Marginal Revolution

Japan bleg

Come mid-May, Yana, Natasha and I have time to do three things in Japan.  Tokyo and Kyoto are on the agenda for sure.  What should the third visit be?  Preferably it should not be too far from the rest.  Afterwards, I am going to Nagasaki for sure, so no need to recommend that.

Bonk (What I've been Reading)

We have molecular gastronomy, so why not apply science to...other things, as does Mary Roach.  The subtitle is "The Curious Coupling of Science and Sex."  Here is the author's home page; she also wrote Spook and Stiff, both of which are good.  This isn't a "how to" book, it is a real popular science book on its topic and I predict it will be successful.

2. The Dawn of Indian Music in the West, by Peter Lavezzoli.  You need to care about the topic, but today this became one of my favorite non-fiction books, ever.  I bought a copy just to express my loyalty to the author.  I've said this before, but lack of knowledge of Indian classical music is the biggest gap in the education -- and enjoyment -- of many many smart people.  This is one very good introduction but it offers much to the veteran as well.

3. How Judges Think,  by Richard A. Posner.  Every sentence in this book is substance, to a remarkable degree.  It's hard to find a central thread to the argument, but I blame that on the topic rather than on any failing of the author.  After all, judges think in some pretty complicated ways and Posner goes out of his way to minimize the role of conscious theory in judicial behavior.  Content aside (which reflects all of Posner's usual erudition), anyone interested in non-fiction should take a look at this book.  Just imagine, a text totally stripped of that which is content-less.  Can the reader stand it?

What went wrong with the economy?

On Wednesday David Leonhardt posed the question, here is part of my answer:

To understand the depths of the current crisis, let’s go back to an apparently unrelated episode in economic thought: the socialist calculation debate. Starting in the 1920s, Ludwig von Mises, the leader of the so-called Austrian School of Economics, charged that socialism was unable to engage in rational economic calculation. Without market prices, he reasoned, no one knows how much economic resources are worth.

The subsequent poor performance of planned economies bore out his point...The irony is that the supercharged capital markets of the American economy are now — at least temporarily — in a somewhat comparable position. Starting in August, many asset markets lost their liquidity, as trading in many kinds of junk bonds, mortgage-backed securities and auction-rate securities has virtually vanished.

Market prices have been drained of their informational value and thus don’t much reflect the “wisdom of crowds,” as they would under normal circumstances. Investors are instead flocking to the safest of assets, like Treasury bills.

The absence of trading is a big problem. Financial institutions have been stuck holding illiquid assets, whose value cannot be easily determined. Who wants to lend to the institutions holding them? No wonder there is a credit crisis and a general attitude of wait and see.

And here is another problem, namely the relationship between Mises's argument and the degree of leverage.  When leverage is high the needs for exact calculation are much greater:

This gridlock is especially harmful because leverage is so high, and financial institutions are so interconnected through swaps and loans. Institutions that rely so heavily on debt are precarious and need up-to-date information about valuations. When they don’t have it, markets freeze up. This is what has taken policymakers by surprise and turned a real estate crash into a much bigger financial problem.

Do read the whole thing; I also consider why price declines don't necessarily restore asset liquidity.

Hayek Doesn't Stop at the Water's Edge

In the miasma (here and here) of people explaining why they got the war wrong here is Jim Henley explaining why he got it right.

I wasn’t born yesterday. I had heard of the Middle East before September 12, 2001. I knew that many of the loudest advocates for war with Iraq were so-called national-greatness conservatives who spent the 1990s arguing that war was good for the soul. I remembered Elliott Abrams and John Poindexter and Michael Ledeen as the knaves and fools of Iran-Contra, and drew the appropriate conclusions about the Bush Administration wanting to employ them: it was an administration of knaves and fools...

Libertarianism. As a libertarian, I was primed to react skeptically to official pronouncements. “Hayek doesn’t stop at the water’s edge!” I coined that one. Not bad, huh? I could tell the difference between the government and the country. People who couldn’t make this distinction could not rationally cope with the idea that American foreign policy was the largest driver of anti-American terrorism because it sounded to them too much like “The American people deserve to be victims of terrorism.” I could see the self-interest of the officials pushing for war - how war would benefit their political party, their department within the government, enhance their own status at the expense of rivals. Libertarianism made it clear how absurd the idealistic case was. Supposedly, wise, firm and just American guidance would usher Iraq into a new era of liberalism and comity. But none of that was going to work unless real American officials embedded in American political institutions were unusually selfless and astute, with a lofty and omniscient devotion to Iraqi welfare. And, you know, they weren’t going to be that....

What all of us had in common is probably a simple recognition: War is a big deal. It isn’t normal. It’s not something to take up casually. Any war you can describe as “a war of choice” is a crime. War feeds on and feeds the negative passions. It is to be shunned where possible and regretted when not. Various hawks occasionally protested that “of course” they didn’t enjoy war, but they were almost always lying. Anyone who saw invading foreign lands and ruling other countries by force as extraordinary was forearmed against the lies and delusions of the time.

More here.

The reasons why I opposed the war are given here.

Hat tip to Brad DeLong for the link.