Assault of Thoughts - 11/13/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

- The Wall Street Journal describes Robert Shimer's suggestion that sticky wages are a major contributor to the current depression. Shimer, of the University of Chicago, is one of the major figures in the worker flows/job flows literature that I'd like to work in in graduate school. He may very well be right that sticky wages are a factor here. How much, I don't know. It seems pretty hard to deny that this is a balance sheet recession, and I'm not sure what would lead me personally to put any undue weight on wages. But I'm sure it's part of the story. So what's the best way out of that, and what can we expect from more flexible wages in the current environment? For the answer to that question, I'd advise going to the nineteenth chapter of the General Theory.

- Brad DeLong shares an anecdote about Keynes from Skidelsky: "when Keynes lectured at Cambridge about monetary theory, he would begin by reading an article from the FT (or occasionally the Economist), and then ask: "What is the theory that lies behind this argument? Is it coherent? Could it be correct? How can we find out?" And that is how he would teach monetary theory at Cambridge."

- Brad DeLong also comments on how a macroeconomics course should be taught now. No explicit mention of capital-based macro, although I think he's thinking of that sort of thing with his second bullet point ("The theory that high unemployment today is the unavoidable consequence of past overinvestment"). This probably isn't entirely satisfying to Austrians (no detailed mention of roundaboutness, etc.), but should it really be entirely unsatisfying either? I've never gotten a straight answer on this "malinvestment vs. overinvestment" point. When I emphasized the malinvestment facet that Hayek emphasizes in a blog post several months ago, I got a sharp reply from Jonathan insisting I knew nothing about Austrian economics. But whenever you call it an overinvestment theory they get bent out of shape too. If you act like it's a sectoral readjustment model, you're wrong - if you act like it's an overinvestment model with some sectoral features, you're wrong - if you act like it's a general overinvestment model, you're wrong. It's a moving target. Rothbard claims that it is "overinvestment in higher stages" only, Skousen here suggests it is undifferentiated overinvestment. Mises here seems to argue that malinvestment in earlier production stages is the point (much like Rothbard). Sechrest presents a combination of malinvestment and overinvestment here. Garrison (pg. 81, Time and Money) also notes that the Austrian school is both a malinvestment and overinvestment theory (and that malinvestments alone would be inadequate), while Anderson calls perspectives like Garrison's a "willful distortion" of Austrian economics (here, of course, Anderson is critiquing Krugman specifically, not Garrison). Jonathan presents a view much like Sechrest's here and here. Jonathan says "So, for those who continue to claim this overinvestment nonsense as an interpretation of what I write, it is only due to your lack of understanding of Austrian business cycle theory," while Garrison writes "over-investment is a critical enabling aspect of the theory. Without the over-investment, the malinvestment would be as short-lived as Hicks's critical remarks suggest". For Jonathan, overinvestment is "nonsense", while for Garrison it is "critical". How are non-Austrians supposed to navigate this? How can Austrians navigate this? Is it perhaps time to consider the prospect that, non-Austrians are not the ones that have understood you wrong, but that it is Austrians who have explained it inconsistently and in an extremely confusing way? I initially just wanted to share the DeLong link and ask what Austrians thought of his second bullet point. Then I figured I had to qualify it or else I'd be confused of distorting things. I generally approach the issue how Garrison does - that's how I think of ABCT. But please, share thoughts -and do it without accusing others of being ignorant.