Saturday, November 27, 2010

If you can't beat your opponents, assume they're idiots!

Arnold Kling and Bob Murphy are both getting on my nerves, and I wish I could say it surprises me. I don't know why these two have so much trouble approaching their opponents as they are rather than as they imagine them to be. Everyone slips into straw-manning every once in a while. It's practically inevitable, for example, when you know enough about someone's position to know you disagree with them, but you don't know enough to make a cogent argument. But that's not the case here - these two should know better.

I'll start with Bob Murphy because he presents a much more egregious (although for that reason, probably more innocent) case than Kling. Murphy quotes Greg Ip writing: "People and businesses spend when their incomes are growing and they’re confident about the future…If…spending outstrips the economy’s productive capacity, inflation could result. But that’s years away: The economy today is awash in idle factories and unemployed workers." Classic demand-pull inflation talk. Fairly innocent stuff (I thought). Murphy, on the other hand, assumes that these two selectively quoted sentences constitute the full extent of Ip's (and Murphy expands it to Keynesians') understanding of inflation. Murphy then takes it upon himself to lecture us that in fact inflation and unemployment can come togehter - that you can have excess capacity and inflation at the same time.

He really has to assume a shocking degree of ignorance or idiocy on the part of his opponents to interpret it the way he did. There is absolutely no suggestion in here that Ip thought demand-pull mechanisms were the only cause of inflation, and in fact Ip mentions and addresses cases like Zimbabwe and the 1970s where stagflation (or hyper-stagflation) occurs. Murphy doesn't even try to address any of that. He takes two sentences about capacity-utilization driven inflation, fails to cite everything else Ip wrote about monetary inflation, and accuses Ip and others of some of the most absurd views on inflation that you can think of. This is precisely how Murphy responded to my 1920-21 paper - he invents ridiculous views of "what Keynesians think" so that half the time in the response is spent walking him back to reality from that strawman.

Arnold Kling writes a post denouncing large computer models of the macroeconomy, specifically citing the model in use in 1970. He suggests that Prad Krulong (Paul Krugman + Brad DeLong) advocate this sort of model and that they think macroeconomics went downhill from there. I searched high and low in Krugman and DeLong's recent postings and cross-postings on the state of macroeconomics to find their advocacy of 1970-vintage models, but couldn't! What is the heart of the problem with this model for Kling? It's similar to the issue that Murphy was addressing: the determination of inflation and wages, which is allegedly done by the Phillip's curve and a price-markup process (workers see prices rise, so they demand wage increases). I have to take Kling's word for this - there's no reason why this 1970s-era model couldn't have taken expectations into account or why it couldn't have distinguished between a long-run and short-run Phillip's curve. But let's take him at his word - so far this actually isn't so bad. Krugman had a recent post combining just such an inflation and wage determination mechanisms. It was basically to illustrate why moderate inflation targets might not be adequate. Kling panned it here, but seemed to essentially understand it. Several of his commenters simply could not grasp what Krugman was trying to say (Miguel Madiera and I try to clear their confusion up in the comment section).

That's all fine - the Phillip's Curve as classically conceived isn't wrong so much as it is inadequate. It's an empirical relationship that a lot of people wrong leverage into some sort of behavioral law. What's frustrating is that without any explanation Kling ties DeLong and Krugman to 1970s-style macro using a logic I can't even fully understand. I guess because recently Krugman and DeLong have advocated going back to an old-school macro before the assumptions of the rational expectations revolution? Anyway - no explanation at all of why this economics is at the heart of the Krugman-DeLong approach, and on top of that Kling raises the specter of wage and price controls and suggests that the Krugman-DeLong approach is going to lead to that. Kling's post is simply a mess. I could at least understand Bob Murphy's argument, as poorly reasoned as it was.


I have to admit - my interactions with libertarians and Austrians have been tiring recently. Hopefully it will pass, cause I like those guys. I've been mulling over some questions of my own that I find discussions with libertarians and Austrians do nothing to help me think through - like how excess worker reallocation relates to changes in the price level (for my NSF application), or how increases in nominal expenditures are supposed to put people to work (I'm increasingly unsure of what exactly I should think of quantitative easing which increasingly seems to me to be treating the symptom [demand for money; falling nominal income] rather than the disease [reduced demand for real output]). It's not encouraging when I read two economists like Murphy and Kling and realize they don't even understand (or they do understand and are straw-manning) the perspective that I'm coming from.


  1. Daniel,

    An increase in liquidity demand is not a reduction in demand for goods and services, but merely a change in preference for more liquid assets. For the economy to remain in equilibrium, an increase in liquidity demand should not alter the path of nominal expenditures. The reduction in demand for goods and services is actually a symptom of the excess demand for money -- you have it the wrong way around!

    The increase in nominal expenditures puts people back to work because it increases nominal demands for the products they are selling. More spending increases the profits of firms and households, and once the higher demand for cash balances has been satisfied, this results in more spending, sales, hiring, investment, etc.

  2. First, I don't think it's clear I have it the wrong way around. These things, like all instances of relative demand, are simultaneously determined. One of the primary reasons for an increase in liquidity preference is depressed demand. An asset bubble pops and wealth evaporates, so demand for goods and services is reduced. In response, demand for productive capital shrinks (because there is nobody to produce for), and demand for liquid assets increases for both speculative and precautionary purposes. And of course, as you say, one of the primary reasons for a decrease in demand is increased liquidity preference. I'm just not sure why you think it's so easy to untangle.

    I see the point of your second paragraph, and that's one benefit of quantitative easing I can agree with - but it still seems to be treating the symptom and not the underlying condition. The response is "so they want liquidity - give them liquidity until they don't want it anymore". The problem is, the liquidity preference is to a certain extent unnatural to begin with. But I suppose if you see it as more natural and not a consequence of a demand shcok, then this might be more viable.

    As I've said before - I'm still cautiously supportive. Just can't shake the feeling this is doing it the hard way.


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