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Bob Murphy interview on the Peter Schiff Show

I liked several things Bob Murphy had to say in his recent appearance on the Peter Schiff Show podcast, which was guest-hosted by Tom Woods. The two main topics they discussed were the contradictions between Keynesians and Austrians even though they have the same empirical data and the justice of insider trading laws.

At 5:25, Woods asked Murphy, "How is it possible that somebody like Krugman can look at the crisis that we've just endured and are still going through and feel like he and Keynesianism in general have been vindicated, and yet at the same time, the anti–Federal Reserve Austrians and 'austere' Austrians feel like they've been vindicated? Does that just go to show that economics is a whole lot of bunk?" Murphy responded,

You're right, I have been very embarrassed just being an economist for the last few years. I keep making jokes to my colleagues, saying, "You'd better get something else going on because people are going to come out with the pitchforks, they're going to string us up pretty soon. You know, maybe right after the lawyers.
[...]
I think a lot of it is the nature of economics, and this is stuff that Mises and other Austrians have been stressing... This is why the methods of the natural sciences—you can't just carry them over blindly into the social sciences. In particular, it's because you can't have a reproducible experiment, a controlled experiment. We can't roll back the clock to early 2009 when Obama came in and say, "Well, what if he had done a stimulus of the size that Krugman recommended? Or what if they did what the Austrians said and they just cut the government's budget drastically and cut taxes and tied the dollar to gold or just got rid of the Federal Reserve, and then what would have happened?

... Just looking at one particular episode, nobody can say. Just like the Great Depression, economists still are in disagreement over that. So from our point of view, the Austrian point of view, we're going to say, "Yeah, see? Hoover raised spending a lot, he put in a lot of New Deal light, even though FDR's own advisers after the fact admitted that what we did under the New Deal, the Hoover administration actually started the ball rolling and we just extended it.

So you would think, from our point of view, what better evidence could you see? The closest the U.S. has ever come to a command economy, absent war time, was the 1930s, and clearly that was the worst economy we ever had. And so, "Duh, what more do you need to see that we're right?" But of course, Krugman's going to say, "Well, if you looked at hospitals, you'd see people getting medicine were really sick, and you wouldn't want to just conclude, therefore, that medicine makes people sick. And the reason FDR had to do all that stuff was because of how bad the economy was since Hoover didn't do enough."

It just shows the importance of having an antecedent economic theory that you use to parse the world with, because otherwise, you can always after the fact come up with some ad hoc explanation as to why your theory's been vindicated.

Woods: ... People will say, "Well, the Austrians don't care about empirical evidence and they're just dogmatists." But the point is, in the real world, when you're looking at the same empirical evidence, people are drawing exactly the opposite conclusions. And that goes to show, the Austrian point is that obviously, empirical evidence in and of itself in the social sciences, when it's not clear when you've got mere correlation or causality, can't in and of itself settle the debate anyway. ...

Murphy: Just to follow up on that, Russ Roberts, an economist at George Mason—he's not an Austrian per se but I think a fellow traveler... On his blog, within the last three months or so, came out and said something like... "There's all these econometric estimates of the multiplier...and I go with the ones that are low or negative because of my prior beliefs, not because I'm weighing the evidence." And he was just being honest because his point was these apparently scientific guys who just say let the data speak for themselves—some people come up with a negative number, and some people say government stimulus has a multiplier of double what the government says.

So his point was, this isn't like we're measuring the charge on an electron. These estimates are all over the place. And he said, "Isn't it funny that the people who are politically in favor of Keynesian remedies tend to believe the studies that come up with a high number, whereas I, who am a libertarian personally, I tend to like the studies that come up with a low number?" So he's just being honest.... And people were jumping all over him, saying, "Ah! See, he admits he's an ideologue." When in fact, he at least acknowledged what the situation was.

At 15:30, they start talking about insider trading, the justice of laws against it, and the economic effects surrounding the issue. It was slightly more interesting than I expected.

Woods: This week in 2004, Martha Stewart was convicted of lying to Congress in the course of an insider trading investigation. Libertarians in general believe that insider trading is basically a victimless crime, and they are willing to defend it as a perfectly acceptable practice. And yet it sometimes comes off sounding like the person is an apologist for evil and wicked people in our society. ...

Murphy: The official justification for these laws against insider trading is that it's allegedly unfair if somebody who works in a Wall Street firm or somebody who deals with certain companies and has access to information that's not in the public realm...and they're allowed to personally trade on that and, in a sense, take advantage of the person on the other side of the trade who didn't have access to that information. Some people say that's just unfair, end of story, it should be illegal. And other people try to make a utilitarian justification and say, "Well, that's going to make regular people afraid to invest in the stock market...and we need some assurance that's not going to happen."

There's the libertarian argument to just say, "Hey, it's property rights, no one's sticking a gun to your head, if you want to trade with somebody and they happen to know more information, so be it." But even beyond that, just economically, that's a silly objection to raise [the ones mentioned above].

In any other context besides financial stocks, we want people to trade who are experts. Like when it comes to baseball scouting, can you imagine if somebody said, "No, we don't want the sports teams hiring guys who actually know baseball and can identify talent. We should just randomly grab people off the street and say, 'Hey, get me my next pitcher.' We think that the Major Leagues would be better that way." That would be crazy.

Or when it comes to art, would anybody get mad if at an auction, people actually went there who were experts in the art that was being auctioned off and were making bids based on their own knowledge about how valuable the thing was instead of grabbing random people off the street and saying, "What do you think this particular painting is worth?"

In any other context, we want experts with so-called insider information profiting from their trading so that the prices are accurate. And that's what happens with stocks and the financial sector: If somebody has information, they know there's going to be a court ruling that's going to come out tomorrow and make the stock go way up, we want them out there buying the stock now because that makes prices less volatile. So when the news breaks, the price doesn't jump 50%, maybe it only jumps 10% because the so-called insiders have already been bidding the price up. So us, like Joe six-pack on the outside who has no clue about these things, that actually makes the stock market less risky for us. We know day to day there's not going to be these massive bombshells of news getting released that'll make our portfolio go way up or way down. ...

Woods: ... I don't agree with it, but I understand the complaint that somebody gets some inside information that makes them think that this stock is going to plummet because he knows something about the company, and so he unloads it. And you've got a good argument as to why that's actually socially very useful.... But what if he gets inside information saying, "I think this company's going to get better, I think this stock's going to rise," so his inside information leads him to hold on to his stock [when he otherwise might have considered selling]? Would we throw him in jail for insider non-trading?!

Posted in Economics