Friday, August 19, 2011

Assault of Thoughts - 8/19/2011

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

- Nick Rowe does a good job explaining S=I, and talking about the difference between accounting identities and behavioral theories in economics. I will have to keep this post in mind this fall. My TA assignment is to work with a 300 student introductory macroeconomics class. As a new PhD student I'm sure I'll get a pile of grading, but I'm pretty sure I'm going to be holding review sessions as well. My experience in the blogosphere these last couple years has taught me that keeping identities and theories (and their respective purposes) straight is a big struggle for how people think about macro.

- Livio di Matteo is also looking towards fall classes, specifically teaching a history of economic thought class (I'll be taking such a class as well). Matteo discusses three excellent reasons to take history of economic thought seriously:

"1.It is fun.
2.As part of the liberal education of an economist.
3.A better understanding of the discipline as something that is subject to change rather than set in a final form

Number 1 I definitely agree with, but I have to keep reminding myself that it doesn't offer as many career options. Number 2 I think is deeply underappreciated. And I like number 3 because it pushes back on this notion that history of thought isn't relevant to the practice of economic science. To a certain extent it's not relevant insofar as all the personalities themselves don't matter all that much. But it does help you understand the context of what you're doing, and just as Newton helped us get to the moon despite being eclipsed, Adam Smith and John Maynard Keynes still offer excellent theory despite being eclipsed as well.

- Karl Smith offers yet another excellent critique of Casey Mulligan. He writes:

"In a summing up post Casey states

'There is still no evidence to confirm the fundamental Keynesian proposition
that supply doesn’t matter.'
That was the fundamental proposition? I don’t think we had to go through all of this to see that this isn’t true and I am not sure who really thinks it is...

In contrast I thought the question we were trying to answer is: how is it possible that output can collapse without an apparent decrease in supply?

How is it possible that the US can have the same number of machines, the same number of workers and the same technological know-how yet nonetheless is producing less of the things that people want then it was a year before?

This is the core question

As Greg Mankiw once said - I'm not a supply-side economist or a demand-side economist. I'm a supply and demand economist.

- Brad DeLong has an interesting
post on Alfred and Mary Marshall.

- Robert Skidelsky
has a surprisingly good post on Keynes and Hayek. I think he does a decent job summarizing the Hayek position too - but you all can let me know if you don't think so.


  1. This is the core question.

    Is that it????

    I would have thought ABCT answers that pretty well! If that's the only economic question Keynesians are interested in, I don't see why (except for some points on methodology and terminology) they couldn't become mostly Austrian.

    I think ABCT answers the above question a lot better than aggregate demand theories.

  2. The DeLong and Skidelsky comments don't have hyperlinks associated with them.

  3. Geez do I have to do everything on this blog Gary!


    Will fix in just a second.

  4. Ahh, on further inspection, they do, the links just aren't highlighted for some reason.

  5. Does Skidelsky present a good description of the "rational expectations" concept?

    "We have here a clue as to why Hayek lost his great battle with Keynes in the 1930’s. It was not just that the policy of liquidating excesses was politically catastrophic: in Germany, it brought Hitler to power."

    Did austerity bring Hitler to power? Or rather, did the economic tumult following 1929 (and the collapse of the Dawes plan essentially) bring Hitler to power? I'm sure that is in there, but it is part of an explanation, not the whole; after all, fascist governments had been on the rise in Europe since 1922.

    "...the real question is whether President Barack Obama has it in him to don the mantle of President Franklin Roosevelt."

    We can only hope not. Most of what FDR tried made things worse or was simply superfluous. Indeed, Keynes stated this himself regarding the NRA - the program which admirers of FDR always wax lyrically about.

    So how is this a useful assessment of Hayek again?

  6. Gary - it was this section that seemed like a much better than average treatment of Hayek:

    "For Hayek in the early 1930’s, and for Hayek’s followers today, the “crisis” results from over-investment relative to the supply of savings, made possible by excessive credit expansion. Banks lend at lower interest rates than genuine savers would have demanded, making all kinds of investment projects temporarily profitable.

    But, because these investments do not reflect the real preferences of agents for future over current consumption, the savings necessary to complete them are not available. They can be kept going for a time by monetary injections from the central bank. But market participants eventually realize that there are not enough savings to complete all the investment projects. At that point, boom turns to bust.

    Every artificial boom thus carries the seeds of its own destruction. Recovery consists of liquidating the misallocations, reducing consumption, and increasing saving."

  7. As for Hitler and the Dawes Plan - what debt do you think Skidelsky had in mind? "German debt before Hitler" can only be refering to so many things, Gary.

  8. By the way - Yglesias had a good post on Nazi monetary policy recently. I recommend Adam Tooze's Wages of Destruction to anyone interested in this topic. His discussion of Schacht's desperate attempts to hold together the German monetary system at the beginning of the book was especially good.

  9. Indeed, Skidelsky's claim regarding the rise of Hitler to power is rather reductionist I'd say. Neither France nor Britain turned to fascism, yet they suffered significantly during this era (and both had popular enough fascist parties and elements on their societies - indeed, France's fascist party sort of normalized itself by 1939).

  10. I won't be reading the DeLong link; too long and too many huge chunks of quoted text. Blogging isn't about that IMO.

  11. "Lord Keynes" has made this argument before.

    You must avoid contractionary policy, or you will have fascists (or socialist extremists) in power.

    Uh huh.

    I merely wrote, "Somehow, you have already decided in advance how voters will react, by making a clear cut cause-effect relation between deflation and extremist candidates".

    I also asked why Estonia has not had any fascists coming to power because of its extreme fiscal contraction for several years.


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