ECON430-Topic #4: New Ideas from Dead Economists

Todd G. Buchholz published a book in 1999 called “New Ideas from Dead Economists” that pointed out that a number of ideas that are attributed to certain dead economists were in fact never associated with those individuals. Rather than rehash this book, the goal here is to compare politics to economics regarding monetary and fiscal policy. Matthew O’Brien, writing for the Atlantic magazine, recently wrote the article “What GOP Economists Don’t Understand About Milton Friedman” where he cites blogs and articles by economists like John B. Taylor, Allan H. Meltzer, and Andy Lapierre (not an “economist” per se) that might have taken what Milton Friedman might have thought as their own opinion. To be sure, left of center economists are commonly putting words in the mouths of long dead economists like J. M. Keynes. Mattias Vernengo shows using a couple of quotes from the General Theory to show that Paul Krugman was confusing Keynes with his Neoclassical Synthesis successors.

The point of this blog comment, is to be a bit more exploratory. I would like you to find an example of how an economist (dead or alive) was taken out of context by a blogger, journalist, or politician. You can look for the big names to do this, such as Keynes, Friedman, Hayek, Schumpeter, Smith, Ricardo, or anyone reasonably famous. Feel free to get creative and while I would like you to stick to monetary policy, feel free to look at other realms of economics. We have talked about Keynes likely stance of price flexibility, but you can look at comments on “Ricardian Equivalence”, “creative destruction”, “rules v. discretion”, or something else. Look on the Wall Street Journal or NY Times opinion pages for examples.

6 thoughts on “ECON430-Topic #4: New Ideas from Dead Economists”

  1. Adam Smith is generally looked to as one of the largest influences on libertarianism. The category of libertarians that seem to garner the most popularity these days believes total disbandment of all government (save national defense) and all subsequent taxing is necessary to maximize efficiency and social welfare in the macro economy. Many of these libertarians feel a particularly strong affinity with Adam Smith. On numerous occasions Ron Paul, for instance, has appealed to Adam Smith and Smith’s laissez-faire out-looks while endorsing an end to all forms of income tax. Ron Paul might be alarmed to find that in The Theory of Moral Sentiments (1759) Smith says:

    “The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich; and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

    From this quotation we find that Adam Smith is promoting a progressive income tax and not finding “anything very unreasonable” about it.

  2. In recent years Majority Leader Eric Cantor, misunderstood Keynes and his theories. Cantor wrote that Keynes represented “the theory that government can be counted on to spend more wisely than the people.” Many even misrepresent Keynes as a borderline Marxist, which is just simply wrong. Keynes did not think that the government could spend more wisely than the “average Joe” Keynes focused on the active role in governments to break harmful economic cycles that have formed in the market. Most of the policies that Keynes would have been in favor for would actually put more money in the hands of people in some way or another for them to spend it, not the government. A case in point would be any fiscal policy that included a tax break or through monetary policy that would include the Keynesian “multiplier effect”. Cantor is just clearly wrong to say that Keynes wanted the government to be in control of spending through the view that governments are wiser. All Keynes wanted was an active role in government to fix any shocks that appear in the market.

  3. The Ricardian Equivalence states that it does not matter to aggregate demand whether government spending is funded by taxes or debt. Also, “ the Ricardian Equivalence Theorem does not tell us that government spending never increases demand, it does not follow that government spending does increase demand – it’s just that we need other tools to think about that question (Lilico).” Krugman a very well-known and well respected economist and Lucas have been misrepresenting the ricardian equivalence for years. In a comment about a speech that Lucas gave he said that “You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge (Lilico).” He is saying that the spending multiplier is the same as the taxation multiplier. But the multiplier has nothing to do with it. Both of them have a fundamental misunderstanding of what constitutes a ricardian equivalence. With such well noted economists misrepresenting fundamental economic theorems it causes confusion among people and lets those theorems become obscured by economists who claim to know what they are talking about.

  4. Ron Paul believes people should assume their own risks and accept responsibility especially when it comes to health care. In a question asked to Paul from Wolf Blitzer, “What should we do if a 30-year-old man who chose not to purchase health insurance suddenly found himself in need of six months of intensive care?” Paul replied, “That’s what freedom is all about – taking your own risks.”
    By attacking Ron Paul in his ideas of liberalism, Paul Krugman quotes Hayek for support for his position in favor of a welfare state. Krugman writes, “In the past, conservatives accepted the need for a government-provided safety net on humanitarian grounds… take it from Friedrich Hayek.” He continues to say, “[he] specifically declared in “The Road to Sefdom” his support for a ‘comprehensive system of social insurance’ to protect citizens against the ‘common hazards of life”.
    Hayek wrote, “Economic freedom is often represented as an indispensable condition of real liberty. Independence of mind or strength of character is rarely found among those who cannot be confident that they will make their way by their own effort.” He continues to say, “because of this general approval given to the demand for security may become a danger to liberty.”
    On the note of health care, Hayek states that it “may become a danger to liberty”. He also claims that the state should be able to assist individuals who became sick or had an accident within a free market economy and without infringing upon individual liberty. In conclusion, Ron Paul is not completely agreeing with Hayek when he claims he is.

  5. Milton Friedman did advocate free-market policies, but not necessarily as a way out of poverty. Friedman’s work with tax policy and welfare did not come from his advocating it as a way out of poverty. Friedman’s main concerns were in monetary economics where he advocated the monetarist school of thought. He advocated the association between price inflation and the money supply, and how price inflation should be handled. He rejects fiscal policy as a tool of demand management, saying government intervention should be restricted from the market. Friedman also worked on the permeant income consumption function we know today.

    Since Friedman was not a proponent of government intervention then how could he advocate this as a way out of poverty? Yes the free-market could bring the poor out of poverty, but we have seen many times that it does not, it even sometimes widens the gap between the poor and rich. His work in monetary economics is very well known but the work in other areas is not. So I would not be using Friedman as an advocate of countries growing out of poverty.

  6. Politicians and economics traditionally don’t mix well. Some politicians can’t even properly attribute quotes to economists (as Mitt Romney rather infamously did this past September, attributing the quote “When facts change, I change my mind” to Winston Churchill instead of John Maynard Keynes, as noted by Grace Wyler (1.), let alone their economic positions. However, the misinterpretation of economists is not limited to politicians alone, and often it is fellow economists who misquote or misunderstand their colleagues.
    Threats and calls for further quantitative easing (QE III) have been forthcoming for over a year now. Among those who have been predicting the Fed would pursue additional open market purchases in the coming months are the primary dealers of the Fed (2.) and a manager of one of the world’s biggest bond fund (3.), who all see potential economic slowdown as an impetus for further easing. Brad DeLong suggested QE 3 in March of 2011, when GDP growth began to sag and the economic recovery looked ineffective (4). Unfortunately, this appears to point to a misunderstanding of the effect of quantitative easing in our current situation. Keynes clearly described that in situations with low short term interest rates (as the United States currently has) further quantitative easing will be ineffective, as the additional liquidity will simply be held as speculative balances and wait for interest rates to rise. Although the argument can be made that other , less orthodox monetary policy options are available, Mr. DeLong’s assertion that QE III would have an impact on slowed GDP in a low interest rate environment is a gross misunderstanding of Mr. Keynes philosophies.

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