability over the next 50 years. PS.  While the media has focused on SVB, the much bigger outrage is the Fed’s new facility to bail out all banks that made bad decisions.  You bought risky long-term bonds with short-term deposits?  Don’t worry; the Fed’s got your back: This is one of the darkest days in US financial history—a breathtaking expansion of moral hazard.  Younger readers should brace themselves for much worse in the decades ahead.  We are sowing the seeds of future financial crises. PS.  I highly recommend reading Peter Conti-Brown’s tweets on this affair.  Here’s one example: (0 COMMENTS)

On February 9, the Wall Street Journal reported a “victory” for intellectual Property (IP) rights, with the subhead: “Case Seen as test of how a company can exercise its IP rights against virtual assets.” Okay, we kind of get that: This is about assets that exist in cyberspace. The French luxury brand, Hermès International SA, had gone to federal court in Manhattan to sue an “entrepreneur and artist,” Mason Rothschild, and won modest damages ($133,000)—but “the legal principle was large.” The court upheld Hermès right to the “Birkin” trademark in cyberspace. The story quoted Felicia Boyd, an attorney with Norton Rose Fulbright LLP, as saying that brands like Hermès had sought clarity on the their legal rights “as virtual reality expands.” In this case?  Their legal rights regarding non-fungible tokens (NFT) that can be “transferred to digital worlds in the metaverse.” The concept of IP has been repeatedly expanded and redefined. Readers once read stories about “property rights” in the airwaves, including rights to specific frequencies. David Henderson writes in “How the Electronic Spectrum Became Politicized: We learn how Hoover’s decision [not to enforce property rights to the airwaves] started a path leading to government control that is still with us today. [Thomas Winslow] Hazlett shows that the FCC has, for over 80 years, set itself up as a central planner, creating the usual problems that central planning creates. The planners are in the dark about the best uses of the electromagnetic spectrum, but that hasn’t stopped them from planning. Hazlett shows how FCC regulation slowed FM radio, cable television, and cellular phones by decades, destroying many hundreds of billions of dollars of value. And, as a bonus, FCC regulation reduced free speech on radio and TV, something that still exists today. The same confusion could engulf cyberspace. That is why the decision in favor of Hermès may qualify as “landmark,” the first trial ever of the NFT/intellectual property nexus. So, what are nonfungible assets (NFTs)? On the blockchain—a  online distributed ledger with the same version on the computer of every participant so all transactions and exchanges are known to very participant—“tokens” have been currency. The prime example is Bitcoin, but there are legion others. These tokens, created by “mining” under a strictly defined set of rules, are used to pay for goods, settle contracts, pay debts, and can be exchanged for other tokens or national currencies at a rate reset continuously on exchanges like Coinbase. There is a huge market for these cryptocurrencies, establishing their value at any given moment. An innovation introduced to the blockchain has been non-fungible tokens (NFTs). As just explained, blockchain tokens like Bitcoin are fungible—that is, exchangeable at a known rate for other tokens or for national currencies. NFTs are not fungible; they are unique. In some cases, they represent ownership of “things” and the blockchain makes it possible to give each a unique, unduplicatable identifier. They can be a digital “chit” for a piece of real estate or a share in a company or collectibles. The advantage is that this property can be exchanged without a broker, or a commission, online. NTFs also can be valuable and collectible in themselves. An artist creates a certain digital image, an “artwork,” in the form of an NTF. Each instance of the image is a unique token, a digitally defined concrete that no one can duplicate. Even if there are thousands that look the same. What the artist sued  by Hermès created is called a “MetaBerkin.” NTFs began in a small way in 2014 with a design tokenized by Kevin McKoy on a blockchain. Every blockchain and every token is created to conform with a standard. The most popular and powerful standard is Ethereum, which specifies all rules and requirements of a blockchain, including, for example, transfer of ownership and confirmation of transactions. With this foundation, by 2021, a group of NFTs by a digital artist, Beeple, sold for more than $69 million—at that time, the most expensive digital art ever sold. The artwork sold was a collage of Beeple’s own work. Subsequently, tokens of the work of photographers, sports celebrity art, trading cards, ownership in virtual worlds (want to own an avatar?), art, other collectibles, domain names, and music all were tokenized—made into unique property, registered, and verified on a blockchain ledger. NFTs became a hot business. Hermès sued Mason Rothchild for using the image of the Hermès Birkin handbag, released in 1986 and today a symbol of luxury with a price tag beginning at $12,000 but in some case as high as $200,000. It is an icon of luxury spending. Mr. Rothchild transferred an identifiable but cartoonish version of the Berkin image to an NFT. To own this NFT meant that you owned one unique image of a Birkin handbag called the MetaBerkin. Rothchild launched a frenzied marketing campaign, raised financial backing, and sold some 100 hundred MetaBirkins. The first few sold for about $500, but their value soared, and they began to sell for the same price as the real Birkin handbags. (It is not within the scope of this article to speculate on the motives of buyers of these NFT artworks.) Hermès argued in court that Mr. Rothchild was profiting unlawfully from the brand-recognition of Birkin—in effect, selling the company’s trademarked product in the virtual marketplace. And undercutting the company’s potential market if it did enter the virtual marketplace. Bloomberg reports that Hermès filed suit when a survey “found a net confusion rate of 18.7 percent among potential NFT buyers.” Mr. Rothchild and his attorneys disputed the accuracy of the survey but argued, above all, that Mr. Rothchild is an artist creating work protected by the First Amendment to the U.S. Constitution. His work is protected as free expression, they claimed, making a socially significant statement about “conspicuous consumption.” During the trial, Mr. Rothschild’s attorneys argued that the brand’s trademark rights didn’t apply to his series of MetaBirkins just as trademark rights did not apply to the artworks of Andy Warhol, who depicted consumer products. Commenting on the jury’s decision, Rothchild’s attorney, Rhett Millsaps, lamented: “Great day for big brands. Terrible day for artists and the First Amendment.” He went on to say that big Hermès is picking on individual artists. Mr. Rothschild called the jury’s decision the result of a broken justice system, vowing: “This is far from over.” In fact, however, companies such as Nike and Miramax LLC are doing or planning the same thing as Mr. Rothchild: to create NFTs of their products to market just as the MetaBirkin “art” is marketed. Except they view it as marketing a different version of their trademarked product, not creating art. Hermès told the jury that it does not yet sell NFTs but has been developing plans to do so and MetaBirkins harmed its ability to break into the market. If Mr. Rothchild had won, said one IP attorney, Maurico Uribe, with the firm of Knobbe Martens, there would have been significant disruptions in IP law. In other words, it would have been open season for “artists” using brand images and company reputations to sell high-priced digital “knockoffs” of their products online. Did Mr. Rothchild incorporate the Hermès Birkin image into his “digital art” to make a point about conspicuous consumption? And only incidentally because of the huge bucks involved in selling “virtual” ownership of a Birkin bag? Hermes attorneys cited emails Mr. Rothchild sent to potential backer saying “We’re sitting on a potential goldmine.” The blockchain can create “virtual assets” but if their market value depends on the market value of brands created and promoted by companies in the real world, then the value of intellectual property created by Hermès or any other company is being stolen. The issue at trial became the “blurred line” between the right to artistic expression under the First Amendment and property rights. The jury decided that the issue was property. To turn to philosophy for a moment, “artistic or intellectual rights” do not trump property rights. That is a false premise based on the mind-body dichotomy. The complexity, and the blurred lines, arose because the alleged artistic creation was in cyberspace, and sold on a blockchain. The did not seem to baffle the jury, however, which decided that the monetary value of what the artist sold had been created by Hermès. The decision seems an initial promising victory for intellectual property rights in a new era of complexity introduced by new technology. But either juries will have to draw new “bright lines” for intellectual property in virtual reality or Congress will barge in as always. It is a fond hope that Congress will take the approach of clarifying the application of property rights instead of creating a new field of government regulation so that bureaucrats can call the shots. Walter Donway is an author and writer with more than a dozen books available on Amazon and an editor of the e-zine Savvy Street. He was program officer or director at two leading New York City foundations in the healthcare field: The Commonwealth Fund and the Dana Foundation. He has published almost two dozen articles in the Blockchain Healthcare Review. (0 COMMENTS)

Tolkien read it as a tale about mortality. The poet David Whyte said it was a metaphor for the psychological demons deep in our minds. And that, insists the cartoonist and writer Zach Weinersmith, is precisely Beowulf’s appeal: Its richness opens the door to endless interpretation. Listen as the author of Bea Wolf, a graphic […] The post Zach Weinersmith on Beowulf and Bea Wolf appeared first on Econlib.

In 2020, the Fed promised to maintain an average inflation rate of 2%. They abandoned that promise as soon as it was convenient to do so.After the 2008 banking crisis, the government promised to refrain from bailing out small and mid-sized banks and instead allow FDIC to handle the situation. According to Bloomberg, that promise is also being reneged on: US authorities raced on Sunday to stem jitters about the health of the nation’s financial system, pledging to fully protect all depositors’ money following the collapse of Silicon Valley Bank while also giving any banks squeezed for cash easier terms on short-term loans. . . . The Fed in a separate statement said it’s creating a new “Bank Term Funding Program” that offers loans to banks under easier terms than are typically provided by the central bank.Fed officials said on a briefing call that the facility will be big enough to protect uninsured deposits in the wider US banking system. This is even worse than only bailing out SVB.  It means that other banks will get similar protection.  It is tempting to think that bailouts solve the problem, but in fact they just make it worse.  The underlying problem is moral hazard, and each bailout makes people behave even more recklessly going forward. One common misconception is that moral hazard is not a problem because bank shareholders at SVB will lose a lot of money.  That misses the point.  Moral hazard doesn’t cause banks to want to fail, but it does tilt the optimal bank strategy toward a socially excessive amount of risk taking.  Obviously most banks don’t fail even under our dysfunctional system, but the problem is getting steadily worse despite an endless series of regulatory fixes that don’t address the root cause of the problem.  When regulators plug one gap, banks find an alternative method of loading up on risk. Another misconception is that we cannot reduce moral hazard because big depositors don’t pay attention to bank risk.  Of course they don’t.  Why should they?  But what if they feared losing their money? The only solution is to reduce moral hazard.  Instead, we are moving in exactly the opposite direction—adding to moral hazard.  Financial crises will get ever more frequent in the decades ahead. PS. This made me roll my eyes: SVB depositors “will have access to all of their money starting Monday, March 13,” the government said in a statement, adding that taxpayers won’t be responsible for any losses associated with SVB’s resolution.  No cost to taxpayers?  Let me guess—the Treasury has a magic wand. (0 COMMENTS)

There is a rational, self-interested reason to choose a strategy, and establish a reputation, of non-lying. This idea been recently illustrated by the condemnation of Alex Murdaugh for the murder of his wife and son, and by Sergei Lavrov, the foreign minister of the Russian government during a conference in India. The theory is that if one follows a strategy of non-lying and succeeds establishing his reputation for telling the truth, he is more likely to be believed in the future. And to be believed and trusted is useful in any social relation. I have no special insight about the trial and condemnation of Alex Murdaugh, scion of a family of prosecutors and himself a former part-time prosecutor in South Carolina. And I have no reason to question the jury’s verdict. My point is that the jury had reasons to doubt Murdaugh’s testimony in his own defense if only because he repeatedly admitted that he had lied in several other occasions (see “Alex Murdaugh’s Trial Lasted Six Weeks. Two Days Mattered Most,” Wall Street Journal, March 3, 2022): The jurors heard Mr. Murdaugh, turned toward them and in tears, say that he had lied to dozens of people, hundreds of times, but he would not lie to them about the brutal killing of Maggie and Paul, who were both fatally shot at close range. He told jurors that he lied to law enforcement about his whereabouts the night of the shooting. … One by one, [the local prosecutor] ticked off a series of dozens of names, asking Mr. Murdaugh if he had lied to that person’s face. With rare exception, Mr. Murdaugh said he had. He admitted to stealing money from friends and clients, including his close friend Barrett Boulware, who was nearly destitute and on his deathbed at the time, and Hakeem Pinckney, a deaf teenager who had been rendered a quadriplegic in a car crash. As for Mr. Lavrov, as he was answering questions at a conference in Delhi after a G20 meeting, he mentioned that the war in Ukraine had been “launched against us.” The audience reacted with a short burst of laughter, which, for an instant, destabilized even a habitual liar like Lavrov. He is more used to be called “Excellency.” It is worth watching a video of the event—for example the one on the website of the BBC, or one of the many others available on YouTube. The Guardian reports (“Russian Minister’s Claim Ukraine War ‘Launched Against Us’ Met With Laughter,” March 4, 2023): “The war, which we are trying to stop, which was launched against us using Ukrainian people, of course, influenced the policy of Russia, including energy policy,” he said, briefly stumbling over his words as people in the audience laughed. If you become known as a liar, nobody will believe you. Lavrov, however, is hired by a state that requires that he lie. The penalty for not lying might be death or at least much discomfort, so his incentives are to try to square the circle: lie each time he is asked to, and try to maintain some credibility outside his den of liars. Which brings me to my second general point: as game theory and ordinary economic reasoning suggest, the individual’s optimal strategy changes if a critical number of liars is reached in a society. At the limit, there is no reason to tell the truth because nobody will believe you anyway. This result has a bearing on the conditions, including possibly the moral conditions, for the maintenance of a free society. Both Friedrich Hayek and James Buchanan emphasized, from different viewpoints, the moral dimension. (0 COMMENTS)

Fortunately, Erica York, a senior economist at the Tax Foundation, nicely shows why stock buybacks often make sense. They tend to happen when a firm doesn’t have better investment options. Stock sellers can then use the funds to invest in firms that do have better investment options. Oh, and by the way, who owns a large percent of corporate America? Pension funds. Many workers rely on these funds for their retirement. Those tears that Schumer and Biden are shedding for workers are crocodile tears. This is the last paragraph of David R. Henderson, “Stock Buybacks Are Good, Not Bad,” TaxBytes, Institute for Policy Innovation, March 9, 2023. Read the whole thing, which is short. (0 COMMENTS)

Throughout our history, the US has always had a dysfunctional banking system. There was never a golden age of American banking. That doesn’t mean the system was always in crisis, but the potential for crises was always there.  (Even in the 1970s.)  This isn’t Canada.There are many problems with the US banking system, but they all tend to revolve around the combination of too many undiversified banks and the socialization of financial losses.  That combination creates moral hazard, which encourages excessive risk taking. This tweet caught my eye: There is no “if”.  We are in trouble, and we’ve been in trouble for our entire history.  And if depositors have confidence in deposits that exceed $250,000, then we will be in even greater trouble.  The moral hazard problem will become even greater.  Unfortunately, I suspect that SVB depositors have little to fear. Dodd-Frank was supposed to fix the “problem” after the 2008 banking crisis.  In fact, it did almost nothing to fix the underlying problem because key segments of the business and political world did not want the problem fixed.  It’s easier to have a system where the profits are privatized and the losses are socialized, with taxpayers picking up the tab.  Neither political party favors any sort of effective reform of banking.   So here we are again.  In a follow-up tweet the congressman suggested “Bank management must be investigated”: I’m reminded of that scene in Casablanca where the officer was shocked to discover that gambling was occurring in Rick’s establishment.   It’s politicians that passed Dodd-Frank.  It’s politicians that passed FDIC.  It’s politicians that object to bank mergers that would make banks more diversified, less brittle.  It’s politicians that demand bailouts even to depositors above the $250,000 threshold.   An investigation?  Look in the mirror. PS.  I see complaints that sophisticated Silicon Valley investors couldn’t be expected to devise a safe way of storing their funds.  Matt Yglesias provides some useful perspective: (Bucks fans know that the number 50 has special meaning for Giannis.) (0 COMMENTS)