Wednesday, September 8, 2010

Surprise! I agree!

It's always surprising to see areas where Austrians or libertarians pronounce that there is some sort of disagreement where there really isn't. It makes me wonder (1.) how much of the rift is caused by misconceptions, and (2.) what am I asserting about Austrians or libertarians that they actually agree with me on?

Two things bring this to mind - first, Jerry O'Driscoll responded to a point on Coordination Problem about demand deficiencies and the impact on the labor market. O'Driscoll responds (quite politely), "There is more to unemployment than a "labor demand deficit." I have a post at ThinkMarkets on the issue." The post he's refering to is very good - I read it several days ago when he first posted it. It's on labor heterogeneity and you can read it here. It's unclear, I suppose, whether he thought that I was saying demand deficiency was all there was to the labor problem. I never said it was all there was to it, so I don't see why someone would assume that that's what I thought. It's the major issue right now, though. Anyway - I know this is minor, but it was surreal to be pointed towards labor heterogeneity by a guy like O'Driscoll. I've been well aware of the issue of labor heterogeneity and the kinds of things that it leads to for quite a while - it's important in a lot of the New Keynesian literature and it was something that I had written on for school long before I even heard of the Austrian school. This is pretty common-ground stuff. This was a more ambiguous case, but it just makes me wonder if O'Driscoll realizes he's preaching to the choir. Hopefully he realizes that and is just sharing a new post of his (God knows I self-promote).

Even stranger was at ThinkMarkets where Mario Rizzo wrote:

"According to an article in the September 6th issue of the New York Times, more and more “experts” are now saying that the government should not try to prop up the housing market but should let prices adjust to their correct levels as rapidly as possible.

Well, you read that here as early as November, 2008 and then again in March 2009. It is part of the continuing myopic harping on aggregate demand which ignores all of the relative price adjustments that a post-bubble economy must experience. The Keynesian habit of ignoring the causes of depressions and dealing only with the analytically-secondary phenomena of aggregate expenditure is or should be unacceptable among intelligent economists.

I repeat what I said in 2008: Let the housing market collapse — fast."
Can someone clarify to me in what universe an aggregate demand or Keynesian perspective thinks that relative price adjustment shouldn't occur or is unimportant? The whole idea is that even when relative prices adjust naturally - as they should - aggregate equilibria can still be below full employment. Keynesianism assumes and expects the adjustment of relative prices - there is a call for price level stabilization, but explicitly and implicitly you don't touch or distort relative prices. I'm not even sure how distortion of relative prices even makes sense from a Keynesian position - it's not simply that Keynesians have never raised an argument against microeconomic efficiency, it's that there's nothing in their macroeconomic inefficiency story that would justify doing anything about relative prices.

So what exactly does Rizzo have in mind here? I had no idea, so I asked. He came around to saying "I am simply saying that if you concentrate exclusively on aggregate demand you would look at the decline of housing prices as bringing about a negative wealth effect and thus (further) decline in demand." This, of course is a very different claim. Yes, I would agree - if you plug your ears and close your eyes and pretend microeconomics doesn't exist at all (i.e. - "concentrate exclusively on aggregate demand"), then you will end up saying some dumb things. Who does that, though???

Keynesian macroeconomics assumes an underlying microeconomic foundation. You can't simply erase that microeconomic foundation and call it "Keynesianism". Neoclassical microeconomics is the microeconomic assumption of Keynesian macroeconomics. You'll see all kinds of frictions and asymmetries and fun things like that introduced, but none of that roams outside of neoclassical microeconomics.

It just gets a little silly to single out Keynesians on a post where the simple point is "housing prices need to deflate" - I point that has been made repeatedly across different economic schools of thought. As I said to Rizzo, I've always interpreted the home price shibboleth as being pushed by politicians who are concerned about the homeowner vote. Odd stuff.

As with most misunderstandings like this, it's a human fallacy rather than a fallacy that any single group is prone to. I'm sure I do it too - are there any areas that I comment on where Austrians/libertarians think "Surprise! I agree!"? Is there any area where I regularly make strange, needless conflict?

UPDATE: Joe Stiglitz, Keynesian grand poo-bah, certainly doesn't find aggregate demand thinking to be an impediment to basic points about relative price adjustment.

Also - I coined a term for this in a prior blog post: the "presumption of ideological orthogonality", or the idea that "because I think X, and their group disagrees with my group, they must think not-X". It's a bad assumption to make.

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