Here. So only briefly in the paragraph starting "The Austrian approach raises the possibility" does he talk about anything that really has to do with the Austrian school. The rest makes it sound like Austrians' contribution is that politicians aren't the greatest investors. Isn't that what practically all economists think?
If Krugman had written this exact same op-ed I don't think I'd be seeing so many Austrians and libertarians on facebook reposting it.
I found it very odd.
Does anybody know of good examples of op-ed overviews of the Austrian take on the business cycle to contrast with this?
Monday, August 13, 2012
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Well Hayek's conception of the economic planning problem is central to the Austrian approach.
ReplyDeleteAnd this is more or less the issue Cowen is dealing with here; can China's central planners allocate capital, resources and labour in a way that doesn't lead to huge stagnation?
I think the opposite of Cowen: in the long run — in terms of long term innovation, technology and prosperity — it seems impossible. In the short run, excess capacity, a huge population and huge FX reserves make it very easy for them to stimulate lots and lots of consumptive demand. As another example, it seems fairly obvious that they have a problem with food inflation right now. I don't think they will have a problem using the machinations of the central state to deal with it.
True, but that's central to most economists' approach, right? Sure Hayek did a lot of work on that issue, but I wouldn't call the point "Austrian", and I got the impression the article was going to be talking about recessions.
Delete"can China's central planners allocate capital, resources and labour in a way that doesn't lead to huge stagnation?"
DeleteDon't you mean "malinvestment?"
There has been no stagnation in China, only explosive growth for decades now.
"In the short run, excess capacity, a huge population and huge FX reserves make it very easy for them to stimulate lots and lots of consumptive demand. "
DeleteThis is yet another falsehood: China's approach has been to engage in massive public sector investment and encourage private sector investment.
China's problem, for years now, is precisely lack of consumer demand, especially for imports, since the mercantilist exchange rate undervaluation makes imports more expensive but China's exports cheaper to foreigners.
"China's problem, for years now, is precisely lack of consumer demand, especially for imports, since the mercantilist exchange rate undervaluation makes imports more expensive but China's exports cheaper to foreigners."
DeleteYes, and my point is that from where they stand today that that problem should melt away, while in the long run, it may be innovation, technical development and entrepreneurship that suffer.
This is a long run prediction — and as your namesake put it I may be dead before I see fruit — not an observation.
Cowen seems to be thinking more of the malinvestment that happens during the boom phase of ABCT.
ReplyDeleteIt's difficult to see how similar malinvestment caused by monetary expansion is to malinvestment caused by direct government action. But, Cowen seems to be say that the latter may cause a period of apparently good economic performance before a bust appears (just as Austrians claim about the former).
Here I can't help thinking of Roger Garrisons broken capital triangles. The ones where long-term investment output is very high and consumption goods output is very high due to demand, but problem lie in the region between the two. I'm not sure how well this applies to China, but I think Cowen is thinking about this too.
Barry Eichengreen has an interesting one.
ReplyDeletehttp://www.readperiodicals.com/201109/2442065751.html
I have to admit, I didn't know from whose point of view that would be. With state capitalism, the measure would have to be the states, so while investment may be productive or not economically, it would always seem so politically, so how could anything be considered mal investment? Does he really want to say the state is unable to maximize its utility? More likely he means from the viewpoint of the populace but the populace doesn't get a say in it so how could one consider their objectives as the measure?
ReplyDeleteHere's a point that Austrians and Keynesians should like. Austrians because it's about capital and Keynesians because it uses very Keynesian logic. I doubt either will like it though :)
ReplyDeleteLet's consider a factory building setup for some specific industry. A building like that will be made from existing building materials and land using labour. Suppose the building doesn't exist yet. An entrepreneur owns the land to make the building and has enough cash to build it. But, he doesn't want to build it unless he is sure that it will be worth his while. He must perceive that the rent or sale price he will receive will be higher enough before he builds the building. It's not certain that building anything will yield a profit. This is the problem that Keynes' MEC discussions point to.
Let's consider society has before the building is built. Most of the materials for the building are in the ground or in stockpiles. The land itself is probably in use for farming or something else and in any case could be built on later. The potential labourers may be working on other things, or they may be unemployed.
Once the building is built the consumable inputs are consumed, the previous use of the land has been ended and the labourers have been drawn off other work - if they were employed. Those sacrifices may be worthwhile, if the building is valuable. But, they are not if it isn't. Little of this is captured in GDP statistics. If the building is built then it's cost is registered as investment, but if it isn't built nothing is registered. The economy may have the capability to build it at any time, but that capability is not captured by GDP. If the capitalist in question isn't positive enough about the future of the project then the inputs (which may be just marginally less valuable) are not used. If some of those inputs hang around as stock for long enough they will enter GDP as investment by companies in stock. But, not everything works like that, I doubt a quarry can book the gravel they have in the ground as investment even if they can access it at any time.
I'm not saying here that GDP is measured inaccurately, or flawed. My point is that it does exactly what it states: it measures output. It doesn't measure potential output and the two can't be expected to track each other precisely.