Wednesday, November 30, 2011
Some have similarly argued that Nazis provided the clearest Keynesian experiment in the 1930s. To a certain extent, this is obviously true. Just as we must admit that Nazi rocket technology was ahead of its time, so we must admit that they implemented certain Keynesian ideas when other Treasuries were still wringing their hands.
However, the character that dispairs at the end of the comic over Nazi rocket building acumen need not draw the same lesson from macroeconomic policy! By the forties we were doing Keynesianism too, without the nasty Nazi baggage. Indeed, as Brad Pitt's character noted in Inglourious Basterds - aggregate demand and killing those very Nazis was virtually identical: "our business is killing Nazis - and business is booming". Why anyone would consider saving Europe and East Asia from the wave of fascism washing over it a waste of resources (as some critics of the idea that WWII got us out of the depression suggest) is utterly beyond me. As far as I'm concerned, taking the cards we were dealt as given, it's some of the best money we ever spent. Hitler practiced economic policy that aided the German recovery. Roosevelt did it better, and defeated the Nazis to boot. Truman did it better, and made a huge human capital investment in prime age males and physical capital investment in Europe to boot. Eisenhower did it better, and gave us an interstate highway system to boot. Perhaps it was wise to pluck marginally attached Nazi party members for use at NASA. But don't send a Nazi to do an American Keynesian's job.
"With easier money we had a small rise in real interest rates, which mostly reflect expected real economic growth. Inflation expectations also rose. Of course this is all completely inconsistent with the Fed’s operating model; they think we need to lower long term rates. And it’s also completely inconsistent with the standard IS-LM model, as interpreted by Keynesians. But it’s completely consistent with the market monetarist version of IS-LM, as developed by Nick Rowe...
...Authors need to re-write the IS-LM model to show upward-sloping IS curves.
Market monetarism: Describing the world as it is, not as textbooks say it is."Now I don't have a real problem with market monetarism, but this whole business of an upward sloping IS curve seems to make a mistake that you see intro students make a lot: confusing shifting curves with shifts along curves. Part of me is hesitant to make so simple a critique of guys like Scott Sumner and I suppose Nick Rowe (it's been a while since I've read the post on why he thinks the IS curve should be upward sloping), but since other intellectually formidable guys think it's nonsense, it's worth throwing this out there.
The IS curve is downward sloping because holding all else constant, a reduction in interest rates increases investment. Changing only interest rates, demand increases. But this is very different from interest rates changing as a result of a shift of the IS curve itself due to changes in demand that are unrelated to changes in interest rates. This bugs my students a lot - it takes a couple weeks to get used to the idea that "increasing demand" is an ambiguous statement. I press them - do you mean increasing quantity demanded or increasing the demand schedule? It all depends on what's causing the change - is it due to a change in price or a change in something else? One is a shift of the curve, one is a shift along the curve.So what are we dealing with here? We have increasing interest rates. Why? Sumner himself says we have increasing interest rates because of growth expectations. Anticipated increases in future income shift the IS curve to the right. And if we can sum up the impact of this morning's policy announcement in one phrase it would be "anticipated increase in future income". We try to segment monetary policy into movements of the LM curve and fiscal policy into movements of the IS curve for obvious reasons, but when we're talking about changes in expected future income we have to be careful. There are two questions to ask:
1. Is demand changing because interest rates are lower? If the answer is "yes", then you are moving along the IS curve.2. Is demand changing because something other than interest rates is making investors willing to invest more than before, given the same interest rate as before? If the answer is "yes", then you are shifting the IS curve itself.
It is quite plausible to have both. But saying "we observe demand increasing with interest rates" is not the same as saying "holding all else constant, an increase in interest rates increases demand".We often see prices and demand both go up simultaneously in other markets - one need not throw out downward sloping demand curves over that.
Right? Tell me if I'm thinking about this the wrong way, please.
Tuesday, November 29, 2011
Commenter "Patch" provides this passage from Human Action:
"It is beyond doubt that credit expansion is one of the primary issues of interventionism. Nevertheless the right place for the analysis of the problems involved is not in the theory of interventionism but in that of the pure market economy. For the problem we have to deal with is essentially the relation between the supply of money and the rate of interest, a problem of which the consequences of credit expansion are only a particular instance.
Everything that has been asserted with regard to the effects of any increase in the supply of money proper as far as this additional supply reaches the loan market at an early stage of its inflow into the market system. If the additional quantity of money increases the quantity of money offered for loans at a time when commodity prices and wage rates have not yet been completely adjusted to the change in the money relation, the effects are no different from those of a credit expansion. In analyzing the problem of credit expansion, catallactics completes the teachings of the theory of money and of interest.”
You can read it in context here.
I think this supports my premise to DeLong initially. Gold is given something of a free pass because it doesn't fluctuate all that much, and certainly not at political whim. If paper money increased at the same pace as the gold supply, you would not see Mises upset about paper money. The whole point (the whole reason why we like it) is that it is more flexible than the gold supply. The sweat of the gold miner's brow has little to do with the matter at hand (and I don't think DeLong ever seriously thought it did).
At Bob Murphy's blog, Danny Sanchez (of the Mises Institute) notes that this is how Rothbard read Mises too. In America's Great Depression, Rothbard writes:
"In his Human Action, Mises first investigated the laws of a free-market economy and then analyzed various forms of coercive intervention in the free market. He admits that he had considered relegating trade-cycle theory to the section on intervention, but then retained the discussion in the free market part of the volume. He did so because he believed that a boom–bust cycle could also be generated by an increase in gold money, provided that the gold entered the loan market before all its price-raising effects had been completed. The potential range of such cyclical effects in practice, of course, is severely limited: the gold supply is limited by the fortunes of gold mining, and only a fraction of new gold enters the loan market before influencing prices and wage rates.”
Another relevant point to emphasize here is that this whole discussion really highlights the reason why Austrians insist on talking about inflation in a way that nobody else talks about inflation. If this is how you think about the business cycle, it clearly matters whether we're talking about price increases or a money supply increase in general. If money "enters the loan market" you're clearly going to have some bidding up of prices as a result of increased borrowing, but the primary impact of the money supply inflation is going to be on the capital structure, not on prices and wage rates. And it's precisely that impact on the capital structure that presents the problem for Austrians.
A much longer discussion is available here.
I don't agree with all of Patch's criticism of DeLong. In my comment section, Patch accuses DeLong of selective quotation. Patch writes:
"Lets take a couple of more sentences from the page that you [DeLong] decided to cherry pick your quotes, okay?
"If gold production had been considerably greater than it actually was in recent years, then the drop in prices would have been moderated or perhaps even prevented from appearing. It would be wrong, however, to assume that the phenomenon of the crisis would not then have occurred."
Brad seems to have left out the sentence that comes right after his "proof", and right before the union quote. How convenient!"
Now this bothers me, because Patch himself is now cherry picking and cutting off his passage at convenient times. If you read the entire passage it's clear that DeLong still has caught Mises making a problematic claim. If you keep reading past where Patch stops, we have:
"It is true that there is a close connection between the quantity of gold produced and the formation of prices. Fortunately, this is no longer in dispute. If gold production had been considerably greater than it actually was in recent years, then the drop in prices would have been moderated or perhaps even prevented from appearing. It would be wrong, however, to assume that the phenomenon of the crisis would not then have occurred. The attempts of labor unions to drive wages up higher than they would have been on the unhampered market and the efforts of governments to alleviate the difficulties of various groups of producers have nothing to do with whether actual money prices are higher or lower."
Mises essentially says "don't think you're out of the woods yet - even if we're on gold the unions are still going to f*#% it up". He gives no indication that he thinks that "it would be wrong... to assume the phenomenon of the crisis would not then have occurred" because gold could cause the crisis. He says it's wrong because there are other causes outside of monetary causes. That's quite an omission on your part, Patch! He continues to discuss labor unions for another paragraph, and then he discusses another danger of being sanguine about how an increase in the gold supply would have moderated the crisis. He says that it "leads to the view that the crisis could be overcome by increasing the fiduciary media in circulation."
So my view is that DeLong has not cherry picked here and he has stumbled upon a genuine gold fetish on the part of Mises in this particular book. I am not convinced by Patch that DeLong has cherry picked because it seems clear to me that the one sentence DeLong picked out is truer to the entire passage than the two sentences that Patch picked out.
That having been said, my view is also that the passages from Human Action provided by Patch do show Mises telling a different story - and being more cautious about gold. That's fine by me - people can change their views over time. But clearly Brad has identified a problematic viewpoint from 1931, at the very least.
In the same collection of essays that DeLong quotes from, an essay of Mises on The Stabilization of the Monetary Unit appears that was published in 1923. This is intriguing to me because Keynes's Tract on Monetary Reform was also published in 1923 and it was on essentially the same topic. Does anyone know if anyone has written a head-to-head comparison of the two, or looked into their comparative influences. Keynes was deeply involved in the German situation at this time too, which I'm sure influenced Mises's thought as well, which is why this comparison seems particularly interesting... I may have to finally add Mises to the reading list. He hasn't quite intrigued me enough up until now.
Peter Boettke offers a very thoughtful post about OWS and leaves it open to his readers. I have two comments at the very beginning.
One of the things that I would have hoped something like OWS would bring to light is that critics of libertarianism do not take libertarian arguments for granted about the (1.) robustness of libertarian polities, (2.) the idea that it is non-libertarianism that devolves into crony capitalism, (3.) the idea that libertarianism is the most advantageous social order for human liberty, or that (4.) non-libertarian social orders are in opposition to principles of emergent order.
Generally, non-libertarians don't think any of these things make much sense. It's why we're not libertarians after all! If we thought these things were true, we would be libertarians!
Nevertheless, as many non-libertarians know when you talk to a libertarian you often get treated like you:
1. Have never put much thought to institutional robustness
2. Do not place great importance on liberty
3. Do not think emergent orders have commendable qualities
Part of the reason why they treat us this way is that we don't always use the same language and buzzwords - so there's a certain amount of information that is lost in translation (you'll notice on this blog I explicitly try to use the language of libertarians when talking about these issues so that less is lost in translation - Bleeding Heart Libertarians could perhaps be said to use the opposite strategy to talk more effectively to the left).
Anyway, to a certain extent the post from Boettke is a little dispiriting for me - really the Chris Coyne video. I know that's Chris's view of things. And I have another view of things. But there's the sense from the video that feels like "these OWS people mean well but this goes over their head", which worries me. I don't think issues of institutional robustness have gone over Chris Coyne or Peter Boettke's head. I just think we disagree about those questions!!! But I get the impression from a lot of libertarians that they don't think it's just a matter of disagreement - they truly think critics of libertarianism don't comprehend the issue at hand.
That's discouraging - to a large extent I think we've failed to "occupy libertarianism".
I don't think all libertarians are like this - nobody in the comment section should go off on that tangent. Gene Callahan is one guy that actually agrees with me on a lot of things, but I think probably is still a "libertarian" - and where we disagree he knows it hasn't "gone over my head" - we just disagree. Same with Bob Murphy who I have developed a tremendous appreciation for. We disagree all the time, but I never get the sense from him that he thinks the fundamental issue is lost on me or has gone over my head (sometimes the whole disagreement is which issues we consider truly fundamental!). Not all libertarian are like this. Many just think their critics have failed to appreciate the real issue at hand. That needs to change.
I've found that an excellent litmus test for this is to talk about "libertarian social engineering". If you think this concern is completely nonsensical and are shocked to hear people talk about it, you really don't understand your critics and probably mistakenly think they are a lot more clueless than they actually are. Now, you can disagree with the charge of "libertarian social engineering" but still know why people like me worry a lot about it. That's fine. But if the very phrase makes you see a big flashing "does not compute" sign then you have some work to do.
Oh well :)
In seriousness, though, I was surprised to hear her even raise the issue of the Austrian school halfway through the lecture - and I was glad she did. We finished our coverage of fiscal policy, and then she started talking about criticisms. She mentioned New Classical macro and then she said that the most prominent criticism today was from the Austrian school. Within a certain context (i.e. - as the most publicly/politically prominent criticism) this is probably correct.
She didn't get into anything too detailed, but she did talk about their views on interest rates and the housing bubble, and perspectives on the Fed and interest rate determination in the loanable funds market.
The feedback from the class on the video was telling. We've talked explicitly about Keynes and Keynesianism for two and a half lectures now - first with aggregate demand and supply, then with actual discussion of fiscal policy, and finishing up that discussion today - and she's discussed Keynes by name in each lecture. No real discussion of the Austrian school, but after the video she asked "who thinks Keynes won the debate" [two hands or so went up out of the whole lecture hall... I refrained to register my vote], then she asked "who thinks Hayek won" [a bunch of hands shoot up - although in fairness most of the 250 or so present abstained - probably a fifth raised their hands].
It just goes to show you, when you make a video where (1.) Keynes says he wants to steer the economy, (2.) Hayek says he wants you to be free, (3.) Keynes appears indifferent between waging wars and constructing public works, (4.) Keynes is acting like a jackass generally, and (5.) Keynes the jackass ends the video barfing in a toilet, then yes - undergraduates who have never read Hayek or Keynes will respond positively to Hayek but not Keynes.
And this is really the issue - that the video really doesn't help the students understand the actual disagreement between Keynes and Hayek. It is fun, yes. But it takes an important debate in economics and acts like it's a debate about ideology where one guy likes freedom and the market and the other guy likes government and control. And it should be no surprise at all that this is the message that the video conveys, since it is a message that is explicitly embraced by its creators, Russ Roberts and John Papola.
I have a macro review session tonight - I'll be going over the liquidity preference, the multiplier, crowding out, and automatic stabilizers - but it will be interesting to see if the students bring up the video.
As a side note, I had not noticed until today that Mike Munger is in the first video as well as the second.
- Principles of Political Economy, Ch. VII Section III
Monday, November 28, 2011
- Capital, Vol. 2, (pg. 466 in the Penguin edition)
That observation by Marx is also interesting considering what Keynes said about the intellectual history of Say's Law. He came down hard on Say and even Mill, but then said that those who followed them - particularly Marshall, Pigou, and Edgeworth - were too smart to put it as crudely as Say did. Still, their conclusions rely on Say's Law (whatever the hell that is - I'm not trying to minimize the arguments over the "law" itself - I'm just not interested in getting into that argument).
- Brad DeLong continues the discussion on Mises and gold, quoting me again. This one is quite good. He pointed out some Misesian contradictions before, but reconciled it with a cost of production theory of value. He never actually thought that's how Mises reconciled the contradiction - I think he simply thought Mises ignored it. But a lot of people (myself included) mistakenly figured Brad was saying Mises actually held a cost of production theory of value. This post is much better in that it identifies the contradiction and simply calls it a contradiction, without any hypothetical reconciliation. Hopefully some Austrians will take it up.
- And speaking of Brad DeLong on the history of economic thought, I had always figured he was exaggerating when he used to talk about Marx as a real business cycle theorist. I figured he must be cherry-picking or exaggerating. Nope - as usual Brad is dead-on. I've had my nose in Theories of Surplus Capital, Capital, and Grundrisse all weekend absorbing Marx on Say's Law, and that's pretty much his position. Granted - he starts with some very interesting discussion of the whole C-M-C' "metamorphsis of commodities" model that gets to sounding a lot like an explanation you'd hear out of Nick Rowe. But then he essentially says "this is all abstract - let's get more concrete" and makes a series of RBC arguments.
- A great old post by Arnold Kling on labor shortages.
- Heeding his warning, I am linking to this Nick Rowe post without comment... I do have a few thoughts, but now I'm nervous about sharing them. His footnote about "political economy" may be the most valuable point in the post for some readers.
- And Nick Rowe's post reminds me of a fortune cookie I got just this weekend: "The wise man learns more from the fool than the fool learns from the wise man". Probably right.
Sunday, November 27, 2011
It's all very good. That's more or less what I thought of the LSE one, so I never ended up even watching the Reuters one. It's roughly my reaction to the whole Keynes-Hayek rap too. These have mostly been thinly veiled political tropes dragged out and forced - like square pegs into round holes - into the mouths of Keynes and Hayek.
To a certain degree I'm exaggerating of course - you don't get the approval of Caldwell and Skidelsky for pure ideological tropes. But I think this accounts for a great deal of the modern Keynes vs. Hayek discussions, simply because people hate Keynes without knowing why and so they make up crap and attribute it to him - and others do the exact same thing with Hayek.
- T.R. Malthus, Principles of Political Economy (2nd edition, 1836)
For my final history of thought essay, I'm doing some reading and thinking about Malthus, Marx, and Keynes and each man's refutation of Say's Law.
Saturday, November 26, 2011
Thursday, November 24, 2011
I think peoples' mistake in criticizing OWS is in acting like OWS is against capitalism.
I think the mistake of both the Tea Party and OWS is in acting antagonistically to the rest of the population - as if nobody outside the movement wants a free society or as if nobody outside the movement is frustrated with Wall Street. And I think both movements are lacking in concrete ideas.
1. Butternut squash and hazelnut salad (One of our favorite fall meals - we're substituting walnuts and walnut oil for the hazelnuts and hazelnut oil, just because we couldn't find hazelnuts - it's very good the original way too).
2. Pumpkin fondue... in a pumpkin! Have never made this before, but it sounds soooo good. Also going to be bringing this to my parents tomorrow.
One of the nice things about the internet is simply that word gets around - there's a lot of information to acquire, of course, but information acquisition is cheaper. So I assume most readers are well aware that in 1623 William Bradford ended a system of collective ownership of the corn production of Plymouth Colony, of course to the great benefit of Plymouth. If you're not aware of why collectivism doesn't work, you need to read this blog (and other economics blogs) more closely! If you're not aware of this particular Plymouth Colony episode, let me know in the comments and I can dig up a few old links.
Wednesday, November 23, 2011
- Mark Blaug, perhaps the best known historian of economic thought, passed away on the 18th (HT Tyler Cowen). This is a paper of his on how nobody does history of economic thought anymore. I've been lucky enough to have had a class offered in the subject both in undergrad and now in grad school, by two great professors who also have a deep interest in history of thought (Robert Blecker and Clyder Haulman). And of course readers know that this blog is practically a "history of Keynesian thought" a lot of the time.
- Speaking of this blog's work on Keynes - the moment I've been dreading has happened! One of my professors has become aware of the existence of F&OST! Not so terrifying as I imagined it - my math econ professor emailed to say my German preface post has been discussed favorably on an economic history listserv, and he offered some other literature. I can deal with one of the more intimidating professors we have reading what I think is one of my better posts :)
- Krugman and Thoma point us to Diamond and Saez offering a new rendition of Edgeworth's old argument for a progressive tax. This - I should add for people entranced by flat tax schemes - is pretty widely accepted by economists. Dan Klein of GMU accepts the logic of it (if not the policy... I'm not sure what his exact views on taxes are). Bob Murphy will give you counterarguments here (I should also note that most economists agree with Bob on interpersonal utility comparisons, but would not draw all the conclusions from that that he does).
- I got this book in the mail yesterday: Beyond Stock Stories and Folktales: African Americans' Paths to STEM [science, technology, engineering, and mathematics] Fields. I'll be reviewing it for the Journal of Negro Education once I get a break from classes this December. Part of my continuing effort to build a foundation (and a chunk of a CV) on science and engineering labor market research.
Tuesday, November 22, 2011
Monday, November 21, 2011
But it very clearly isn't. I have found nothing anywhere in the Austrian corpus about the baneful effects of improvements in gold mining technology, and how they invariably lead to an Austrian boom-bust cycle--how a gold discovery distorts market signals and creates the illusion of artificial wealth just as any other monetary expansion does."
This is all quite true, and as I and a few others in his comment section noted, I probably should have just said "relatively stable measure" in the first place, because clearly gold is not a perfectly stable measure. In an email, Brad says:
"I know that von Mises explicitly holds a subjective utility theory of value [note well, all Austrians who have been accusing Brad of never reading a word of Mises]. But an immediate consequence of such a subjective utility theory is that a given quantity of money is equally good no matter where it comes from--it has the same subjective value, after all. And it seems very clear to me that for von Mises a given quantity of gold money is much better than that same quantity of paper money."
I disagree with that last sentence. If paper money increased at the same rate that the gold supply increased, I don't think you'd have nearly as much complaints about it from Mises.
But these paper/gold comparisons seem to be getting a little off track to me. I enjoy rubbernecking at the horrific train wreck that is gold-buggism as much as anyone, but the real concern seems to me to be the artificiality of money creation in general. I hope Brad can accept the argument that Bill Woolsey and I make, that gold was acceptable because its rate of increase was small and relatively unrelated to political meddling - and that if the rate of increase in the gold supply had been as rapid and manipulable as that of the paper money supply, Mises would have more concerns.
That having been said, I think the real question is "why does Mises consider an increase in the supply of money in response to a recession 'artificial', given that what we are responding to is an increase in the subjective valuation of liquid money - i.e., an increase in the demand for money?" That's the real question for Mises. And the answer, I think, is that he doesn't see an increase in the subjective valuation of liquid money as the cause of recessions. He sees the cause of recessions as a rearrangement of the capital structure after an "artificial" boom. If Keynesians really want to offer a critique of Mises in a language he understands, they would say "Mises is suggesting that in the face of changes in individual subjective valuations of money, the state, by fiat, ought to keep the money supply fixed." Because that's really what Mises and any Austrian who wants a gold standard (::cough::Ron Paul::cough::) is proposing.
Sunday, November 20, 2011
Saturday, November 19, 2011
Friday, November 18, 2011
Listening to and reading Christina Romer ranks among the smartest things anyone who is interested in economics could do
And, importantly it does not depend on reason itself. People don’t have to have any understanding of why they believe what they believe for what they believe to be usefully true. That is, operating as if the world was this way informs you about the world.
A reasoned theory of the world should acknowledge this anchor. In some way our reasoning should accommodate common sense. Either as a special case, or as an approximation, or as a local maximum or something.
Otherwise, you have a hard time explaining why common sense has stood the test of time and cultural selection."
Regime uncertainty is a weak explanation of the current depression... but that is NOT an excuse to fail to take regime uncertainty seriously
We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and, even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance."
Thursday, November 17, 2011
- The 1920-1921 depression demonstrates Keynesians are wrong.
- Keynesians thought there would be a post-war depression.
- Keynes's German preface lauded the Nazis.
- Keynesianism is consumptionism.
- Mises was pro-fascist (there are a lot of things I find reprehensible about that passage in Liberalism, but one thing I don't think is that it suggests he was pro-fascist).
That doesn't exhaust it - it's just a few that interest me. And I added Mises at the end to demonstrate all the Keynes stuff is because that's what interests me - not because I'm trying to put forward a sob story where we're the embattled ones.
Granted, it's not a problem with the internet - it's a problem with how people have interacted with the internet at the dawn of the information age. After all, I could not have produced my counter-arguments to these or promoted them so efficiently on this blog and elsewhere without the internet.
An interesting Slate video on the chemical properties of different elements and why gold has been used as money.
I found the part about radioactive elements interesting. They had two reasons for rejecting them:
1. Health risk, and
2. Radioactive decay - as they say "your money would disappear!"
Now, to a Slate columnist those sound like bad things. But to an economist worried about liquidity preference, that would be a feature, not a bug! Who would want to hold on to money if it depreciated rapidly and posed a health risk?
Silvio Gesell enters the nuclear age!
- One little pet peeve that has come up recently: people who, when speaking of the demand curve facing all firms in a market for a single product, call it "aggregate demand" instead of "market demand".
- Sometimes I just don't understand how other bloggers' minds works. Thankfully, probably the two blogging minds I understand least blog together (easier to contain my puzzlement that way). The most recent zinger was this post from Don Boudreaux where he presents the most common argument for constitutional limits to democratic governance - the argument that I accept for constitutionalism, and the argument that has allowed constitutionalism to sweep the free world - and he asserts that that argument is "seldom identified" as a reason "for restricting the role and scope of government". Really Don? Really? I'm filing this under "inventing an opposition out of thin air just so you can argue with them".
- LK makes an interesting point discussing this Skidelsky interview. Everybody ought to know by now that the 1930s in both Britain and the U.S. amounted to blind groping towards something like Keynesianism. Understandable, of course. Keynes didn't even have a full grasp on Keynesianism until 1936, and these things take time to digest. As we know, his ideas became very popular very quickly, and were eventually used in policy making more deliberately. LK notes that the first time Keynesians really had the reins of policy was during WWII, and their task then wasn't to increase aggregate demand, but to tamp it down and control inflation. When I was looking through the Keynesian predictions for the post-war period I saw this a lot too. They stated regularly how important it would be to keep hold of inflation now that we're out of the depression. One new policy tool that was often cited in this regard was Social Security (forced savings). Hayek said that Keynes was worried his followers might turn into inflationists. I wonder if this is just another of Hayek's many tall tales. If you think about the Keynesian scene in the 1940s, there really doesn't seem to be much reason to think they'd turn into a bunch of inflationists. There was inflation then, of course. But then again - it's not cheap to kill fascists. I don't know how attributable that is to Keynesianism, particularly when the administration hired the Keynesians to keep all that in check.
- Brad DeLong takes Paul Krugman to task for yelling at David Glasner. I agree strongly. Take a look at the update in Glasner's post - he links to F&OST. I made the same connection to the liquidity trap that Krugman did (before Krugman did), without treating Glasner like an enemy (which he's clearly not). [UPDATE: After all, if Brad DeLong has to tell you you're being too harsh to someone on the internet, you know you have a problem! :) ]
- Speaking of people who link to F&OST.
Wednesday, November 16, 2011
My concern with all the Austrian work is that while it may be a very interesting description of what happens to what they call the "time structure of production" in response to the interest rate, there's no obvious reason to tie that to the business cycle. Their story is "during the boom interest rates are artificially low, and during the bust they go back to their natural rate". In a loanable funds world, that makes sense. But in a liquidity preference world, the story is "interest rates are too high for full employment". In a liquidity preference world where those interest rates are kept too high by a zero lower bound, you of course have even more trouble.
So the whole Hayekian story is predicated on the assumption that we move below Wicksell's natural rate during the boom, and return to it in the bust. Our best understanding of macroeconomics (from Hicks et al.) says that we're at Wicksell's natural rate during periods of full employment, and are above it during the bust.
In other words, the Hayekian mechanism should produce a capital structure that is just right during the boom and too short during the bust - exactly the opposite of their normal story.
So while all the fluctuations of the "temporal structure of capital" are quite interesting to me, I don't think they offer much in the way of a business cycle theory."