Another video is out that's going to confuse people about what is and isn't a "fallacy".
So it's interesting, the new Econstories video only attributes underconsumptionism to Malthus (which is fine I suppose - he talked a lot about the consumption of the rich... there's nothing about his discussion of general gluts that precludes an investment focus, but he talks about consumption more than Keynes does, for example). Papola repeatedly insists to me that Keynesians worry about consumption but this video seems to ease off of that when it actually comes time for Keynes himself to sing.
But it seems to me they're still wrong. Output does depend on consumption spending as much as it depends on investment spending. As Gene Callahan covered recently, what Keynesians say of course is that when we look at the business cycle it seems to be about investment fluctuations associated with expectations and the impact of liquidity preference on the interest rate. But there's nothing wrong with saying that a fall in consumption will reduce output or a rise in consumption will improve output. We just usually think that if investment took the hit, investment is probably what needs to be corrected.
Calling the Malthus/Say dispute in favor of Say sets the science back at least 100 years. As Brad DeLong points out, even Say recognized that eventually.
Output is determined by both supply and demand factors. Long run growth is essentially a supply side-story, but fluctuations in output are essentially demand side stories. I know Papola thinks he's helping to educate the public, but he's doing quite the opposite. He's spreading fallacies under the guise of correcting them. And we really don't need a public that thinks demand isn't the primary driver of unemployment right now.
And what's amazing is that Papola always comes to me with NGDP stuff! Many Austrians do, of course. But when Ryan Murphy, for example, advocates market monetarist type stuff he recognizes it's a demand-side argument (I think he does at least!).
We also have - once again - the fairly substantial mistake of saying that Keynesians think saving is bad when it's actually the discoordination of savings and investment (and the re-equilibration of the two at a lower output level) that's the problem. Jack up savings. That's fine. The question is where is investment at, and is it commensurate with whatever level of savings we have? If it's not, output will shift to make up the difference and that, kiddies, is what we call the business cycle.
These videos have consistently been confused and misleading. Artistic license is one thing. I enjoy watching them and I'm not concerned about minor problems in order to make it rhyme, etc. What's a problem is when you make mistakes and then jump on the mistaken version that you've provided and tell students and non-economists that that's a fallacy. Even where the exposition is accurate (as in the Malthus/Say disagreement), Papola is on the wrong side.
Also - I've always been told that people thought Hayek's English was hard to understand. I personally thought he sang beautifully - I'm not sure what you guys are talking about.
Thursday, December 6, 2012
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Unfortunately, as well-intentioned as they are, I don't think John Papola and Russ Roberts actually pass an ideological Turing test when it comes to Keynesianism. Maybe they should bring you or another Keynesian on board to help write the Keynes lyrics.
ReplyDeleteI don't know if my experience is common or not, but the original Hayek-Keynes video is what originally brought me to the econ blogosphere where I've been having a heck of a good time and learned a lot. So maybe the primary advantage of the videos is that it turns people onto economics.
What I'd like to see is an explicit Austrian critique of Alfred Marshall himself. So far, I haven't been able to find any writings by Austrians that directly criticise Alfred Marshall himself in the time when Marshall was active.
ReplyDeleteKeynes has an angelic voice.
ReplyDeleteI noticed that, too. Too bad there are no youtube videos of him doing karaoke.
DeleteBlue Aurora,
ReplyDelete--> What I'd like to see is an explicit Austrian critique of Alfred Marshall himself. So far, I haven't been able to find any writings by Austrians that directly criticise Alfred Marshall himself in the time when Marshall was active. <--
Man, Economy, and State by Rothbard. It's in Chapter 6 I think. He takes apart the scissors concept and a couple of other Marshallian fallacies.
Seriously, what is it with you guys and the word 'fallacy?'
Delete"And we really don't need a public that thinks demand isn't the primary driver of unemployment right now."
ReplyDeleteRight, Daniel. I have to spend my money. Hell, I need to spend other people's money, too. Because prices can't drop. And certainly, producers that made things that would not make them money should never go out of business or have to scale back for that error.
Saying Say, and not Malthus, was correct does not "set the science back 100 years". Keynes did that when he utterly ignored what Say's Law actually meant. In a properly functioning market, you still need to produce something to sell before you can buy anything.
Obama: "Look, I get the Keynesian thing. But it's not where the electorate is."
ReplyDeleteWe really need a public that doesn't think "demand" is the primary driver of unemployment right now. Or ever. Or the "primary driver" of anything. Ever.
Consumption is the reward for boosting output. It is taking real resources out of the economic system, without putting real resources into the economy.
ReplyDeleteConsumption can easily be seen as not able to boost output by considering a situation where every single individual starting tomorrow began to spend their entire incomes on their own consumption. Business owners, investors, entrepreneurs, workers, everyone. All consumption. What would happen? Output would collapse, and very soon all capital accumulation would be consumed and used up, and at some point, no resources would be left.
Now, this scenario, while extreme, and unlikely, shows us that consumption does not boost output even when consumption is less than 100%. Output is ONLY boosted through productive activity, not consumption activity.
The reason much of the public is consumption minded is precisely because of the myth you mentioned above is perpetuated by the economics profession to not only students, but members of the press, politicians, and authors. It is why virtually every journalist, when reporting a drop in consumption spending, communicates it in a downtrodden way as if the economy necessarily suffers with lower consumption.
Demand side explanations of downturns are fallacious. Humans have a practically infinite desire to consume. The reason why aggregate cosnumer spending and investment drop is because the economy is out of equilibrium to such a degree that it will take quite some time to recalculate, reallocate, and produce that which consumers actually want to buy when they want to buy it. The decline in aggregate spending is a derivative, not causal, phenomena during recessions.
The question that needs answering is "why has AD fallen?" The new-Keynesians have done a decent job of describing inefficiencies in wage and price adjustments, but this does not explain the sort of fluctuations that we have seen over the last decade. Other factors include uncertainty about future economic conditions and the impact of future - or even current - policy changes. This can lead to businesses to increase RCB as the cost of holding money my actually be less than the expected value of losses that occur as policy changes negatively impact investments. (Think of California's retroactive income tax increases that just passed on November's ballot.) Deficiencies in AD are usually caused by government intervention. This was the case during the Great Depression (due to bad monetary policy at home and abroad, unit banking, and price fixing - all government impediments to the market) and it is the case now.
ReplyDeleteI don't care about what economists write to each other behind JSTOR paywalls and in language and equations that nobody understands. I care about what economists, pundits and politicians say to the general public. I care about what's driving our cultural understanding about the way an economy works and grows. Since these two things are at odds with one another, I put particular emphasis as a filmmaker on the latter since it matters, and not the former.
ReplyDeleteAnd an overwhelming number of them talk about how consumer spending can "drive growth" because "consumer spending is 70% of GDP". That is a fallacy. And when nobel-prize winning Keynesian economists are saying that consumption grows the economy, I have every right to criticize that position for the fallacy that it is. The fact that they publicly contradict the technical literature and even their own work has nothing to do with my intellectual honesty and everything to do with theirs.
Consumption doesn't grow the economy. Period. Consumption uses stuff up. It shrinks the stock of value. And I'm fully aware of the technocratic tweak about demand for money and the ideal of nominal spending stability. I'm unaware of any sudden nominal shocks that weren't reactions to some inciting phenomenon like a rash of business failures. People don't just suddenly hoard cash for no reason. And regardless, if they do, money supply should be increased to meet that demand. I included this in my 2010 video with Larry White. It's got nothing to do with this video. It would confuse people to attempt including it.
It's not an academic paper, Daniel. And thank god... because nobody reads those and no politicians either. Hence we hear that UI benefits are a stimulus and tax cuts for those who have to spend every nickel on consumption are better than those for people who might save the money. That's the point. That's what matters because it's what the public is actually told about policy. It's false. It's nonsense. So I honestly and openly criticize it. I'm open and honest about my position. It's clear. I stand by it 100%.
Good post, John.
DeletePS. Thanks for embedding the video, Daniel. I appreciate your spreading it and taking the time to criticize it.
ReplyDelete