This morning I listened to Russ Roberts and John Papola's Keynes vs. Hayek rap, called "Fear the Boom and the Bust" again. I enjoyed this when it first came out. They took so many artistic licenses that I was pretty skeptical of the claims that anyone would actually learn anything about Keynes (or Hayek) from it. But it's definitely entertaining, and it will definitely get people interested in economics and provide some of the broad strokes. That was my only critique initially. But I noticed something else this morning that struck me. When Keynes and Hayek show up at the concierge desk at the beginning of the video, the attendant recognizes Keynes immediately but has no clue who Hayek is - the implication being that Hayek is obscure and under-appreciated, while everyone knows and loves Keynes.Is this really true, though? I would guess that the average person is about as likely to know either one of them. However, I'm guessing more people have read Hayek's The Road to Serfdom than The General Theory. In that sense, I think the video gets it exactly backwards, at least when it comes to the populace in general (although even among economists I'm guessing there are few who have read the General Theory itself, and a lot that have picked up The Road to Serfdom... The Road to Serfdom is something of a cult classic in a way that The General Theory simply isn't). Of course, there are no real numbers available on who knows Keynes and who knows Hayek, or who has read their books, so there's no way to confirm these suspicions.
Later today, though, I had the sense again that Roberts and Papola have it exactly backwards when it comes to public perceptions of Keynes and Hayek (or thinkers like them). I was reading Megan McArdle's blog post on the dramatic drop in the stock market this afternoon. She furnishes several very sensible explanations of the sharp drop, but this one was especially notable:
"The market knows something that we don't, but ought to, about Greece. Greek approval of the austerity plan should have perked things up. Instead, the markets are in turmoil. And maybe they're right to be. Passing an austerity plan doesn't guarantee that it will work; Argentina was going through governments like paper plates right before it terminated the dollar peg and defaulted." (the emphasis is mine)
Now, of course it makes sense that someone like McArdle might have this positive view of the austerity plan. She has well known libertarian sympathies. But it's not just that she thinks the austerity plan is a good thing. She demonstrates here that she also thinks that the market thinks that the austerity plan is a good thing. Why in the world would the market think that (forgive my anthromorphization)? If you completely reject Keynesianism, that's why. I suppose even a Keynesian might think that an austerity plan might be better than default - but even that only makes sense as an explanation for the stock market drop if listed companies had a lot invested in Greek sovereign debt. However, an austerity plan is a good thing if you come from a (crudely, broadly conceived) Hayekian perspective. In other words, McArdle is implicitly assuming that the biggest market players are fundamentally Hayekian - or at least much more Hayekian than Keynesian.
This mistaken assumption that "Keynes is King" is apparent when you discuss recent American macroeconomic policy as well. Inevitably, people will call it "Keynesian" - particularly if you ask someone that is relatively Hayek-friendly. In fact, it's been nothing of the sort. Despite the large increase in federal spending, declines in state spending have made our macroeconomic response something very different from Keynesian fiscal stimulus. I discuss this confusion here and here. People make the same mistake that Megan McArdle, Russ Roberts, and John Papola do: they assume Keynes is everywhere and that government spending is tremendous. It's not. When you factor in all levels of government it's not really registering.
The way I see it we're muddling our way through all this. The best that can be said is that the Fed performed a lot better than it could have, and the federal government didn't make it appreciably worse. But other than that we're just muddling through. I know we haven't tried a Hayekian solution - I'm not claiming that we have. But we haven't tried a Keynesian solution either. Why is there this sense among some people that everyone's a Keynesian and that Keynesianism is dominating things? I just don't see it. I don't know if this narrative feeds into some sort of martyr complex that Hayek fans like to foster or what. I'm not sure what the origin is.
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And don't get me wrong - as far as I can tell there is no good Keynesian way out of Greece's situation. The only potential Keynesian way out is devaluation. Since Greece is on the euro, that potentially good way out is a very bad way out because pulling out of the euro just so you can devalue is going to fall pretty decisively in the "cure is worse than the disease" category. So the Keynesian perspective doesn't really have a solution here. But that doesn't mean that an austerity plan is something to celebrate...
ReplyDelete... unless, as I said, you're not a Keynesian and you don't put much emphasis on effective demand - in which case it might be worth celebrating.
I think the point that the video makes is that more people are familiar with "Keynesian" policy approaches. It's true that more people have probably read The Road to Serfdom than have read the The General Theory, but when it comes to economic policy, most people simply accept the notion that the government should engage in deficit spending in a downturn in order to "stimulate demand". None of my friends, be they "liberals" or "conservatives", challenge the consensus that the central bank should cut rates and the government spend. The conservatives might question the quality or timing of the spending, but they still accept the same basic argument. And if I suggest we should get rid of the central bank and cut spending and taxes in a recession, they look at me like I'm some kind of libertarian freak (but then again, I guess I am some kind of libertarian freak)...
ReplyDeleteSo true, they may not know who Keynes is, but they take his policy suggestions for granted, while very few are aware of the Austrian Business Cycle Theory. And if they mention Hayek, it's usually in the same sentence as Milton Friedman or Margaret Thatcher (an association I find somewhat irksome).
Actually, I'll put it another way.
ReplyDeleteSure, more people have read The Road to Serfdom, including the Rush Limbaughs of the world (unfortunately). But even then, more people are aware of Keynes' General Theory than have even heard of Hayek's Prices and Production etc. Which is a shame. Although, I think The Road to Serfdom is relevant, even though the results Hayek predicted have not (yet) occurred in the West, it irks me that this work has given birth to a kind of "vulgar Austrianism".
As for Greece, well... I know it's probably not going to have much of an impact on a Keynesian like you, but I always think back to Bryan Caplan's book, Myth of the Rational Voter. One of the key insights of the book is that when the price of engaging in irrational behaviour becomes to high, people default to rationality. In this case, I would say the more "Hayekian" approach wins out. If Greece was not in such dire straits, perhaps the approach would be more "Keynesian"?
RE: "but when it comes to economic policy, most people simply accept the notion that the government should engage in deficit spending in a downturn in order to "stimulate demand"."
ReplyDeleteDo you really think so? The anti-deficit spending is so strong right now that even the president is paying lip service to cutting the deficit soon. I think if you asked the average person what the government should do they may say "help Main St.", but if you ask what they should do with the budget, they're still going to say "stop these deficits".
Re: "One of the key insights of the book is that when the price of engaging in irrational behaviour becomes to high, people default to rationality. In this case, I would say the more "Hayekian" approach wins out"
I'd agree with that premise to a certain extent. The irrational behavior of the Greek government is coming back to haunt them now, but I don't think they're defaulting to anything "rational". They're defaulting to the lesser of a couple evils that's going to result in a lot of pain.
"So true, they may not know who Keynes is, but they take his policy suggestions for granted, while very few are aware of the Austrian Business Cycle Theory."
ReplyDeleteBut we're not doing his policy suggestions. That's my whole point. Government spending increases have been making very little net contribution because the states have neutralized the activity of the federal government. That's a Hayekian policy, Sebastian, not a Keynesian one. That's my whole point.
Good points Daniel. I can only really speak from an Australian perspective. Both major parties, the Liberals (somewhat akin to the Republicans) and Labor (more like the Democrats, except without the fetish for protectionism) promoted "Keynesian" stimulus packages at the time, both of which were based on Treasury modelling. The key difference between the two were the size and nature of the spending. The Labor government's won out, and consisted of cash transfers (to stimulate consumer spending) and infrastructure projects (many of which have not yet been started). But the point is that nearly everyone in this country believed that there should be some stimulus. Even the dissenters said something along the lines of: "don't get me wrong, I believe in economic stimulus; it's just that this one's too large/is spent on the wrong things etc". Then again, we are currently running a small deficit at the moment, and the budget was in surplus for 10 years before. If the gov't continued running failed stimulus packages, I think people would start to reassess the nature of this spending, as they appear to be doing in the US.
ReplyDeleteI must say I look upon the USA, with its Tea Party members (at least those in the Ron Paul camp, not those in the Sarah Palin camp) with a kind of envy. Aside from the New York Times running stories on the most imbecilic or racist members, they represent a kind of common sense attitude to government that is sadly lacking here. I'm prepared for you to disagree with me on that one.
I object somewhat to your applying the Hayekian label to the idea of cutting spending and taxes in a recession. This was the "classical medicine" - it is not really uniquely Hayekian. It was the same strategy that the Harding administration applied in the 1920-21 downturn. Most interestingly, the "classical medicine" was also (surprisingly) administered by the left-wing Labor party in Australia at the outset of the Great Depression. Spending and taxes were cut, the budget was balanced - and Australia was the first developed country to emerge from the Depression.
ReplyDeleteI think the Austrian/Hayekian and Classical positions are basically the same with respect to dealing with downturns, although the theory differs in many ways. That said, J S Mill did recommend some intervention, in that he believed government should employ idle capital to stimulate production, (not demand). This is of course tied up in his belief in Say's Law.
I'm also not sure of what to make of your claim that the spending isn't really registering. Whereas the Austrians are accused of having "unfalsifiable" theories, I think Keynesians are, if anything, worse. If a stimulus has no result, or makes things worse, they can always claim that it wasn't big enough, or the timing was off, or that it was ended before it had a chance to kick in etc. Keynesian policies (to the extent that they are actually Keynesian) haven't had any widely accepted peace-time success (and I would also deny that it worked in war-time), yet they still dominate undergraduate classes in economics and gov't policy.
The Ron Paul camp represents a "common sense" attitude towards government? A Ron Paul government would be far more secure and safe than a Sarah Palin government from a national security perspective, but "common sense" is about the last thing I would attribute to them. We had a reasonable "common sense", third party movement with Ross Perot in the early 90s, but at this point a lot of these people found their way to one of the two major parties. Clinton stole quite a bit of the thunder of that movement.
ReplyDeleteRE: "I object somewhat to your applying the Hayekian label to the idea of cutting spending and taxes in a recession. This was the "classical medicine" - it is not really uniquely Hayekian."
Right - I parenthetically noted that they are "crudely and broadly" Hayekian. Ultimately, I think Hayek's contributions are much like Keynes's in the sense that the major contribution wasn't really an explicit policy suggestion, but a contribution to our understanding of how the economy works. My point is only that (1.) this narrative that everyone is a Keynesian is completely out of touch with reality, and (2.) while they might not be strictly Hayekian, the public a lot more sympathetic to Hayek than the Roberts/Papola video suggests.
Your points on Australia are interesting... a cursory review on Google, though, seems to suggest that it lasted just as long in Australia as in most other places and that unemployment there was actually higher than the U.S.. As for their recovery, you also conveniently leave out the fact that Australia was one of the first countries to go off the gold standard, was it not?
RE: "I'm also not sure of what to make of your claim that the spending isn't really registering."
ReplyDeleteAh - let me clarify that. What I said was "when you factor in all levels of government, it's not really registering". In the United States, quite a bit of spending is done by state and local governments. So people look at the hundreds of billions of dollars at the federal level and think we're doing Keynesian stimulus, but completely ignore the fact that hundreds of billions are being cut at the state level - so that total government spending "isn't really registering". In other words, by paying attention only to what's happening at the federal level people ignore the fact that we're really not doing that much Keynesian policy (and even if we were only paying attention to the federal level, it still wasn't as big as a lot of Keynesians were advocating). That's all I meant. The economy doesn't know the difference between whether a dollar was appropriated by the federal government or a state government.
RE: "If a stimulus has no result, or makes things worse, they can always claim that it wasn't big enough, or the timing was off, or that it was ended before it had a chance to kick in etc."
You're going to have to explain this more. Why do you think Keynesians have such a free hand? People made suggestions about what it would take ex ante. Krugman wanted twice as big of a stimulus and he didn't want the states cutting their budgets. You're not really disproving Krugman if you don't have anything resembling what he suggested.
I don't know - I guess I'm just not quite sure what you're refering to. Nobody wants to not have an answer - but we only have a few instances of these ddep depressions, we barely even try Keynesian policy in any of them, and we don't have a good way of tackling the endogeneity problems that bias the estimates downwards. It's just a shitty situation in general.
As for the 1920-21 depression. You might be interested in this working paper I have up on SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1591030
ReplyDeleteGenerally I agree with the classical perspective on that downturn, but (1.) Harding's fiscal policy is vastly overstated, and (2.) the very vigorous monetary policy at the time is substantially understated.
Thanks for the paper Daniel. I haven't read Thomas Woods' book, but I would agree with you in that I believe his claim that the Fed was inactive is probably false. That said, I have read other Austrians (although I cannot remember who it was) recognise that the central bank pushed up rates in this manner to engineer deflation (it almost bordered on praise!). This is consistent with the classical position on such matters, and despite my general opposition to central banking I do believe it was the correct move to make. And I believe most Austrians will have some measure of praise for Volcker's cutting of the money supply at the beginning of the 80s. While it may not prove that central banking is unnecessary, I do believe it mounts a firm case against the perhaps-stereotyped "Keynesian" response of trying to get the economy moving with repeated bouts of inflation.
ReplyDeleteSebastian -
ReplyDeleteYes, I think the comparison to Volcker in the 80s is exactly the right comparison. I don't mention Volcker in my paper, but that is implicit in what I say.
I also point out that this is essentially a Keynesian position as well. In 1923 Keynes praised the post-war policy of the Federal Reserve and he described how it was in line with his own views. I spend a lot of time in the paper explaining why it was still consistent with his own views over a decade later in the General Theory.
People easily forget the importance of demand deficiency in the Keynesian economics. When there isn't a demand deficiency, Keynes is for all intents and purposes as Classicist. And I don't think anyone can seriously argue that there was a demand deficiency in 1919 and 1920. The downturn in 1920 and 1921 was a response to extremely contractionary monetary policy, but it was not due to demand deficiency. That makes everything considerably different from how people stereotypically think about Keynes.
RE: "a cursory review on Google, though, seems to suggest that it lasted just as long in Australia as in most other places and that unemployment there was actually higher than the U.S.. As for their recovery, you also conveniently leave out the fact that Australia was one of the first countries to go off the gold standard, was it not?"
ReplyDeleteI'm not arguing Australia was untouched. It was certainly long and severe, and you are correct in noting that at the lowest ebb, unemployment was significantly higher than in the USA. Then again, the recovery was certainly more substantial, and unlike the USA there was no "depression within a depression" that occurred in 1937-38. In fact by this stage unemployment was safely under 10% in Australia, while it got to around 19-20% in the US.
As for the gold standard, you are correct in noting that Australia left the gold standard incredibly early, in 1929. Then again, apart from the fact that I don't agree inflating the currency is any use in a depression, it would only seem to weaken the case for currency devaluation in that the unemployment rate in 1932 was even higher than in the USA, after several devaluations.
Don't get me wrong, I am well aware that Keynes was not some cheerleader for inflation (the position taken by some of his so-called followers).
ReplyDeleteRe: Demand deficiency - from where does this come? I was never satisfied with the "animal spirits" explanation. Perhaps I am resorting to crude Keynesianism here, but it appears most Keynesians seem to overlook the basic premise that before one can demand anything, one must first produce.
You probably wouldn't be able to get this book in the US, but Australian economist Steven Kates wrote a great book called "Say's Law and the Keynesian Revolution" (Kates did a video "Why your grandfather's economics is better than yours" at Mises not long ago, even though I'm not sure if he is an "Austrian").
It explores the classical economists ideas about the notion of demand deficiency. Obviously books can (and obviously have) been written on the subject, but the classical position is that demand deficiency is never the cause of recessions, but a symptom.
The classicals lacked the insight of the Austrians and (I will concede) the Keynesians in considering the role of credit creation and monetary factors in leading to and exacerbating the business cycle, but I think it would be worth your while exploring the criminally neglected and/or misrepresented views of the classical economists (such as Ricardo, Mill and Say).
Anyway, I'm tired and I will probably leave it there. But I recommend very strongly that you do some research into Say's Law.
"Perhaps I am resorting to crude Keynesianism here, but it appears most Keynesians seem to overlook the basic premise that before one can demand anything, one must first produce."
ReplyDeleteThey don't overlook the premise - they contend that it is a false premise :) One of the insights of the Keynesian revolution is precisely that demand and supply are separate phenomena - that saving and investment are separate decisions.
RE: "Demand deficiency - from where does this come? I was never satisfied with the "animal spirits" explanation."
Animal spirits I think of as simply being a way of describing the volatility of investment relative to consumption. I think "irrational exuberance" is a real phenomenon, and it can be quite important when we think in terms of bubble psychology - but I don't think there's a need to stake everything on that. The origin of demand deficiency in the Keynesian system, as I understand it, is an output level coming out of the loanable funds market and liquidity preferences that is below full employment. Stable demand deficiencies for Keynesianism come out of that IS-LM type framework. Animal spirits are an interesting case that probably explain a lot that goes on with bubbles and dynamics. Rigid wages are an interesting case that provide an argument for temporary demand deficiency. But it's the liquidity preference theory of the interest rate that introduces the possibility of stable, sub-optimal demand.
RE: "but the classical position is that demand deficiency is never the cause of recessions, but a symptom"
And this, again, is where I think Keynes (and Hicks and Modigliani - who should really be credited with cleaning him up) makes a real contribution. A lot of Keynesians fall into this trap of providing an explanation for why, once we get into a downturn, it's hard to get out. That doesn't really break from classical economics at all, as you say. It's correct as far as it goes, but it's an incomplete picture.
Keynes/Hicks/Modigliani provide a framework for thinking about permanent deficient demand because they actually produced a theory to determine output, where everybody else just assumed that we sit happily on a production possibilities frontier that is determined exogenously by technology.
I think I explained the last point very badly, because you gave the typically Keynesian reply. You ascribe assumptions to the classical economists which they certainly did not hold. Furthermore, you seem to juxtapose the Keynesian definition of savings (Income - Consumption) with the classical maxim "savings = investment", despite the fact that this was not the classical definition of savings. As for
ReplyDeleteSay's Law, well of course the classicals recognised that not every product produced would find a buyer, and that there would be the potential for gluts in some markets. They denied the existence of a general glut.
I think Bill Anderson explains it well in this essay, much better than I:
http://mises.org/journals/scholar/sayslaw.pdf
also this one, which explains the relevance of Say's Law (in its true form) to the ABCT:
http://mises.org/journals/qjae/pdf/qjae12_2_4.pdf
I should clarify that accepting Say's Law is not necessarily a prescription for laissez-faire.
You know Keynes very well, but I think you would profit from reading back over the works of the economists whom Keynes was attempting to refute.
I apologise for beating around the bush and getting off topic, but I was intrigued by your earlier idea of a Austrian/Post-Keynesian synthesis. While ostensibly appealing, I think you need to be aware that the two theories rest on very different edifices and this will make them incompatible, in my opinion.
RE: "You ascribe assumptions to the classical economists which they certainly did not hold."
ReplyDeleteI reread my comment twice and can't find a single place where I ascribe anything to classical economists. I do ascribe things to Keynesians at several points. I'm genuinely confused about what you're refering to.
RE: "As for Say's Law, well of course the classicals recognised that not every product produced would find a buyer, and that there would be the potential for gluts in some markets. They denied the existence of a general glut."
Right - this is my understanding of their perspective as well, and I think they were wrong on the general glut.
RE: "I apologise for beating around the bush and getting off topic, but I was intrigued by your earlier idea of a Austrian/Post-Keynesian synthesis. While ostensibly appealing, I think you need to be aware that the two theories rest on very different edifices and this will make them incompatible, in my opinion."
I describe in more detail here: http://factsandotherstubbornthings.blogspot.com/2010/05/first-day-of-rest-of-my-academic-career.html (second to last full paragraph) exactly what I have in mind for this synthesis. I would be jettisoning the rejection of the prospect of a general glut and Say's law. I think that what Austrian economics has to offer is the importance of the capital structure to the business cycle. I think their rejection of the prospect of a general glut is their biggest mistake, so of course that's what I would drop. An Austrian-Keynesian synthesis without the possibility of a general glut isn't a synthesis worth having, because it keeps one of the biggest mistakes of the Austrain school and leaves out one of the most important advances of Keynes.