I'm still chewing on all these, but these posts by Russ Roberts and Bryan Caplan seem to be quite disappointing.
- Russ Roberts provides a ham-fisted attempt to disprove Keynesianism, as he does every couple of weeks. He seems to be sincerely dedicated to the view that crude Keynesianism is Keynesianism, and that fiscal policy works anywhere things aren't doing well with the economy. I list a few other problems in the comment section. If find it very troubling that he teaches young people economics. This isn't even advanced macro stuff - this sort of understanding of Keynesianism wouldn't have passed my freshman year macro class. That's bad. I'm amazed commenters on here still ridicule Krugman and DeLong. Look - I know they trash the people they disagree with, but you can learn considerably more from a Krugman or DeLong post on this subject than from this post on Cafe Hayek. Read Russ, then read this, this, this, this, this, this, and this for starters. Also pick up Lawrence Klein's The Keynesian Revolution. The man is practically a Marxist, but he gets Keynes and he really cleared up a lot for me. Also go through every single comment section on this blog and read everything that Lee Kelly has ever written about monetary disequilibrium. This sort of thing makes me want to be a humble macro professor at a big public school that may not be particularly prestigious, but where I'll get to teach lots of people.
- Bryan Caplan, I think simply needs to incorporate the idea of effective demand into his discussion. If Russ was an example of confused macro, this seems to me to be an example of the sort of confused micro thinking that leads people to say things like "if they wanted it they would have demanded it in the market", and draw all sorts of bad conclusions. I could repeat some externality points here too, but I won't belabor the point.
This is why I won't be applying to George Mason this fall, even though it's just a couple blocks away from my apartment. I could do work with their public choice program - that would be interesting, but I think it would be frustrating to work with Don Boudreaux, and while I find all that fascinating it's not my primary research interest. I'd love to work with Peter Boettke, but I don't really have an interest in studying Austrian economics (even though I enjoy reading and blogging about it). The macro pool is fairly shallow.
OK - I feel like a jackass rereading this post now, but we'll see how it goes. Reading both the Roberts and the Caplan piece really took me by surprise, though. I do want to send a red flag up the flag pole on these, because I know my readers read both those blogs.
Tuesday, September 14, 2010
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You have lost all credibility by recommending something I wrote, at least in my eyes.
ReplyDelete:P
In any case, I don't like fiscal stimuli -- I am terribly biased in this regard. But the intellectual masochist in me finds it far more enjoyable and interesting to make arguments for fiscal stimuli than against. Perhaps Russ Roberts would benefit by doing something like the same, because the world benefits little from yet another refutation of vulgar (usually strawman) Keynesianism.
And I know that about you on fiscal stimulus and I STILL recommend you, which should say something about the clarity of the comments.
ReplyDeleteRuss's Keynesianism amounts to "if you increase G than Y goes up".
There's really no excuse for it.
The word "spending" is the cause of much confusion, I think.
ReplyDeleteAll income is spent. If income is $1000 and consumption is $800, then $200 of income is spent on goods to provide future consumption, i.e. saving. In this context, "spending" is the use of scarce resources to pursue desired ends. With this definition, one cannot increase spending as a proportion of income -- only real spending can rise and fall.
But "spending" is often used to refer to cash transactions. (Here "cash" does not just refer to currency, but all money -- as is customary in accounting). With this definition, one can increase spending as a proportion of income, because holding money is treated seperately from saving.
When the supply and demand for money equilibrate, changes in money spending are irrelevent to real spending, but merely reflect a portfolio shift -- people choose to hold cash balances rather than other assets.
But how do the supply and demand for money equilibrate? Either supply must increase, demand must decrease, or prices must inflate or deflate.
Supposing that a central bank is incapable or unwilling to adjust the money supply, and assuming that government cannot alter money demand by increasing or decreasing its debt, we must rely on inflation or deflation to restore equilibrium. But given inflexible prices, economy wide disequilibriums (shortages and surpluses) can be deep and prolonged.
In this way, a change in money-spending can change real spending. (Though an asymmetry exists -- monetary surpluses may only create the illusion of increased real spending, I think, whereas monetary shortages really do reduce real spending.) A shift in portfolio from assets to cash balances represents a decrease in real spending, even though resources are no more scarce.
The price system is blinded to some part of the available resources, because the medium of exchange is being frustrated in its role as a medium of exchange. One could say the economy is suffering from bad money and mean the same thing as another who says that aggregate demand is too low. Unfortunately, in a monopolist monetary order, there are few recourses available. A fiscal stimuli, in my opinion, is a rather ham-fisted means of trying to equilibrate the supply and demand for money when better alternatives exist.
Anyway, notice how it is possible to describe a Keynesian-like recession without saying "we need more spending!" The term "spending" seems to confuse matters, because people mix up the spending of resources and the spending of money. These are not the same thing, especially during a recession! At least, it seems to me Russ Roberts mixes up these notions when asking "where does the money come from?"
The word "spending" is the cause of much confusion, I think.
ReplyDeleteAll income is spent. If income is $1000 and consumption is $800, then $200 of income is spent on goods to provide future consumption, i.e. saving. In this context, "spending" is the use of scarce resources to pursue desired ends. With this definition, one cannot increase spending as a proportion of income -- only real spending can rise and fall.
But "spending" is often used to refer to cash transactions. (Here "cash" does not just refer to currency, but all money -- as is customary in accounting). With this definition, one can increase spending as a proportion of income, because holding money is treated seperately from saving.
When the supply and demand for money equilibrate, changes in money spending are irrelevent to real spending, but merely reflect a portfolio shift -- people choose to hold cash balances rather than other assets.
But how do the supply and demand for money equilibrate? Either supply must increase, demand must decrease, or prices must inflate or deflate.
Supposing that a central bank is incapable or unwilling to adjust the money supply, and assuming that government cannot alter money demand by increasing or decreasing its debt, we must rely on inflation or deflation to restore equilibrium. But given inflexible prices, economy wide disequilibriums (shortages and surpluses) can be deep and prolonged.
In this way, a change in money-spending can change real spending. (Though an asymmetry exists -- monetary surpluses may only create the illusion of increased real spending, I think, whereas monetary shortages really do reduce real spending.) A shift in portfolio from assets to cash balances represents a decrease in real spending, even though resources are no more scarce.
The price system is blinded to some part of the available resources, because the medium of exchange is being frustrated in its role as a medium of exchange. One could say the economy is suffering from bad money and mean the same thing as another who says that aggregate demand is too low. Unfortunately, in a monopolist monetary order, there are few recourses available. A fiscal stimuli, in my opinion, is a rather ham-fisted means of trying to equilibrate the supply and demand for money when better alternatives exist.
Anyway, notice how it is possible to describe a Keynesian-like recession without saying "we need more spending!" The term "spending" seems to confuse matters, because people mix up the spending of resources and the spending of money. These are not the same thing, especially during a recession! At least, it seems to me Russ Roberts mixes up these notions when asking "where does the money come from?"
Oops -- double post. Please delete.
ReplyDeleteLee Kelly -
ReplyDeleteYou mention consumption but then you talk about savings, ignoring the most obvious "spending" counterpart: investment! That's what Russ is missing! It's the most important component of demand for Keynes - how Russ left that out is beyond me.
"One could say the economy is suffering from bad money and mean the same thing as another who says that aggregate demand is too low."
Precisely. And most more sophisticated people who talk about AD being low talk about MD being high (DeLong, Krugman, Sumner). That point is rarely highlighted in pieces like Russ's, and I increasingly think that it's because Russ himself doesn't understand the point.
So is the "better options that exist" QE in your opinion?
ReplyDeleteThat's the problem! Monetary disequilibrium drives a wedge between saving and investment spending. In the case of a monetary surplus we get Austrian malinvestment, and in the case of a monetary shortage we get a Keynesian recession. For the latter, income is spent on savings but not on investment, because money is not a higher order good. Unless the saving of money -- the postponement of consumption -- is somehow channeled into the production of higher order goods, for some time saved resources will go to waste. Normally this is achieved by financial intermediaries like fractional reserve banks, but when that system breaks down Say's law appears to be violated.
ReplyDeleteOh, and yes, quantitive easing would be good, I think. There are other policies I might advocate, but ultimately I would prefer a real free banking system. It seems to me that a developed free banking system would be highly robust against these types of problems.