What a strange day yesterday was – I post a quick link from Krugman suggesting that sectoral readjustment can’t explain the breadth of the crisis, and suggest that this is a recurrent concern that Austrians need to address seriously. For raising the issue – the not uncommon concern with ABCT – I get accused of not knowing what I’m talking about, lying, posting in bad faith, failing to write an extended critique of the Austrian school, etc. I’m told “we’ve answered this” when what is really meant is “we’ve answered this to our own satisfaction”. Anyway, I did not have time to do such a post justice yesterday – I hope I manage it here.
The Thesis: Readjustment from worker mismatch across sectors does not explain the severity of the downturn
Jonathan tries to respond to this here. He offers two main justifications:
1. “the lengthening of the structure of production relative to one good can have the consequence of lengthening the structure of production relative to a myriad of other goods. In this fashion, the structure of production tends to expand over multiple sectors of the economy—a basic way of saying this is, different sectors become interdependent… [ad hominems]… For all intents and purposes, Austrian theory predicts unemployment across a wide variety of sectors, and this ultimately affects both lower-order and higher-order industries.”
I’m not sure exactly how this suggests a broad-based downturn. Jonathan is not careful to distinguish here between vertical and horizontal production (in the traditional sense, not in the x, y, z coordinate plane that Jonathan mentions in his post). The whole problem with relying on readjustment of a sectoral distortion to explain the downturn is that it only explains unemployment in certain firms – namely, higher order production in more roundabout industries. Jonathan ably explains why we can expect to see a lengthening of the production process across multiple industries. I would go a step further than him and suggest that Austrian theory gives an excellent case for expecting a lengthening of the production process across all industries. But this doesn’t do anything to explain unemployment in lower order production (Jonathan’s use of “for all intents and purposes, Austrian theory predicts” rather than simply “Austrian theory predicts” indicates he may even be aware this doesn’t explain it). It still only explains unemployment in the higher order firms. Instead of explaining how a lengthening of production processes across all industries leads to unemployment of both high and lower order production, he spends his time telling me that I don’t understand any of these fundamental points.
So Jonathan comes back to a lengthening of the production process. Fine. But when the malinvestment is revealed, what happens to the lower order production? He doesn't address the question, but I'll try. Well we know there’s no input bottleneck because (1.) there has been a lot more higher order production than necessary so there should be ample inputs, and (2.) if there is any demand for those inputs, then provision of those inputs wouldn’t be malinvestment in the first place and would have remained profitable even after other malinvestments were revealed. So it can’t be a bottleneck issue that allows unemployment in higher order goods sectors to spread to lower order goods. It’s also not a problem of a lack of labor or capital. The whole point of ABCT is that labor and capital that was used in higher order goods needs to be moved to lower order goods, and while this adjustment process takes time there’s no reason to think that there would be a fall in lower order employment in the interim, while the adjustment is taking place. The increase may not be immediate, but there’s no reason to think there is a fall, as Krugman points out in the data. Jonathan, too busy insulting my understanding of ABCT, failed to provide any reason to believe that a lengthening of the production process across multiple sectors would cause unemployment in both higher and lower order goods. I provided two possible reasons to believe that here, and then provided a refutation to each. Come on man – I’m doing your job for you. If you have any other reasons, though, I’m happy to hear them.
2. “If a box of nails [previously employed in house construction] is suddenly pitted towards another industry altogether (let us say, the construction of a lumber factory), then the stage it is at suddenly changes, as well. While the lumber industry, in this case, is relevant to the housing industry, these kinds of switches can occur in industries which may not be directly related (as suggested above). This, as also mentioned above, causes the structure of production to intensify across multiple sectors. As a consequence of this interdependence (for lack of a better word), it only makes sense that a fall in productivity would affect several different sectors of an economy, not just the housing sector.”
The second argument Jonathan provides is based on the switching of capital goods between industries. This one isn’t quite as clearly sketched out, but I think the point is that if the marginal productivity of the capital good (the nails) falls, because industries are interrelated production in all sectors will fall. Capital goods are substitutable and switchable across industries. But Jonathan fails to even consider any magnitude for the elasticity of substitution between sectors, and implicitly assumes such an elasticity is extremely high. Otherwise productivity shocks couldn’t propagate across sectors. So that’s one implicit assumption of his that he chooses not to share with his readers. It’s a bad assumption I think (and an odd one for an Austrian to make – Austrians usually emphasize the heterogeneity and specificity of capital and labor, something which of course I concur strongly with them on), but I’ll grant the bad assumption for the sake of argument. That still leaves the question of how a fall in the productivity of a higher order good, even if it can propagate horizontally, leads to unemployment in lower orders of production in the context of a readjusting capital structure. Again, the adjustment may not be instantaneous, but it still should not produce balanced unemployment. You could assume an infinite elasticity of substitution between capital goods and it won’t change the fact that lower order production will face expansionary and inflationary pressures, not contractionary pressures.
If Jonathan assumes that all capital goods at all stages of production experience a fall in marginal productivity I can certainly accept that as an explanation for widespread unemployment. That’s Real Business Cycle Theory. That’s New Classicism. That sort of thing could happen. But ultimately that’s an “aggregate supply” explanation that mirrors the “aggregate demand” explanation that he oversimplifies and ridicules. The difference is, there’s a theoretical framework based on liquidity preference underpinning a precipitous fall in demand. There’s no good reason to assume the sort of economy wide technological retrogression that would be needed to put forward an aggregate supply explanation like Jonathan seems to be doing here (by assuming a broad-based reduction in the marginal productivity of capital). And even if you could provide such an explanation (dubious in our current case - and he hasn't proposed one at all), that gives you unemployment but it doesn’t give you downward pressure on prices, so you’d still have that to explain as well (one explanation might be a surplus of goods left over from the boom, of course).
Ultimately, I still see no good reason to believe that any explanation based on sectoral readjustment or on the rebalancing of the structure production after the lengthening of the production process could be a primary explanation of this downturn. Reading Jonathan's post didn't change that, and I quite well understood Jonathan's post. That’s not to say such a process isn’t occurring. I would be surprised not to see that unemployment was worse in higher order production processes than in lower order production processes (and it would be really nice to have empirically-inclined Austrians look into this more rigorously!). But that’s ultimately not an explanation for the broad based unemployment we’re seeing.
My Concession
Nevertheless, this doesn’t mean that Austrians are worthless. My claim and Krugman's claim was only that readjustment of the structure of production doesn’t explain the sort of unemployment we’re seeing. For some reason, in the criticism of my post, this got twisted into me dismissing the Austrian school as a whole.
Xenophon shared with me a link to a Bob Murphy lecture that I do think offers an explanation for broad based unemployment that Austrians can get behind: unsustainable growth and capital consumption. I didn’t mention this for two reasons:
1. It wasn’t what Krugman or I were talking about – the initial point was that the readjustment of the capital structure and ABCT can’t explain the downturn, not that an entire school of thought can’t explain it, and
2. I never really thought that the idea that inflationary monetary policy can create unsustainable growth belonged to the Austrians or was the "Austrian business cycle theory" – it’s one of those things like supply and demand or market efficiency that I never really think of as belonging to anyone.
So, as far as I’m concerned the initial thesis still stands and Jonathan didn’t really make much of a counter-argument. Nevertheless, it’s worth highlighting this point that Xenophon shares because it’s a good one. And honestly the worry about capital consumption is just icing on the cake. You don’t even need that. If growth was unsustainable across the board because of a loose monetary environment then when that monetary environment tightens (either because of an increase in money demand or a decrease in money supply… in this case we have the former), you’re not only going to have a decline in demand (a la Keynes), but you’re also simply going to have a lot of production that is revealed to be unsustainable.
Fine. That isn’t the Austrian business cycle theory, that’s basic bubble dynamics. I’ll certainly acknowledge that Austrians acknowledge this – I never claimed they didn’t. But it doesn’t change the fact that capital structure arguments offer no explanation for the kind of unemployment we’re seeing.
Another reason why I don’t readily associate this with ABCT is because of how many times Austrians drill into people that “malinvestment is not overinvestment!”.
A Note
I spend a lot of my time thinking about economics. It’s an interest, a calling, and a profession. I’ve come to many conclusions about economics, and those conclusions will change over time and have changed over time, but I don’t draw a conclusion lightly or without reason. I have absolutely no qualms about being ambiguous or "on the fence" if I honestly don’t know what to think. And if I think something, it’s because I’ve thought it through. When I blog, sometimes I’ll produce long posts, sometimes it’ll be just to share a quick thought or link. If you disagree with me, it’s not incumbent upon me to satisfy you on my time, and you really need to realize that and get over it. Don’t insult me by assuming I toss around ideas casually, and don’t have the hubris of assuming that because someone doesn’t agree with your argument they don’t understand your argument. Truth in the social sciences is extremely hard to come by. A lot of things remain quite ambiguous and are consistent with a variety of explanations. If you think you have an air-tight theory that someone would have to misunderstand to disagree with, then you probably don’t understand your own theory. Very few theories are that air-tight.
Two other things:
- I'm probably not going to respond much in this post unless I truly feel that a new argument has been offered that's convincing, or that there is a flaw in my own argument (as I did with Xenophon's point, which I appreciated him raising... I especially appreciate it because I haven't thought much of what I've heard from Bob Murphy in the past - probably because I only really have contact with things he's said on 1920-21 and the Great Depression - but the thoughts he shared in the lecture were often good). In all likelihood, I'm not going to post on this again either (unless there's a good counter-argument I haven't thought of that needs a response). I really need to spend a few mornings writing and working.
- I still haven't seen much reaction to Krugman besides on this blog and on Jonathan's. Does anyone else think that's weird? Usually the very term "hangover theory" is like catnip to Austrians. Feel free to direct me to any links I've missed.
A few mentions:
ReplyDelete1) There's no mention (to my knowledge) of marginal productivity in Austrian Business Cycle Theory. No one is claiming that such-and-such input now has a lower marginal productivity than before. Productive assets are determined by the subjective values of consumers, and a bubble economy can distort the lens that shows that, but there is no theory or contribution that takes notice of marginal productivity.
Possibly if you want to talk about post-bust recovery, we could talk about capital substitution in fixed industries, and what kind of marginal productivity that capital has - sure. But that's not ABCT anymore.
2) At least one reason why there is unemployment in lower order goods during a recession is because there is a drop in consumption. When the boom busts, both investment and consumption fall (your empirical fall in GDP) because they were both on unsustainable paths. You should have learned this in Garrison. Both ends of the triangle become distorted. Investment in capital goods is unsustainably long and investment in consumption goods is unsustainably tall. It no longer even looks like a triangle.
On your point 1 - see Jonathan's discussion. When you say "productive assets are determined by the subjective values of consumers" that sounds like a statement about marginal productivity to me. How else would we get a marginal product if not with subjective values? I guess my point is I agree, but I'm quite sure Austrians and just about everyone else incorporates marginal productivity. How would you even be able to talk about investment demand if you didn't talk about marginal productivity?
ReplyDeleteOn point #2 - see my post. I'm quite sure I cover this. But as I say, this is just bubble logic. I never thought that was part of ABCT, particularly with how much you guys emphasize that "malinvestment is not overinvestment". If you want to call it ABCT, fine. Call it that. It seems a little silly to me. That's like calling supply and demand ABCT. I never denied that that would cause broad based unemployment. I always said and Krugman said here that the critique is that distortions of the capital structure and malinvestment cannot explain the crisis. If you want to bring in other issues, that's fine and perhaps we can agree on that - but it's not really the issue at hand.
Reread the Krugman post - check out what he's actually critiquing. He's critiquing this idea of the readjustment of the structure of production after a spell of malinvestments. Don't make him out to be critiquing things he never brought up.
For all you bring this back to Garrison, Garrison made the point several times as well that "malinvestment is not overinvestment" - and when he was discussing Friedman's plucking model he made a point of highlighting how that was never really Austrian business cycle theory for either Mises or Hayek.
ReplyDelete1) I'm just saying that marginal productivity is not relevant to ABCT. It's relevant to understanding a market economy, and prices, etc. - sure it is. But there's no argument about either the BOOM or the BUST that incorporates marginal productivity of goods. That, to me, sounds like something we would discuss after-the-fact when talking about the mobility of capital.
ReplyDelete2) The specific type of overconsumption is what I'm talking about when I say ABCT. And, on the whole, bubble logic IS ABCT. Specifically, I was referring to the act of overconsuming when the interest rates are low, because it discourages savings. When the bust hits, industries that produced lower-order goods are suddenly unprofitable and likewise need to be liquidated. This generates unemployment. If this analysis was already included in typical "bubble logic," great. Then I've taught you nothing new.
When I mentioned Garrison, it was a tangential reference to the fact that it was Garrison who revived the Hayekian triangle and gave it its current popularity. All the dynamic capital changes I've been discussing stem from Hayek (and by extension Garrison), which you should then be familiar with.
You keep bringing up this "malinvestment is not overinvestment" nonsense. Nobody is claiming otherwise.
ReplyDeleteI've said it several times at this point - if this is simply a matter of definition of ABCT, well then I guess that settles it very easily.
ReplyDeleteKrugman and I are talking about malinvestment-type arguments. You are responding with overinvestment-type arguments. If you really agree with that (and I suppose you do), why the hell are we disagreeing? Is it simply because of the way ABCT has been defined?
Now - we may still have some questions about how much of a role overinvestment played. But it clearly played some role, and one clearly can't make the accusation that it doesn't account for broad-based unemployment.
But I'll ask you again - if you truly agree with me on this, why do you keep badgering me with over-investment type answers to my critique of malinvestment-type arguments?????
Perhaps in an effort to defend the Austrian school as a whole you misinterpreted what it was that I was concerned about in the first place, and perhaps to a large extent this does boil down to definitions.
ReplyDeleteMaybe you just don't Austrian theory as much as you think you do, and so you have really absolutely no idea what you're talking about when you critique it. I'm sorry to be harsh, but this is becoming more and more obvious as you continue to debate.
ReplyDeleteYou bring up this "malinvestment not overinvestment" nonsense as if we said otherwise. You probably don't even know what "malinvestment not overinvestment" really refers to.
I never said anybody overinvested. I never said the recession was caused by overinvestment. You are putting words in my mouth. I don't agree with you, at all. Marginal productivity can fall for reasons other than overinvestment. You are confusing causality.
It does boil down to definitions. But, it boils down to the fact that you simply don't know the full "definition" of Austrian business cycle theory. You have yet to put together the pieces of monetary theory, capital theory, interest-rate theory, et cetera. You have a very limited understanding of the idea of malinvestment.
"You bring up this "malinvestment not overinvestment" nonsense as if we said otherwise."
ReplyDeleteJesus Christ man, will you listen to me? I'm expecting you to agree with me on that.
"Marginal productivity can fall for reasons other than overinvestment. You are confusing causality."
When did I say it couldn't fall for reasons other than overinvestment? Rather than bad-mouthing my understanding of these things, would you care to cite where I said that?
You are responding with overinvestment-type arguments. If you really agree with that (and I suppose you do), why the hell are we disagreeing? Is it simply because of the way ABCT has been defined?
ReplyDeleteI don't know where I've said it before (probably on one of your comments), but I'll say my position again.
In the midst of a bubble, there are both malinvestment and overinvestment. There is investment that does not correspond with consumer desires, and there is entirely too much of it (in that sense, ANY malinvestment can be considered overinvestment). The important part of of the ABCT is malinvestment. In fact, we never really recognize that there is "too much investment" because that phrase is meaningless.
There is unemployment in lower order industries because the new investments that went to accommodate consumptions turned out to be malinvestments and had to be liquidated. It's the same story with higher order goods. Both higher and lower order goods receive malinvested capital, so similar stories can be told of each.
Jonathan, you might not realize this but there's considerable disagreement amongst Austrians, so it can be hard to figure out what falls under ABCT and what doesn't. In the review to my article, both my reviewers disagreed with each other on whether Hayek would have advocated loose money in the depression or not (which made responding to them very tricky). There's disagreement on the monetary disequilibrium point too.
ReplyDeleteGiven the chaotic state of the school, I was quite clear from the get go what I was talking about (as was Krugman) - specifically, the adjustment of the capital structure and its sufficiency as an explanation for the downturn.
So maybe what you would put under ABCT might be different, but that's precisely why I laid out what I was talking about from the very beginning. You've consistently ignored that and accused me of not understanding Austrian economics because instead of addressing my point you address the straw man that you wish my point was. Now I've finally got it drilled into your head what I have been addressing from the beginning, and now you're saying I don't understand ABCT because I don't define it the way you do. Fine, if it boils down to a what falls under ABCT and what falls under something else it seems to me that's nothing to get pissed off about. Until the Austrians get their ducks in a row you can't talk down to me for not being sure exactly how to address the issue at hand, and instead just being clear about what I mean.
Here's the thing, Jonathan. You haven't raised any points that I didn't raise. We haven't uncovered any point of yours that is especially newsworthy (which is fine and good - I don't expect either F&OST or Economic Thought to be breaking new ground! Do you?).
So instead of droning on and on about how I don't understand what I'm talking about, why don't you quit the crap and recognize that substantively we've barely disagreed on anything and its largely been a matter of definition. If you want to chuckle at what I called ABCT, go for it. But Krugman and I were both pretty damned clear about what we were talking about from the very beginning.
" But Krugman and I were both pretty damned clear about what we were talking about from the very beginning. "
ReplyDeleteObviously not. Or, you can talk about one thing and call it another. If it's the latter, just admit it. Just don't get insulted when we accuse you of not really addressing what you're claiming to address (i.e. a strawman).
" Until the Austrians get their ducks in a row you can't talk down to me for not being sure exactly how to address the issue at hand, and instead just being clear about what I mean."
ReplyDeleteActually, Austrian business cycle theory is pretty unified. Free banking versus full reserve banking doesn't really change anything.
Furthermore, it's not within your right to define Austrian business cycle theory. It has already been defined. If you do not understand the definition it's not our fault.
I think the reason why you think I'm attacking a strawman is because you think I was initially attacking you and your view of the Austrian school, when I was actually just attacking this idea that reallocation of labor and capital explains everything.
ReplyDeleteNobody brought up banking questions.
ReplyDelete"Furthermore, it's not within your right to define Austrian business cycle theory. It has already been defined. If you do not understand the definition it's not our fault."
ReplyDeleteIs this really what your argument is boiling down to now?
Look I was quite clear (as was Krugman) what was being addressed. Don't hide behind this with that sort of indignation. If this is really your beef you should have said from the beginning "ok - ABCT is probably too broad for what you're talking about".
Like the other day in your post - you put the justification for the policies that Keynesians advocate under the "liquidity trap" label, and I just said "well, the liquidity trap is actually a little narrower than how you're using it", and that's all that's really necesary. You clearly knew what the liquidity trap was - you wanted to talk about the liquidity trap specifically (just like I wanted to talk about the readjustments of the capital structure specifically), but you might have thrown in one phrase that cast too wide a net. I knew what you were addressing - I didn't go on and on about how ignorant you were because you mixed that up.
Don't go around telling me the problem is my ignorance when the problem is really just a slight misuse of terminology (which may even still be debatable - I've heard people distinguish between the credit cycle and the business cycle - so maybe not everyone agrees with you?). I was perfectly clear what I was talking about - now you're masking your overreaction to it with this point that could have been very easily addressed very early on - if that was sincerely your issue.
Daniel,
ReplyDeleteWhat the fuck are you talking about?
What differences between Austrian definitions are you even talking about, then? I labor to understand what you're thinking (again, I unfortunately can't read your mind).
My view? My view is the same as Mises's, Hayek's, Rothbard's, Huerta de Soto's, et cetera.
"Look I was quite clear (as was Krugman) what was being addressed."
ReplyDeleteOh please, get off your high horse. You weren't clear at all. You said you were critiquing Austrian theory, and it's obvious that you weren't. Now you're trying to defend yourself from two exclusive angles:
1. That my theory is not the same as the rest of the Austrian school's.
2. And that you were critiquing something else.
Well, obviously, you were critiquing something else. But that "something else" was not Austrian theory of the business cycle. You can claim otherwise as much as you'd like to, but it doesn't make it true.
"If this is really your beef you should have said from the beginning "ok - ABCT is probably too broad for what you're talking about"."
This has nothing to do with it.
" ...(just like I wanted to talk about the readjustments of the capital structure specifically)"
And nobody is talking about anything else. But, to understand the structure of production you have to understand the nature of the distortions it went through. You can't look at it and ignore the rest of Austrian theory, and then claim we assume our premises. It just doesn't work like that. It's all related.
" Don't go around telling me the problem is my ignorance when the problem is really just a slight misuse of terminology..."
No, the problem really is your ignorance (and your continued attempts to claim that you everything there is to know about this).
" (which may even still be debatable - I've heard people distinguish between the credit cycle and the business cycle - so maybe not everyone agrees with you?)"
what?
Daniel,
ReplyDeleteThe only substantial difference in the Austrian school is on banking. There are no differences in interest theory, capital theory, etc. There's some wiggle room for monetary theory but I can't think of anything besides that where there is substantial disagreement on. To be perfectly fair, the Keynesians have much more disagreement (as shown by the multitude of New/Neo/Post schools). This is one advantage of basing a school of thought on apriorism. Differences come down to logic, not interpretation or emphasis.
I didn't think you were being clear. After some time, I managed to pull from your argument that ABCT doesn't explain unemployment in lower order goods - but that wasn't immediately apparent to me. In the future, if we have a discussion on Austrian theories, I would suggest stating your point clearly so I (or Jonathan if he stops being pissed) can respond and answer your question.
I don't know what to tell you other than my traditional reference of books. Jonathan and I have given you the Austrian treatment; I don't know of anything we haven't covered. Of course, a final answer to this (and most questions) would consist of you understanding fully Austrian interest theory, capital theory, and monetary theory (hint: I don't understand these fully - which is why I defer questions on them to the scholars).
"You can't look at it and ignore the rest of Austrian theory, and then claim we assume our premises."
ReplyDeleteJonathan - quit this witch hunt mentality. I am not out to get the Austrian school. I'm not trying to ignore the rest - I'm saying that the people who do ignore the rest, who do only point to this readjustment issue, have a completely bankrupt approach. Why are you so intent on this idea that the point was to somehow discredit the Austrian school.
"No, the problem really is your ignorance (and your continued attempts to claim that you everything there is to know about this)."
Could you actually take the time to quote me when you make these sorts of claims about what I claim?
Mattheus -
ReplyDeleteSure - I don't think I was claiming there were differences on capital or interest. I cited monetary differences. Jonathan brought up banking differences. Those are the two big theoretical differences I'm aware of, but I'd also add that there are methodological differences (some taking the a priorism more seriously than others).
"To be perfectly fair, the Keynesians have much more disagreement (as shown by the multitude of New/Neo/Post schools)."
Ya definitely. We do make up new words when we have disagreements (just like free bankers vs. full reserve banking). "Keynesian" is certainly used as a catch-all, but you'd never attribute a post-Keynesian idea to Greg Mankiw because he might call himself a Keynesian. Nothing's wrong with any of this, let's be clear. Too much uniformity I think is unhealthy.
"Differences come down to logic, not interpretation or emphasis."
Well, in theory at least. Whether this is true in practice is an empirical question (there's no deductive process that can lead you to conclude how human beings will actually differentiate themselves intellectually).
I apologize for being an asshole in the past and in all future cases. There are times when I do go overboard. I will address any concerns or future concerns later, with a clearer head.
ReplyDeleteThe money differences are the banking differences. The disagreement is over monetary equilibrium theory.
ReplyDeleteDamn it dude! I was planning a dramatization of the last two days... you can't go apologize cause now I feel like an asshole and can't post it!
ReplyDeleteLook - I clearly cast a wider net than I should have by even mentioning ABCT. I should have just stuck to talking about mismatches, or called it "crude ABCT" (which is always a handy way to knock down fallacies without being accused of knocking down strawmen).
Let me put it this way - go back to the Krugman post and read the Kocherlakota quote that he's taking to task. THAT is definitely not what you are saying over on Economic Thought. THAT idea of mismatch is clearly fallacious, and it's all I'm trying to point out.
It sucks, but the fact is a lot of people have this basic "labor and capital need to be reallocated and that's all" understanding of the situation. Cochrane is another one - he has said "People who spend their lives pounding nails in Nevada need something else to do". It is purely a reallocation story, and that's really dumb.
Now - that's not all that the Austrians have said on the matter. One good thing that your posts have highlighted is that not only does the Austrian school point to more than this, but that it's this distortion that causes the boom (the boom and the malinvestment aren't separable). That's a really important point to make.
I suppose there's just so damned much "labor and capital just need to be reallocated" out there that I think that needs to be addressed. I'm no Austrian because I think it's insufficient - but if you're going to be an Austrian I don't think you can just put out this reallocation of labor and capital theory. That's really my only point - that's a bad argument.
Here's what I had... I apologize in advance :)
ReplyDeleteA Dramatization of the last two days:
Krugman: People who believe that busts are caused by reallocation between sectors don’t make any sense. I’m going to call them “hang-over theorists” and mock them in a very juvenile way that will probably give Wayne Anderson an aneurism.
Kuehn: Krugman has a good basic point, albeit probably a lack of deeper understanding and tact; a lot of Austrians trump the readjustment of the capital structure as an explanation for the situation we’re in, but that’s not really sufficient. They need to take Krugman’s criticism seriously.
Xenophon and Murphy: There’s also this issue of unsustainable growth during the boom and capital consumption and that could be broad-based.
Kuehn: Oh right, good point. I was addressing the readjustment of the capital structure which is specifically pointed to by some people but we should be clear that Austrians also point to this issue too and that does address it. But the initial point still stands – don’t rely on sectoral readjustment for this sort of thing.
Catalan: You don’t understand what you’re talking about!
Kuehn: Well, that’s a little insulting and highly dubious.
Catalan: You don’t understand what you’re talking about! It’s the lengthening of the capital structure that causes that unsustainable growth.
Kuehn: OK, but my concern is that an awful lot of people are just talking about the need to reallocate labor and capital as the source of all this. That’s the only piece of the Austrian school that I was ever criticizing. I never denied the other stuff – I’m just trying to make this fairly basic point.
Catalan: You don’t understand what you’re talking about! You’re clearly not pulling capital theory, credit theory, interest theory, etc. together if you just talk about that. Malinvestments and the distortion of the capital structure lead
Kuehn: Well my whole point is that it’s problematic to just point to this reallocation issue.
I don't get a mention? Wow Daniel. I thought we were closer than that...
ReplyDeleteAlso, I didn't bring up the fact that there are institutional barriers to employment that are not directly related to ABCT. The minimum wage, for instance, tends to create unemployment in lower order capital goods industries (like retail).
Dude - you got a WHOLE BLOG POST.
ReplyDeleteGreedy, greedy, greedy :)
btw - not sure if you saw, but Crooked Timber picked up your Mises post.
I am unabashedly happy about my plug. Thanks again.
ReplyDeleteI just checked it out now. No comments worth reprinting. Oh well.
Low interest rates encourage spending on producer and consumer goods simultaneously. Whether spending increases more on producer or consumer goods depends on their relative elasticity. ABCT predicts a lenghtening of the capital structure, but it also predicts an increase in consumption.
ReplyDeleteSince no extra resources have been created or discovered, all the extra spending must eventually begin driving up prices. By sustaining the excess supply of money (and artificially low interest rates), then relative price distortions can be suspended for a time. Eventually, however, when the money injections cease, prices adjust and reveal malinvestment.
Since spending has been "stimulated" on both producer and consumer goods, and corrupted price signals have transmitted these false messages throughout the economy, all manner of industries that are far from the epicenter of the boom may be affected.
Having said all that, NGDP did not rise significantly above its normal growth rate between 02 and 07. Then, in 08, NGDP fell more than any time since the Great Depression. I tend to think an excess demand for money is the primary cause of the recession's depth. However, what caused the excess demand for money? Here I tend to look toward ABCT and the housing bubble. They weren't big enough to cause a recession of the depth we are experiencing, but they are big enough to set in motion a series of events that culminates in monetary disequilibrium.
The Fed probably helped fule the boom (though I don't think all that much) and it certainly should have prevented the excess demand for money that followed.
I think Krugman meant to characterize the entire Austrian school, even if you didn't. He has explicitly referred to Austrians in other posts, and he doesn't recognize a difference between the hangover theory and the Austrian theory.
ReplyDeleteJonathan -
ReplyDeleteWell here he was just refering to Kocherlakota, who he clearly knows is not an Austrian. I think he has this idea in his head of "liquidationists"/"hangover theorists" as a pure sectoral readjustment story - like Arnold Kling. Krugman certainly puts the Austrian school under that umbrella - appropriately for many "crude Austrians", inappropriately for other Austrians - but I think he sees the liquidationist perspective in more places than that, whereas many Austrians read him and think he's talking just to them.