Curing “rights talk” with more “rights talk”

John Gray reviews Dominic Raab’s The Assault on Liberty: What went Wrong with Rights and makes an important observation:

Ironically, while he astutely criticizes the rise of a legalistic culture of rights, Raab seems to believe we can extricate ourselves from our present predicament through another exercise in legalism. Yet when much of the British political class no longer cares about freedom and barely understands what it means, a Bill of Rights can hardly be expected to turn the tide. It was not law or rights that Churchill invoked when dismantling wartime infringements of freedom. It was civilization, which requires a measured restraint in the use of power on the part of our rulers without which bills of rights are not much more than scraps of paper.

Classical liberals should not be surprised about the current proliferation of rights. As soon as the term right is divorced from actual contract, the road is cleared for all other kinds of rights claims. The challenge is to overcome the incoherent thinking about rights as such.

Understanding business cycles

In his book Recessions and Depressions: Understanding Business Cycles, Todd A. Knoop points out that a Rational Expectations perspective does not necessarily require that all segments of society are rational or use all available information:

Those who are rational will take advantage of the profit opportunities created by those who are consistently making mistakes.

In other words, the failure of some individuals to act on the future effects of policies  will create profit opportunities for people who do anticipate such effects.  This is an important observation because it highlights how public policies can be rendered ineffective without having to assume that all people are forward-looking, rational individuals.

The book also contains a useful observation about the effect of random shocks on business cycles:

It might seem strange that random shocks to productivity can create business cycle swings. Shouldn’t every negative shock be quickly offset by some positive shock? The answer is, no. Economists and statisticians have long known that if you flip a coin 20 times, cyclical patterns will emerge. There will be series of heads that follow each other just as there will be series of tails. If productivity is a random variable, then it is not surprising that economies exhibit cyclical patterns. Persistent business cycles can come about as a result of the luck that is inherent in any random process.

The existence of business cycles as such in unregulated economies does not necessarily constitute “market failure.”  In its most simplistic form, such a view of market failure would be akin to saying that free markets fail because they are not immune to meteorite attacks.

But at the end of his chapter on Rational Expectations Knoop states that

rational expectations in an imperfectly competitive model of the economy can have much different implications….It is not necessarily rational expectations but the Rational Expectations model of perfectly flexible markets that generates what many economists consider to be implausible results.

Any model that assumes competitive markets will lead to implausible results if it is used to predict how individuals behave in an economy where government policies adversely affect the operation of markets. This does not invalidate models of perfect competition but highlights the need for models that reconcile the postulate of rationality with imperfect markets, provided such models do not claim to be actual descriptions of laissez-faire economics.

One troubling implication of Rational Expectations is that government can only influence real variables in the economy if its policies are secret and unpredictable.  Even if one does not agree with the strong postulates of Rational Expectations, public stabilization policies that assume that people will repeatedly ignore their future tax burden or neglect profit opportunities that are generated by these policies, do not even pass the test of common sense. Government can, of course, respond in turn by preventing markets to refect these new realities, but this can only produce  a perpetual cycle to disturb the operation of the price mechanism.

Knoop’s book on understanding business cycles is a useful introduction to the subject although his chapter on Real Business Cycles Models could benefit from a more balanced perspective. The conjecture that business cycles could be the most efficient response to  exogenous changes given the structure of the economy is an important insight and reconciles microeconomics and macroeconomics.  Although the New Keynesian economists also provide microfoundations for their views, it is sometimes hard to tell whether these views are refinements of classical economics or departures from it. If New Keynesian Economics is just a “hodge podge of reasons for this or that market failure” it runs the risk of being able to explain any kind of empirical observations.

New Keynesian Economics seems to be less confident about public policy recommendations. It will be interesting to observe what the fate of this school of economics will be if recent work on the microfoundations of political failure will be given more attention in macroeconomics.

Avoiding Karl Popper

The philosopher Karl Popper has published on a wide variety of subjects but his most lasting contribution is his answer to the problem of induction by drawing attention to the asymmetry between verification and falsification. A theory can never be proven, but it can be falsified. Popper’s falsification criterion can also be used  to distinguish scientific theories from unscientific theories. His ideas on science and knowledge are captured  by his philosophical perspective called critical rationalism.

One does not necessarily have to be an avid reader of Popper to be a critical rationalist. As a matter of fact, some people are critical rationalists by temperament. They have an open mind, encourage critical thinking, and are suspicious of any claims that something is “certain” or “settled.” Unfortunately, one can also subscribe to critical rationalism as a philosophical perspective and be a self-righteous arrogant debater at the same time, such as…..Karl Popper.

One of the great ironies in the history of thought is the disconnection between what people preach and what they practice.  In Fooled by Randomness, Nassim Nicholas Taleb writes how members of the Vienna Circle tried to avoid Popper, “not because of his divergent ideas, but because he was a social problem,” being “a terrible listener and bent on winning arguments at all costs,” according to people who knew him.

Even a casual acquaintance with his writings is sufficient to detect this trait. His self-righteous character is not only evident in his thinking about social philosophy and politics, it permeates his writings about epistemology and science as well, as can be seen in his strong obsession with his own place in the history of thought and his recognizable belligerent style.

Although Popper has become known as a fierce critic of authoritarian social thinking, utopian plans to reform society and an advocate of the “open society,” his writings on political matters display the spirit of a rabid Jacobin, throwing around words such as “catastrophe,” “nonsense,” “irresponsible,” “evil,” and “absurd” like there is no tomorrow. Despite  his “anti-authoritarian” perspective on politics, Popper routinely descends into handing down all kinds of dictates about how to organize society.

Some people have drawn attention to the tensions between Popper’s epistemology and interventionist views. The social philosopher Anthony de Jasay carefully reviewed Popper’s problematic arguments for “piecemeal social engineering” and democracy in his insightful essay “The Twistable is not Testable: Reflexions on the Political Thought of Karl Popper.” It may not come a surprise that Popper’s writings have been employed to advocate the most grandiose plans to remake the world.

Taleb observes that “we like to emit logical and rational ideas but we do not necessarily enjoythis execution.” Reading Popper can be a rewarding experience, but it is not necessarily a pleasurable experience….