Happy New Years! I had mine, but I have a bad cold and want to be well enough to see my niece and nephew tomorrow before they leave, so I'm going to feel very old and go to bed now.
Monday Smackdown: New York Times Edition
7 hours ago
"Now, the thing about Schiff and all the other Austrians predicting runaway inflation is that they were right to make this prediction given their model. If you believe that a recession is caused by a failure on the production side of the economy, the result of past malinvestment or something, you should also believe that any attempt to correct this decline by expanding credit will simply result in too much money chasing too few goods, and hence a lot of inflation."It seems to me the answer is ambiguous or at least depends on what you consider "Austrian theory" and what you consider to be some auxiliary take on the quantity theory (which is obviously a lot bigger than Austrian economics).
"...it’s really important to distinguish between fundamental predictions of a model and predictions that an economist happens to make that don’t really come from the model. The prediction that huge increases in the monetary base will cause large increases in the price level, and that big government deficits will cause big increases in interest rates, are more or less inescapable if your model of the economy is one in which recessions are supply-side problems, not the result of inadequate demand. Conversely, the prediction that neither of these things will happen if the economy is in a liquidity trap is a fundamental prediction of Keynesian models. On the other hand, the unfortunate Romer-Bernstein prediction of a fairly rapid bounceback from recession reflected judgements about future private spending that had nothing much to do with Keynesian fundamentals, and therefore sheds no light on whether those fundamentals are correct."
"Finally my substantive point: I have never seen any of these guys explain why price inflation (and interest rates) are the decisive criteria for whose model and hence policy recommendations are right. Consider, for example, the infamous Christina Romer unemployment graph, showing what would happen with and without the Obama stimulus package. As far as I know, DeLong didn’t ask Romer to announce to the world that she had been wrong about everything and to spend years at the feet of Joe Salerno. No, Daniel Kuehn for example thought that anyone who wanted to use the Romer forecast as a test of the efficacy of her model was putting out “complete horsesh*t.”One important difference with the Romer prediction that bugged me was that it was made in late 2008 and released in early 2009 when we were still getting a sense of what the scope and scale of the problem actually was. And with Romer (as Bob alludes to here), there was also the question of which projection was wrong - the baseline or the actual trendline. [If I am losing readers please speak up in the comments - I'm assuming this is all common knowledge].
So I’m not saying the following–like I said, I screwed up in a way that is relevant for economists talking to the general public. But since the following is exactly analogous to how Keynesians deal with the unfortunate Romer situation, I’m curious why they think Austrians who warned of large price inflation can’t say the following:
"Hey, it’s true, we threw out some predictions of how much prices would rise, and we were off. But our basic model wasn’t wrong, it was just the underlying forecast of the baseline. Bernanke really did create a bunch of price inflation, it’s just that in the absence of Fed action, the drop would have been bigger than we expected, so on net we didn’t see as large of an increase in absolute terms. Indeed, Krugman et al. agree with the economic model involved: they all congratulate Bernanke for having staved off massive price deflation. So what’s the argument here? We’re arguing about the counterfactual of price movements in the absence of Fed monetary inflation."
Seriously, how is the above any different from how Keynesians defended Christina Romer, to the point of saying anybody who thought her prediction should be used against her was intellectually dishonest?"
"These background conditions were, in modern parlance, treated as being exogenous to the economic system. They lay outside the model, treated as a 'black box' whose detailed internal workings were to be willfully ignored. Exogenous to her concerns is what the waitress means when she says, 'It's not my table'."No, no, no! The first part is fine but that last sentence completely misses the point! Something is exogenous if it does
"The most terrifying thing of all is that being completely, comprehensively, unmistakably, fundamentally, fatally, totally wrong has not led Robert Murphy to rethink or modify any of his analytical positions or ideological beliefs by even one iota.I think it's fair to say that he hasn't changed his perspective on how the economy works to date (he certainly hasn't dropped dismissing Krugman), although he has acknowledged how badly this has gone at a couple points.
I mean, one would expect an announcement on his weblog like: "I have been totally wrong, about everything. I am closing down this weblog for five years to avoid misleading readers while I intellectually retool. You will find me sitting at the feet of Paul Krguman, chanting 'om mani padme hum' until I achieve enlightenment."
Not gonna happen..."
"I believe that in many cases the ideal size for the unit of control and organisation lies somewhere between the individual and the modern State. I suggest, therefore, that progress lies in the growth and the recognition of semi-autonomous bodies within the State - bodies whose criterion of action within their own field is solely the public good as they understand it, and from whose deliberations motives of private advantage are excluded, though some place it may still be necessary to leave, until the ambit of men's altruism grows wider, to the separate advantage of particular groups, classes, or faculties - bodies which in the ordinary course of affairs are mainly autonomous within their prescribed limitations, but are subject in the last resort to the sovereignty of the democracy expressed through Parliament.I love that last sentence especially, and it's one of those cases where you wish Keynes had lived longer than he did. He simply had no use for the wave of nationalizations that washed over Britain in the mid-20th century - the nationalizations that disturbed Hayek so much. I wish more of this had made its way into the General Theory. The need for the socialization is clear in both. The doubts about central planning and the state are there in both. But people still think of state socialism when they read those passages of the General Theory because we've been hard-wired to associate "socialization" with "socialism". How depressing is that? Keynes can't talk about any sort of social action without people thinking of socialism - even when he denigrates state socialism in the very same passage. Anyway - in addition to denigrating state socialism I wish he talked more about joint stock companies in the General Theory as well. It would have helped to clear a lot of things up. Keynes also regularly notes that different solutions are appropriate to different societies - I imagine he would say that lot of the public corporations he personally found appropriate for Britain in the 1930s might not be appropriate for America or even for Britain in the 2010's. The point is clear on the socialization of investment, though - he is least enthusiastic about state ownership, most enthusiastic about complete private ownership by joint-stock companies, and willing to contemplate public corporations. Needless to say, that's not socialism and I personally think it's a stretch to call it corporatism (but perhaps that could apply).
I propose a return, it may be said, towards medieval conceptions of separate autonomies. But, in England at any rate, corporations are a mode of government which has never ceased to be important and is sympathetic to our institutions. It is easy to give examples, from what already exists, of separate autonomies which have attained or are approaching the mode I designate - the universities, the Bank of England, the Port of London Authority, even perhaps the railway companies. In Germany there are doubtless analogous instances.
But more interesting than these is the trend of joint stock institutions, when they have reached a certain age and size, to approximate to the status of public corporations rather than that of individualistic private enterprise. One of the most interesting and unnoticed developments of recent decades has been the tendency of big enterprise to socialise itself. A point arrives in the growth of a big institution - particularly a big railway or big public utility enterprise, but also a big bank or a big insurance company - at which the owners of the capital, i.e. its shareholders, are almost entirely dissociated from the management, with the result that the direct personal interest of the latter in the making of great profit becomes quite secondary. When this stage is reached, the general stability and reputation of the institution are the more considered by the management than the maximum of profit for the shareholders. The shareholders must be satisfied by conventionally adequate dividends; but once this is secured, the direct interest of the management often consists in avoiding criticism from the public and from the customers of the concern. This is particularly the case if their great size or semi-monopolistic position renders them conspicuous in the public eye and vulnerable to public attack. The extreme instance, perhaps, of this tendency in the case of an institution, theoretically the unrestricted property of private persons, is the Bank of England. It is almost true to say that there is no class of persons in the kingdom of whom the Governor of the Bank of England thinks less when he decides on his policy than of his shareholders. Their rights, in excess of their conventional dividend, have already sunk to the neighbourhood of zero. But the same thing is partly true of many other big institutions. They are, as time goes on, socialising themselves.
Not that this is unmixed gain. The same causes promote conservatism and a waning of enterprise. In fact, we already have in these cases many of the faults as well as the advantages of State Socialism. Nevertheless, we see here, I think, a natural line of evolution. The battle of Socialism against unlimited private profit is being won in detail hour by hour. In these particular fields - it remains acute elsewhere - this is no longer the pressing problem. There is, for instance, no so-called important political question so really unimportant, so irrelevant to the reorganisation of the economic life of Great Britain, as the nationalisation of the railways."
"We must aim at separating those services which are technically social from those which are technically individual. The most important Agenda of the State relate not to those activities which private individuals are already fulfilling, but to those functions which fall outside the sphere of the individual, to those decisions which are made by no one if the State does not make them. The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all."
Daniel Kuehn is a doctoral candidate and adjunct professor in the Economics Department at American University. He has a master's degree in public policy from George Washington University.