Friday, October 1, 2010

Assault of Thoughts - more macro links - 10/1/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

Lots of good macro posts to chew on lately.

- First, Krugman and DeLong hit back at that David Beckworth post I posted (favorably) yesterday, more from a theoretical than a practical angle. It's question I've struggled with a lot - why Keynesianism rather than, say, a run of the mill monetary disequilibrium perspective that lot's of people agree on? There are two dividing lines: paradox of thrift, and the liquidity trap, with the later being a more substantial dividing line than the former. Many people will buy the paradox of thrift besides Keynesians - but I think some have a tendancy to treat it like another increase in money demand. It is that, but it's more than that - it's an increase in money demand that is unmatched by an increase in investment demand, and that coordination problem necessitates a drop in real output. I can see how using monetary policy to make sure fluctuations in money demand don't put us into slower growth than is necessary makes sense - monetary policy to keep an even keel in a "business as usual" world, as it were. But in a pardox of thrift world, giving savers without investors to match them cash instead of actually increasing demand seems like something you may want to do - but it seems like really unappealing second-best. Let's say you satisfy the cash needs of savers. Then what? Does that take any purchasing power and put it back into circulation? Maybe a little because savers are more confident and savings rates come down (I'm not suggesting it would be entirely ineffective), but it doesn't really seem like it should. It seems like the monetary policy which in the normal world would have higher real effects, in the paradox of thrift world would have much lower real effects.

- The second issue that separates Keynesians from monetarists is the liquidity trap. Brad DeLong goes over this in a lot of detail. This is a good point to bring in Scott Sumner's response. I liked it - it was essentially trying to find common ground on monetary policy, which is fine with me. That's what I'm all about - pointing out that economists create more controversy than is necessary. But his attempt at finessing the liquidity trap wrinkle wasn't especially convincing. He pointed out that people don't really change their cash balances in response to the interest rate, and T-bills aren't really perfect substitutes for cash in the way that Keynesians say they are. I think this is largely right, but I don't really think of consumers as presenting the biggest saving problem here. It's businesses that are really the problem, and businesses are sensitive to interest rates, if not in their investment decisions (this is Keynes's argument - not sure I'd agree completely, but we can say "investment demand is relatively interest inelastic" at least), they're at least sensitive to interest rates in their portfolios. So Sumner's counter-argument doesn't really stand here. I guess I would say consumers worry me from a paradox of thrift angle, and businesses worry me from a paradox of thrift and from a liquidity trap angle. Tyler Cowen as very strangely pointed to corporate profits as evidence that there's not an aggregate demand problem. To me, it's precisely the run up in corporate profits that illustrates this point that paradox of thrift and liquidity trap are a problem when it comes to businesses. I'm not sure why it would indicate to him that AD is OK.

- Bryan Caplan calls Keynesians smug, and Daniel Kuehn wonders why he's giving this a forum. OK, there are a couple reasons - he actually points out something that I didn't think was all that revolutionary but I suppose worth reminding people that never thought of it before: Keynesians don't really distinguish themselves on empirical work. There's no magic, shut-everyone-down empirical study on this sort of thing for reasons that I've talked about countless times before: finding a counterfactual is very difficult in macroeconomics. Caplan points out that where Keynesians do well is in being very introspective and having a strong theoretical basis for their claims. Not exactly a news flash - if empirics are tough you compete on your theory, and Keynes does very well on that count. But still important, I suppose, for any a priorist inclined readers. What's also interesting is at the end where Caplan points to what he doesn't think is convincing about Keynesian theory. It's a little weak, but his first point is interesting because it's the same thing that Sumner was harping on - the interest sensitivity of money demand. If you click through that link you go here, to a post that Caplan wrote on the efficacy of fiscal policy in 2005. And let me tell you - it reads like it was written in 2005. Wow. I'm actually surprised he linked to it. Anyone who bases their argument on "where does the money come from" probably isn't making an informed critique of Keynesianism (and I feel like a post-Keynesian every time I point that out). For example, Caplan writes:

"this seems like a wash for total spending. If the quantity of loanable funds stays the same, the government borrows more and the private sector borrows less. If the quantity of loanable funds goes up because of higher interest rates, the government borrows more and the private sector consumes less."

This is sitting on the PPF, business as usual, demand is fine, loanable funds markets clear economics. This sort of economics has no place in 2008, 2009, or 2010. Caplan wrote this in 2005 and it shows. It was good economics in 2005. It should have stayed in 2005.

- John Quiggin on Hayek. I know what you all think of Quiggin, but it's worth a read. It really makes you wonder why Hayekians are always somewhat embarassed that Beck is the one promoting their book so much. Quiggins reminds us - Hayek was a lot like Beck but without the chalkboard, at least in Road to Serfdom. He predicted that Britain was headed towards totalitarianism. Quiggin points out that if Hayek just said that Britain was on the way to somewhat slower growth and higher unemployment unless a Tory came along and cut back on a few programs, then Hayek might have been on to something (and honestly, he wouldn't have really distinguished himself from a lot of other commentators). But he didn't say that. He went the full Glenn Beck. And his prediction was wrong. And if his prediction was wrong, you have to wonder about the theory motivating that prediction. So anyone that's made a fuss about Samuelson and 1946, I'd ask (1.) why you still haven't really provided any substantial response to the Keynesian explanation of 1946, and (2.) what do you think of Hayek's powers of prediction?


  1. What was "his prediction" exactly?

    I would note that Europe - Sweden in particular (the place that ignorant American liberals love to talk about the most) - spent much of the last twenty years rejecting everything that American liberals stand for. That appears to be accelerating.

  2. Everything that American liberals stand for?

    Like freedom of speech, the market, democracy, etc.?

    Hyperbole is tough to work with - I'm not sure what to make of this. And I'm note sure how it's relevant to the critique of Hayek (Quiggin's critique isn't original, by the way - Gordon Tullock raised essentially the same criticism).

  3. American liberals do not stand for free speech; they do their level best to attack it as much as possible. See "Campaign Finance Reform" (Incumbent Election Guarantee), so-called "hate speech" laws, their efforts to attack commercial speech, etc.

    American liberals are anti-market; they only begrudge its existence as a temporary strategy.

    American liberals are elitists; thus they aren't terribly fond of democracy either.

    Again, what was his prediction exactly? Have you ever read "The Road To Serfdom?"

  4. OK - I'm not going through all those points for the ump-teenth time with you.

    As for the prediction - Quiggin frames it as "that the policies advocated by the British Labour Party in 1944 would lead to a totalitarian dictatorship". I've read Tullock put it less sweepingly that rights would erode with the size of government. I haven't read it myself, as I've said several times on here - and I don't really have much inclination to. If you have a different understanding of the predictions, please share with quotes! I was thinking more about this on my way in to work and I may post on it more extensively this weekend.

  5. If you read the article in question it is rather unimpressive; check out this language as an example:

    "...and that Obama is propelling the US along the Road to Serfdom by making medical care marginally more affordable."

    Beyond questioning whether ObamaCare makes medical care "more affordable" that is not really the problem with what ObamaCare proposes - the main problem with it is that it politicizes individual healthcare decisions. I have to seek further government input into a decision that the state ought not be involved in the first place.

  6. And I'm not interested in what you have to say about those issues.

    Hayek's prediction wasn't much of a prediction; Hayek's claim was provisional. It was a point of what could happen if those policies (state assumption of production, etc.) were undertaken. And many of those things have come about as a result of those policies. All we need do is look at the drug war as an example of such - it is the most obvious example of the violation of individual liberty as a result of the state's assumption of various powers that liberals/progressives championed. It is an obvious result of of those ideas, and a policy area which conservatives have latched onto and largely taken away from liberals/progressives (even though the latter were the greatest earliest champions of such).

  7. The government at work:

  8. I recall that this debate - on what exactly Hayek predicted would lead to "the road to serfdom" - was the subject of a (gasp!) little spat between Jeffrey Sachs and William Easterly.

    You can read more on this to-and-fro, as well as some relevant quotes from TRTS here:

  9. stickman,

    The entire thrust of the comment in question depends on a controverted reading of the text in question. Of course Mr. Kuehn cannot be bothered to actually read the text itself (though it would take less than day to do so).

  10. Well, we now know what the left fantasizes about:

  11. I don't think Hayek made that prediction. He wasn't the sort to engage in historical prophecy. His claim was that unless particular trends change or are restrained by some other counterforce, then we're on the road to serfdom yada yada yada ... But those trends did change and intellectual and popular movements rose against them. Hayek clearly did not see this as impossible. Indeed, he hoped that his book would contribute to that end.

    Why write a book warning of these dangers if he had the fatalistic and prohetic notion could be done about it? That wasn't Hayek.

    Hayek wasn't right about everything, but he is one of the most insightful and subtle thinkers I know. Most of all, he is acutely aware of the limits of rationality, prediction, science, etc. He qualifies almost every opinion or comment in such a way that can frustrate some, because it seems evasive and unwilling to commit. But I believe it merely reflected Hayek's strength -- his willingness to take seriously his own limitations and consider almost any criticism, no matter how much it conflicted with his own priors.

  12. In other words, Quiggin can shove his opinions up his arse (or put them back where they came from, as it were).


    I wish I could be as gentlemanly about disagreement as Hayek was.


  13. Lee Kelly -
    Peter Boettke and others have made this point about "endogenous political economy" and Hayek's prediction. I'm not sure I entirely buy it. If you thought endogenous forces would react to these trends and prevent serfdom, why would you call it the road to serfdom? Why not write about the endogenous self correction? Seems like kind of a funny post-hoc justification, doesn't it?

    Think of it this way - what did the people arguing against Hayek think was wrong about the argument? Well, they thought that democracies self-correct and would avoid the excesses. It's hard to say "Hayek was right because we beat it back" when the people arguing against him were the ones touting our ability to beat serfdom back.

    Ultimately, this is hard for me to argue without having read it. But this interpretation of the book doesn't come from some kind of liberal minority. And if Hayek really though much of this "endogenous political economy" idea, I would think he wouldn't have written a book called "the road to serfdom" in the first place.

    As for "gentlemanly about disagreement as Hayek" - you should read some of his 1983 interviews and see what he has to say about Keynes. "Gentlemanly" is not the word that comes to mind.

  14. Hayek didn't want his book to be called The Road to Serfdom. It was the publisher's decision, and Hayek still complained about the title decades later. Why? Because it misled people into believing he was making a slippery slope argument.

  15. Daniel,

    I have watched his 1983 interviews when he talks about Keynes. Almost all the bad things he says are said quite reluctantly, and I have never heard anyone dispute their accuracy. He did not volunteer this information, but was pressed by the interveiwer to give his honest, personal assessment. Moreover, since the interviews were conducted to record Hayek-the-man, rather than just the economist, such personal views were not inappropriate. This is the closest I have ever known Hayek get to unkind about an intellectual rival, and I have certainly never known it in any of his scholarly work.


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