David Gordon reviews John Allison’s new book


9thdoctor

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Maybe I should put ‘reviews’ in scare quotes. It’s a takedown. I haven’t read the book yet of course, so I reserve judgement. Here’s how Gordon opens his review:

This book contains the oddest sentence I have ever read about the current financial crisis, or for that matter about any financial crisis. John Allison, President of the Cato Institute, writes,

I also thought of titling the book
How the Critique of Pure Reason by Immanuel Kant (1783) Caused the Financial Crisis
, but that was too obscure for most people, although it was more accurate, since Kant was the major philosophical opponent of reason who put an end to the Enlightenment century (1700s) that indelibly shaped the founding of the United States. (p. 255, n.3)

Does it go uphill or downhill from there? Find out for yourself:

http://mises.org/daily/6269/You-Call-That-Austrian

And here's follow-up commentary by some people who aren't sure whether Gordon's Homeric epithet is (or should be) "the assassin" or "the destroyer":

http://www.economicpolicyjournal.com/2012/11/will-john-allison-be-too-embarrassed-to.html?showComment=1352304487775

Perhaps the rules of dactylic hexameter ought to guide us to the answer.

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When Allison sticks to topics that fall within his experience as a banker, such as the effects of Freddie and Fannie on the home-mortgage-lending business and the problems of fair-value accounting, his comments are often insightful; he is after all a distinguished banker of great experience. When he strays into Austrian theory, though, he seems at a loss. If Allison relied on Salsman for his remarks on business-cycle theory, his errors would be understandable, given Salsman's egregious mistakes and prejudices. I freely acknowledge that my suggestion is no more than speculation.

Richard Salsman has become the house economist at the Ayn Rand Institute. He is fiercely anti-Austrian. And if John Allison hadn't relied on Salsman's sage counsel, Leonard Peikoff would have wanted to know why.

One of Larry Sechrest's last publications was a critical review of Salsman's series of articles on the Great Depression:

http://www.aynrandstudies.com/jars/archives/jars9-2/jars9_2lsechrest.pdf

Robert Campbell

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Dennis, thanks for the link to David Gordon’s informed and informative review.

. . .

There is something I noticed a long time ago about Atlas Shrugged, which I don’t think anyone has ever mentioned. When Rand wrote that epic, America had been through the Great Depression and the Roosevelt economic policies. Rand’s novel contains projections of future technology, as imagined from where we were in the 1950’s. It contains projections of how uniformly socialistic she thought it likely all the other countries of the world would be in that future. It contains, for the USA, a projection of how she expected the federal government to respond to economic disintegration and regression in that future. In the Atlas story, the decline in the US capital goods industries is due focally to their generative leaders removing themselves from those employments. But Rand knew the Austrian theory of the business cycle. Quite apart from the fictional organized strike among certain business creators, by Austrian lights, economic decline of a mixed economy, the actual US economy, was to be expected over the decades ahead from the 1950’s (unless the governmental factor in the mix were contracted to that of the night-watchman state of classical liberalism).

It would be interesting to examine how much of the government initiatives in the Atlas future were reflections of what the US government had initiated during the Roosevelt years in a really big economic crisis. Compare also what was done in the crisis of 2008-2009 with what was done in the Hoover and Roosevelt years. I have one note on that here. (See also.)

I have no formal education in economics. I read Murray Rothbard’s America’s Great Depression, and I studied thoroughly his Man, Economy, and State. The US government relies on professional economists, such as Christina Romer and Alan Greenspan (both of them Chief Economic Advisors to Presidents—Obama and Ford) who know a great deal more than I about the way macroeconomics works. But as Locke said, we continually need to act under our ignorance and uncertainty. I’m justifiably uncertain of the correctness of my views on political economy—certainty of those with even less economics education than mine is just blustering or bad epistemology—yet laissez faire is what I would bet best.

I wrote in that post “Rand knew the Austrian theory of the business cycle.” However, I’m not sure how far she (or I) would stick with it when confronted with a detailed disputation by a professional economist such as Greenspan or Friedman. I’ve gathered over the years that all economists outside the Austrian school reject the Austrian theory of the business cycle. Those of us versed in only Austrian economic theory should take seriously the possibility that we are seeing macroeconomics through a distorting lens. I mean unless we have mastered the economic theories of economists who reject the Austrian theory of the business cycle, we are in no position to say with fullest justification that the Austrian theory is correct. Those of us who are not professional economists—most of the country—have to rely on analyses of the professionals, and most in that predicament (i) choose to give credence to economists who suit their moral and political ideals or (ii) throw up their hands and give the boot to the sayings of all economists.

It would be nice were there reviews of Allison’s book from economists of several stripes. I do not expect that luxury.

Related

~~~~~~~~~~~~~~~~

PS

I tested my old links within the link “Greenspan” and found one needed updating:

“The Roots of the Mortgage Crisis” (12/12/07)

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Maybe I should put ‘reviews’ in scare quotes. It’s a takedown. I haven’t read the book yet of course, so I reserve judgement. Here’s how Gordon opens his review:

This book contains the oddest sentence I have ever read about the current financial crisis, or for that matter about any financial crisis. John Allison, President of the Cato Institute, writes,

I also thought of titling the book
How the Critique of Pure Reason by Immanuel Kant (1783) Caused the Financial Crisis
, but that was too obscure for most people, although it was more accurate, since Kant was the major philosophical opponent of reason who put an end to the Enlightenment century (1700s) that indelibly shaped the founding of the United States. (p. 255, n.3)

Does it go uphill or downhill from there? Find out for yourself:

http://mises.org/dai...l-That-Austrian

And here's follow-up commentary by some people who aren't sure whether Gordon's Homeric epithet is (or should be) "the assassin" or "the destroyer":

http://www.economicp...t=1352304487775

Perhaps the rules of dactylic hexameter ought to guide us to the answer.

Well, I guess John Allison will not be inviting Professor Gordon to be a participant at the next Cato conference... :o:angry:

It is pretty clear that Gordon is impugning Allison's grasp of Austrian economics, of economic theory in general, and of his scholarship. The implication that that will trigger in readers of that review is that Allison may not have been the best choice to be the new CEO of the Cato Institute. Between the lines, he is saying, "Will if this is an example of what we can now expect from Cato,...." :blush:

Which leads me to speculation on why (if Gordon's characterization is accurate) the out-going CEO of Cato, Ed Crane, offered Allison's name to the Koch brothers as someone that they would "really like" (since there was no love lost between the Kochs and Ed Crane). to replace him. Just idle speculation here, but I'm wondering whether Ed Crane, tired of the Kochs' pressure to get him out of the Institute that he founded, decided to give them a "poison pill". But that couldn't happen,...nahhhh! :unsure:

I am a great admirer of Ed Crane, who created and has led the Cato Institute to a position of prominence as the leading libertarian "think tank." However, some others have been rather critical of his actions when he was running the Libertarian Party, prior to his creation of Cato. An interesting account of the influences of the Kochs, as well as Crane, can be found in Brian Dougherty's Radicals for Capitalism: A freewheellin' History of the libertarian movement.

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Richard Salsman has become the house economist at the Ayn Rand Institute. He is fiercely anti-Austrian. And if John Allison hadn't relied on Salsman's sage counsel, Leonard Peikoff would have wanted to know why.

I met Salsman in ‘95 or ’96 at a weekend conference put on by Yaron Brook’s Lyceum. I had him autograph his book Breaking the Banks, so even though I had functioned as quite the gadfly he was nice to me. I remember he did some spiel about how bad Greenspan was, and saved for last, the climax, that ARI had sought him out for a contribution or some other kind of help, and that he refused. I asked something along the lines of, if you’d already determined that he is so bad, why would you want his sanction? He shot back with something about past integrity.

Now to get to the good part, if you look at the history of the stock market you know that the time period I’m talking about immediately preceded the dot com boom (and/or bubble). Stocks were going up, and with 20/20 hindsight we know that they’d be going nowhere but up for the next 4 years. Now Greenspan made his “irrational exuberance” speech about the same time, so one shouldn’t be too hard on Salsman here, but he advised being totally out of equities, on the grounds that the big one, the crash, was imminent, coming within months.

Well, I guess John Allison will not be inviting Professor Gordon to be a participant at the next Cato conference... :o:angry:

And no Christmas card either. But it's good to have competition and strong critical voices out there, otherwise it becomes all yes-men and groupthink. Gordon can be awfully sarcastic, however, and it gets to be a problem. For example:

It is not enough that Kant lies at the origin of Nazism, as Leonard Peikoff so cogently demonstrated in Ominous Parallels. (It comes as no surprise that Allison admires this great contemporary thinker and scholar.

If you don't know to read that sarcastically, you'll probably get confused.

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But, in stark contrast to David Gordon's put-down of Allison's book, is this very long and - one might even say, adulatory, review of the same book in Forbes. The Forbes reviewer found nothing of note to criticize and refers to it as one of the most important books of the year.

http://www.forbes.com/sites/johntamny/2012/10/17/book-review-john-allisons-the-financial-crisis-and-the-free-market-cure/

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I'm not sure that Ed Crane would recommend John Allison as a "poison pill."

Crane may instead have pointed the brothers Koch toward Allison because he feared they would otherwise go with a Bush Republican.

As for the long review that Jerry pointed to, John Tamny is very hard-money-oriented, but not, to my knowledge, an Austrian. Tamny is the guy who brought Robert Tracinski to the attention of Real Clear Politics.

Robert Campbell

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Reviews like this are... weird.

Then again, I'm a scholar with no need to preserve my face/reputation in inter-think-tank disputes and spats....

Look, Kant was the primary epistemological inspiration of von Mises. I disagree with Kant and most of Kant's intellectual offspring were anti-classical-liberal but this damn Kant-demonization is so demented. Yes, German Idealism is dangerous, can we PLEASE start blaming Hegel, Fichte, Heidigger, Nietzsche and co. for their mistakes rather than imputing them all to Kant? Thanks!

Goddamn I need a drink.

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.

Additional windows into The Financial Crisis and the Free Market Cure are available here.

~~~~~~~~~~~~~~~~

PS

I see now that the windows into the book in the review linked in this note (a review by Ari Armstrong) as well as the review by David Gordon are very small in comparison to the windows offered by John Tamny, whose review (three weeks ago) is linked by Jerry above and by Merlin below.

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Having read Tamny's extensive review of Allison's book, I can only wish that the vast majority of worthwhile books got this kind of extended engagement from their reviewers.

Tamny has plenty of disagreements with Allison, but all are presented within a framework of respect for Allison's genuine expertise.

Enough of Tamny's own views can be seen that it's clear he is extremely hard-money, but not a latter-day Austrian. In place of Rothbard's 100% reserve requirement, Tamny advocates that banks be subject to no reserve requirement at all, that deposits be privately insured, and that no governmental action ever be taken to bail out a failing bank.

If the quality of Allison's book is fairly captured in the review, Allison did not need to consult with Richard Salsman about anything. It might have smarter—though surely impolitic within the ARI orbit—had he not done so.

Robert Campbell

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From the beginning of Tamny’s book review:

This review will jump around, but since it’s generally agreed that the rush to housing underlay the eventual economic contraction, it’s best to start there.

From what follows apparently Tamny thinks that Allison agrees. Nowhere in his review does he mention the invasion of Afghanistan, the invasion of Iraq, setting up Homeland Security including and especially the TSA, fusion centers, expanding FEMA, or any of the other boondoggles (and tyrannies) for which 9/11 furnished a pretext.

We're talking trillions of dollars sucked out of productive Americans and given to parasites. There's no question the effect on the economy is significant, significant as in huge, yet nary a mention in the review.

How about in John Allison's book?

Perhaps the book focuses on banks and their regulation to the exclusion of everything else, after all that's Allison's field. If so, he should state that at the beginning, prominently, and Tamny should have mentioned it instead of what he began his review with.

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From what follows apparently Tamny thinks that Allison agrees. Nowhere in his review does he mention the invasion of Afghanistan, the invasion of Iraq, setting up Homeland Security including and especially the TSA, fusion centers, expanding FEMA, or any of the other boondoggles (and tyrannies) for which 9/11 furnished a pretext.

We're talking trillions of dollars sucked out of productive Americans and given to parasites. There's no question the effect on the economy is significant, significant as in huge, yet nary a mention in the review.

How about in John Allison's book?

I bet not because the idea is absurd -- that said wars, etc. caused a housing/mortgage bubble that subsequently burst.

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As for the role of mark-to-market, or “fair value” accounting, Allison’s analysis of this may perhaps be what emerges as the most controversial part of the book. Allison is a critic of mark-to-market given his view that it “distorts operating earnings and provides misleading and confusing information about the underlying earnings power of the business.”

He goes on to write that “this distortion is particularly destructive when markets are not fully clearing because of external disturbances.” Fair enough, but if a market is frozen, that’s the market, and at times at least with some assets, it’s probably wishful thinking that any frozen market will clear. Shouldn’t asset prices reflect this?

[snip]

Allison cites Bill Isaac, former chairman of the FDIC, who observed about mark-to-market that if had existed in the early ‘80s, there would have been mass failures of banks across the U.S.

The latter may be true, but the early 1980s was a quite different situation. The depressed market values of bank assets in the early 1980s was due to high interest rates. In the recent financial crisis, the depressed market values were fear of defaults. Asset values can bounce back following drops due to higher interest rates when interest rates later fall like happened in the 1980s, but they can't bounce back from actual defaults.

This is a difficult topic. The "fair value" of an asset is determined by an appraisal or a model -- e.g. discounted cash flow or an option pricing model -- and is used when there is no readily discernible market price for that kind of asset due to lack of trading. A "fair value" may be rather subjective. On the other hand, "market value" in a panic can be a momentary thing quite different from what the asset is worth in the long run.

It was good that life insurance companies were not required to mark-to-market their bonds in the late 1970s and early 1980s. If they had, most would have been declared insolvent. As things turned out, interest rates later fell and the temporarily depressed prices mattered little. Even today life insurance companies do not have to mark-to-market bonds they plan to hold to maturity. But I refer here to statutory accounting, which is what insurance companies use to report to state regulators, not GAAP accounting.

Whether or not the fear of default was much higher than what was and is forthcoming is something we might never know. Many of those mortgage-backed securities banks had are no longer held by the banks, but rather by the Federal Reserve. Also, for those backed by Fannie Mae or Freddie Mac, losses will be absorbed by the federal government (ultimately taxpayers).

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Consider the notion that the government could suck several trillion dollars from producers and give them to war profiteers.

How would this would affect the economy, that is, the welfare of those of us not "in the loop."

Would the adverse effect be negligible? How does one argue against the absurd? Reductio ad absurdum won't work!

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  • 9 months later...

Dennis, thanks for the link to David Gordon’s informed and informative review.

. . .

There is something I noticed a long time ago about Atlas Shrugged, which I don’t think anyone has ever mentioned. When Rand wrote that epic, America had been through the Great Depression and the Roosevelt economic policies. Rand’s novel contains projections of future technology, as imagined from where we were in the 1950’s. It contains projections of how uniformly socialistic she thought it likely all the other countries of the world would be in that future. It contains, for the USA, a projection of how she expected the federal government to respond to economic disintegration and regression in that future. In the Atlas story, the decline in the US capital goods industries is due focally to their generative leaders removing themselves from those employments. But Rand knew the Austrian theory of the business cycle. Quite apart from the fictional organized strike among certain business creators, by Austrian lights, economic decline of a mixed economy, the actual US economy, was to be expected over the decades ahead from the 1950’s (unless the governmental factor in the mix were contracted to that of the night-watchman state of classical liberalism).

It would be interesting to examine how much of the government initiatives in the Atlas future were reflections of what the US government had initiated during the Roosevelt years in a really big economic crisis. Compare also what was done in the crisis of 2008-2009 with what was done in the Hoover and Roosevelt years. I have one note on that here. (See also.)

I have no formal education in economics. I read Murray Rothbard’s America’s Great Depression, and I studied thoroughly his Man, Economy, and State. The US government relies on professional economists, such as Christina Romer and Alan Greenspan (both of them Chief Economic Advisors to Presidents—Obama and Ford) who know a great deal more than I about the way macroeconomics works. But as Locke said, we continually need to act under our ignorance and uncertainty. I’m justifiably uncertain of the correctness of my views on political economy—certainty of those with even less economics education than mine is just blustering or bad epistemology—yet laissez faire is what I would bet best.

I wrote in that post “Rand knew the Austrian theory of the business cycle.” However, I’m not sure how far she (or I) would stick with it when confronted with a detailed disputation by a professional economist such as Greenspan or Friedman. I’ve gathered over the years that all economists outside the Austrian school reject the Austrian theory of the business cycle. Those of us versed in only Austrian economic theory should take seriously the possibility that we are seeing macroeconomics through a distorting lens. I mean unless we have mastered the economic theories of economists who reject the Austrian theory of the business cycle, we are in no position to say with fullest justification that the Austrian theory is correct. Those of us who are not professional economists—most of the country—have to rely on analyses of the professionals, and most in that predicament (i) choose to give credence to economists who suit their moral and political ideals or (ii) throw up their hands and give the boot to the sayings of all economists.

It would be nice were there reviews of Allison’s book from economists of several stripes. I do not expect that luxury.

Related

~~~~~~~~~~~~~~~~

PS

I tested my old links within the link “Greenspan” and found one needed updating:

“The Roots of the Mortgage Crisis” (12/12/07)

Being a faculty member of a University, or a professional 'economist' for the State, is equivalent to being a priest in the middle ages. Do smart people go there? Yes. Are some scientific advances and artistic productions of merit to be found among its members? Sure, they've got smart people and funding. However, this is not the teleology of the modern University. Like the monks and priests of the past, it exists to defend its paymaster in the political and ideology authorities. It cooperates with the Mediastapo to form a fourth branch of the government. Robert Stadler is the norm in modern America.

We should certainly remain critical to economic theory, and to economic history's application of the theories we do accept, but the sheer weight of popular mythology doesn't give it credence. As David Gordon observed, just because we can be wrong about some propositions doesn't entail that we could be mistaken about every particular proposition. I think the praxeological approach to economics is simply correct, even if its total philosophical foundations are not thoroughly investigated and there is controversy on everything it entails. In a far less deductive manner I might as well conclude that I am certain the chemical elements exist, in that there is no coherent picture of our Universe that could reasonably be expected that would utterly refute these relationships. The fact that in pseudo-intellectual propaganda mills there are more who doubt economics than chemistry really has no bearing on the subject: these people very often have no idea what they are talking about, as evidenced by their disdain for philosophy. Some of them (like Friedman) only do good work when they violate their stated methodology.

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