Thursday, April 28, 2011

The Fight of the Century

John Papola and Russ Roberts' new Keynes v. Hayek video is up. It is very high quality and entertaining, like the last one. I have a few reservations about the content, though (also like the last one) - but it's still worth a watch.

First and foremost, is this really "the fight of the century"? The contrast between Keynes and Hayek just seems so artificial to me. I've always been a proponent of what's been called "Hayekian micro" and see no contradiction with Keynes on that front. In some ways, Hayekian micro is more consistent with Keynesianism than more traditional neoclassical micro. As for Hayekian macro, I've always thought there was something to that too (Keynes thought there was something to it as well), it just doesn't seem to provide a viable counter-argument to the liquidity preference theory of the interest rate, and therefore it doesn't displace Keynes. Keynes still provides the best view of the macroeconomy that we have, and I think Hayek provides a good treatment of a more specific process that probably also goes on. Of course, when we juxtapose Keynes and Hayek it's often a stand-in for the libertarian and non-libertarian strains of the classical liberal tradition. OK, fine. There is some conflict on that front. But they seem to be allies in the liberalism vs. fascism or liberalism vs. central planning fight. In economics itself their conflict doesn't really exist in any real way in micro (Keynes didn't weigh in there and there's nothing about Hayek's micro that contradicts Keynes), and their conflict in macro is fairly marginal compared to other macro fights (I know it doesn't seem this way from some corners of the blogosphere, but it really is).

Another issue with the video is that Keynes is referred to as "central planning", "top-down", "chessmen moved on a board at a whim", etc.. Oh please. If this is artistic license, then OK. As I said, I enjoyed the video and don't want readers here to get the impression that I'm disparaging it over what amounts to artistic license. The concern, though, is that people that are starting to get interested in these subjects and are relatively new to Keynes and Hayek are going to get a very skewed idea of Keynesianism.

A recurring problem in this video is that it distorts Keynesianism in much the same way that the first one did - namely, Keynesianism is reduced to "C+G+I=Y, so if we boost G we boost Y". This is exactly what you're supposed to learn that Keynes was not saying. John and Russ are confusing accounting identities with behavioral laws. They're confusing a static economy with a dynamic Keynesian economy. This is a very bad habit in economics. In the last video, we had the Austrian theory of the interest rate, but no Keynesian theory of the interest rate. In this video we have neither theory. So once again, John Papola gets hung up on this "you can spend on anything - it doesn't matter" issue. That sounds very strange if you think that Keynesianism is "if we boost G, we boost Y". It makes more sense when you realize it's about government note creation - Keynes's version of the helicopter drop.

Econometrics makes its way into this video as well, in some funny ways. First, I'm not sure why the Hayek character thinks that econometricians have a predisposition to Keynesianism. Any macroeconomic theory is going to have its cadre of econometricians and empirical evidence. Second, it's odd that Russ keeps making this claim about how unscientific this work is... we're still waiting for Russ's "Great Austerity Hoax" post about the Heritage analysis where two economists formerly affiliated with GMU use exactly the same models that stimulus advocates used!

Another thing that might be worth noting is that the Austrian inferiority complex comes out here, as in the last one. Hayek isn't recognized at the door again and gets a cavity search (the Hay-eksplosives line was great!), he loses in the end despite punching out Keynes, etc. This is all a little silly too. Hayek won a Nobel Prize. He's widely recognized as a towering figure in economics. He's not a marginal figure. Keynes is lionized too, of course - and for good reason. And he's not celebrated today despite being proven wrong. He's celebrated because most of what he predicted has been borne out by the data. We can note that you can squeeze Austrian theory into the data too if we are so inclined. Predictions about interest rates and inflation that Keynesians got right are a little embarassing for some Austrians, but you can make a case for them. But it's simply not true that Keynes has been knocked out here. John and Russ and many others want to ascribe Keynes's success to politicians - because apparently politicians love Keynes (you could have fooled me - I thought everyone's been trying to outdo each other on deficit reduction). Personally, I think it's more than a little condescending for John and Russ to keep repeating this sort of thing. Politicians get elected on promises to "rein in spending" - you don't see me going around saying that the only reason Hayek is having a revival is that politicians love him. I know that's condescending and I know that's simply not true, despite the apparent coincidence between what some politicians say and what Austrians say. That's not the reason why a large share of the profession is coming around to ideas they had rejected for decades in the case of Keynes or Hayek.


So in summation, it's a great video. It's always tough to talk critically about this or the last one because I do think there's a degree of artistic license and I do thoroughly enjoy the videos. But you have to be careful with these as well. I think people could really enjoy this if they come at it knowing something about the economics of Keynes and the economics of Hayek. But for less informed viewers, a lot of these videos can be extremely misleading. And the "central planning" lines, etc. are very unfortunate - even from an artistic license perspective. It makes me less interested in taking part int he discussion if that's what "the other side" thinks of me, and I'm sure I'm not alone. If you want to fight with a central planner over the pretense of knowledge go find a central planner, and stop wasting your time with Keynesians.


A few links that might be relevant:

- My first long post contrasting Keynesianism with consumptionism. My post taking Krugman to task for slipping into consumptionism. Taking Casey Mulligan to task for consumptionism (this is when I knew I was making an impression, because commenter Samuel Wonacott said he knew as soon as he read Mulligan's post that I would "jump all over it").

- This, I think, is an important post where I talk about why Keynesian "ditch digging" is more like Friedman's helicopter drop than it is like a public works program. This isn't to say public works are bad from a Keynesian perspective. We should just think of public works as "a helicopter drop where we get a bridge too" rather than "boosting G to boost Y". And this is just a fun post on helicopter drops.

- This is an old post on the prospect of a Keynesian-Austrian synthesis. Also here and here. I sketched out some of the math on this a couple weeks ago in response to a conversation at Coordination Problem where - again - commenters insisted on this false choice between Keynes and Hayek. I hope to finish that this fall. The posts above actually don't get into exactly what that entails - essentially I was working on an IS-LM models with a capital structure. Or, if you prefer, a capital structure model with a liquidity preference theory of the interest rate.


What are people's thoughts on the video? I want to draw people's attention to my new comment policy - I'm not going to put up with drive-bys anymore.

UPDATE: One more point I meant to mention on the substantial WWII segment in the video. I think the episode is suggestive, and it's suggestive in clear favor of Keynes - but it's very hard to make much of it because as Hayek says in the video, it's just one datapoint. However, one of the things that bothers me about this talk about WWII is the idea that all wars are all waste. I am always stunned that people talking about WWII from a Bastiatian angle are so loathe to note that keeping fascists from dominating Europe was a very, very good thing. War is hell. It's not something to be excited about. It causes lower standard of living at home. It does all these things. But Nazis are more hellish, and I wish people would do less insinuating about how the draft tinkers with unemployment figures and be more explicit about the fact that those soldiers were fighting for a free world.


  1. "I am always stunned that people talking about WWII from a Bastiatian angle are so loathe to note that keeping fascists from dominating Europe was a very, very good thing."

    And without WWI there would have been no WWII.

    "...that those soldiers were fighting for a free world."

    Most of those who fought in WWII were not fighting for a free world - and even in the case of Canada, the U.K., and the U.S. the massive deprivations of liberty which came with the war have been something which had to be hacked away at for decades (take the draft as an example and consider how many people were drafted after WWII until Milton Friedman put a stop to that).

  2. I loved the video and thought it was quite accurate.

    I in particular loved the shout out to the loss of personal liberty associated with the rise of ever bigger government; that was the point of the cavity search after all.

  3. Gary -
    1. Well presumably there could have been WWI without WWII if the treaty wasn't as screwed up as it was. But that is neither here nor there - certainly it would have been better if there was no WWI or WWII. WWI did tremendous damage to European civilization even aside from any causal connection with WWII.

    2. Certainly the Allies weren't angels - I hope you didn't interpret me to be claiming that they were. I'm not sure what in that statement is supposed to make me hesitate about supporting fighting back against a fascist war machine. Perhaps it was not your intention to make me hesitate about that claim.

  4. It wasn't meant to be viewed as a "cavity search". TSA agents put on those gloves when they pat you down or go through your belongings.

  5. I would have agreed with you five years ago that these issues were strawmen since hydraulic Keynesianism looked like it was dead. But so long as Christina Romer says things like we need more aggregate demand, paraphrasing Adam Smith on chess pieces, emphases between top-down and bottom-up, and that C+G+I=Y is irrelevant becomes important criticisms once again. I know we differ on what Keynes "really" meant, but at one point hydraulic Keynesianism did exist, and the arguments pushed by too many Keynesians today are suspiciously similar to it.

  6. lisaversa,

    Then why is putting his clothes back on then?


    The point is that WWII is nothing really to lionize; it ought to be at best a cautionary tale. So, the evil Nazi regime wasn't able to take over all of Europe, but the evil Soviet regime was able to take over half, and in doing so all manner of liberty was lost in so-called free world.

  7. The cavity search is meant to illustrate (in a funny manner) what happens when the state grows large - it effects all manner of aspects of our lives, not just what some might call the purely economic areas.

    Anyway, the Hayek character devastated Keynes on regulation; you can have all the regulation you want, it is easy enough for clever people to get around; so what one tends to get is regulation as window dressing.

  8. increasingmu -

    Don't we need more aggregate demand?

    Must one be a hydraulic Keynesian to think that?

    C+I+G=Y ISN'T irrelevant. It's crucial. It's just not complete. You can't say "if you increase G you increase Y" any more than you can say "MV=PQ so if you increase M you increase P". But that doesn't mean these things are irrelevant. They help you understand feedback loops (like the multiplier). They help you understand how stuff does work when you bring more solid behavioral information to these skeletal accounting identities. They're not irrelevant at all, you just can't stop at them.

  9. "Don't we need more aggregate demand?"

    No, we need government cut spending. Of course what people call "austerity" these days is a bit odd; mostly these measures are limits on the growth of government spending, not actual cuts into the bottom line.

    Anyway, the raps weren't as good this time. That's not surprising - how many good rap lines about economics exist? Seems like diminishing returns there.

  10. increasinggmu -

    This is an interesting point: "the arguments pushed by too many Keynesians today are suspiciously similar to it"

    A lot of politicians and a lot of economists speaking to the public do frame it as simple hydraulic Keynesianism or filling up the hole - and for some of them, that's truly how they understand the economy. I have a hard time criticizing this too harshly, because I would rather have a politician that thinks that than a politician that thinks about stimulus the way Russ Roberts does, because practically speaking the effect is roughly the same even if you misunderstand the economics. So you may hear lines from Romer in a public statement that sound like that - but you won't read it in a paper. Sometimes that kind of talk creeps into Paul Krugman's column but you don't see it on his blog. This - I think - has a place. There are a lot of people out there who are "wrong for the right reasons".

    In other words, if you teach hydraulic Keynesianism in a grade school history class about the New Deal, I don't lose sleep over it. But if you're going to have Hayek give a counter-argument to hydraulic Keynesianism then you oughta present what Keynes really said. If Hayek provides an interest rate theory, just provide Keynes's interest rate theory. Why not?

  11. Ugh, I find it absurd.

    There was once a time when physicists were glorified to the point of being celebrity. Sure, it is strange to hold Richard Feynman to the level of Jay Leno. But at least Feynman dealt with something that

    Now, economists have become the new physicists.

    Economics, I am sorry to say, is not cool. It is a splash of cold water in the face at its most generous moments, and forced drowning at its worst. It only highlights mundane facts, and when those facts are not mundane, they are harsh and unpleasants.

    This whole Keynes v. Hayek song thing is taking something dorky and trying turn it into something interesting. It's like that fat kid in Simpsons, who wants his group to be called "Team Discovery Channel". All this would make more sense, if it were a distinguished physicist singing a rap song. But it would still be a little stupid. And distinguished physicists would never sing rap.

  12. Daniel,

    Seems like you want it both ways there.

  13. Gary -
    That may make sense in your head, but I'm not quite sure what you mean.

  14. Prateek,

    When I think of intellectual stars of the past that were well known I think of Von Neumann. I don't think economists are the new physicists (or mathematicians for that matter); for one thing, none of them are as smart as that collection of geniuses who came around roughly between the 1920s and the 1950s were.

  15. You guys have to agree with me here.

    Haven't economists been given way too much of celebrity status?

    New York Times doesn't have any prominent scientists or any prominent philosophers writing popular columns for it. No, it has Paul Krugman, an economist.

    Economists maintain that they work on a science. But they write political columns. When was the last time we saw politics discussed regularly by marine biologists or metereologists on a major public media? Like never.

    And then this Keynes/Hayek rap.

    It's not about the theories of these two people. It's about Keynes and Hayek. The PERSONALITIES! The two are celebrities now.

    I think they are really aiming for turning economists up to the same level as sports stars and TV talking heads.

  16. I don't know if you caught it Daniel, but there's a very good part of Hayek's verse where he says there's no "it;" there's no "engine." It's us. The economy is a network of people, and there's no "sum" that is greater than its constituent parts.

    Sound familiar?

  17. Mattheus,

    I like to combine that insight with Arrow's "impossibility theorem."

  18. Mattheus - yep - that's the idea you always tell me that I always agree with but you always think I don't agree with.

  19. Gary,

    Not totally relevant, but very cool nonetheless. That speaks more towards Hayek's views on planning and majority decision.



  20. I know you say it - is that what you mean?

    I just remember in the past you've thought I've denied that it's a network of people interacting.

  21. Lyrics for the video here:

  22. DK - This was a well-measured post and I think you were fair in your interpretations (maybe it's only ubiquitous in your exogenous posts =P).

    I think the only things I disagree with were in one of your later paragraphs.

    You put forth that the video showed that Austrians had an "inferiority complex" when, in fact, they have no need to as they aren't maligned as much as they like to pretend they are. I'm not a professional economist so I'm not sure what it's like, personally, amongst that community. But from what I've seen in broader political contexts, Austrianism is marginalized to a much greater extent than Keynesianism in terms of economic methodology. I think it's fair to say that Hayek may present the weakest personal case but I really believe he's the exception. Most other Austrians don't get particularly serious recognition on an academic level. I'm not aware to many economic curricula that take time to focus on the Austrian school of thought. I can't say the same for the Keynesian school.

    The other issue I took is with the assertion that politicians seem more fixated on fixing the deficit than increasing spending. I think there's two distinctions that could provide a context for this to be misleading. The first is the obvious phenomenon that politicians talk a good game to get elected (or once elected for PR reasons) but what they bring to the table, on net, diverges fairly sharply from the rhetoric. You can say that you're for reducing spending if you cut a few million or billion out of a budget that grows hundreds of billions annually - and people might not even question it - but that doesn't dismiss the reality of their collective political action. Net decreases in spending seem pretty rare.

    The other somewhat less obvious point is that, for reasons that pertain to the first point, politicians are always going to talk about saving constituents (or subsets thereof) money in terms of redistribution or lightening the overall tax burden or cutting waste, etc., etc. But, more often than not, they're looking at cutting the waste or lightening the burden in specific areas (portions of the budget that are used towards ends with which they disagree). Republicans can look fiscally hawkish by attacking entitlement spending (certain kinds at any rate) while Democrats can look fiscally hawkish by attacking defense spending. However, it doesn't follow that the next effect of their proposals will be to decrease overall spending. I would guess that's actually the exception.

    Shorter version: Although there's a lot of rhetoric about austerity, what politicians generally end up doing doesn't seem to amount to it.

  23. "next" = "net" in my second to last paragraph...I need to proofread before I comment.

  24. Ryan -

    Yes, I think it's probably right to say that Austrians are marginalized. Hayek certainly isn't, though. But here even Hayek is treated like a nobody, which he certainly isn't.

    To a certain extent, though, I still think this is approached as more of an inferiority complex than it needs to be. Too many say "they don't pay attention to us". Very few say "perhaps we need to raise the quality of our work". Some do. Peter Boettke talks about the need to publish in major journals all the time. I haven't gotten published in (and won't get published in for a long time) a major journal, but I don't pretend it's because I'm being shut out. It's because it's an extremely competitive thing to do with a lot of high quality work out there.

    Many Austrians or Austrian sympathizers have gotten recognition. We can point to Buchanan and Smith too - not as Austrians perhaps, but certainly as guys affiliated with Hayekian approaches. The public choice literature and the experimental literature both have lots of cross-pollenization with Austrians and they're both very strong.

    Do you know of any Austrian papers that deserved to be published in a major journal that weren't? Do we have any working papers floating around - any lower-tier journal papers that were first rejected? What are the examples? The knee jerk reaction of many (not all - again I point to Boettke) Austrians is to think that people aren't Austrian because they are unaware or prejudiced against them. The first may have some truth, of course. But what is rarely considered is "I have not made a convincing argument".

    I think ABCT - if not other Austrian material - has the potential to break into mainstream economics. What percentage of papers written on ABCT even get submitted to AER though? A very small percentage.

    You can't blame the mainstream for that.

    I sympathize - really I do. People just don't know the Austrians as well now as they used to. That's a shame. My only point is that (1.) there may be a reason for that and Austrians need to understand that, and (2.) if you think you can break back in, nobody is actively standing in your way. Submit more to mainstream journals. Surely some headway can be made. Start by refuting the mainstream if you can't get a foothold by presenting Austrian economics.

  25. As for politicians -

    Look, again I know what you mean. This is precisely why I said you don't see me going around talking about how Hayek is only having a revival because of politicians. My point was I don't go around claiming that even if I could potentially construct such an argument. Politicians don't do what you guys like, in the end. I get that. But when they get more votes by saying what Austrians say than by saying what Keynesians say, I have trouble struggling this condescending line that Keynesianism is popular because it's good for politicians. That's a lazy claim to make, and it logically makes no sense.

  26. Same with Hoover, btw.

    The fact is he's not in anyone's camp. Keynesians are right that he's not a Keynesian. "Austerians" are right that he's not an "austerian". Can't we just live with that?

  27. On your second point (regarding politicians) consider me somewhat convinced. I think I have to give it to you that, in general, the electorate is certainly more generally pushing for fiscal restraint at least of some sort. I'd argue that the reasoning is not generally purely economic per se, and when it is, it rarely lines up with the Austrian reasoning. But nonetheless, I think your point stands.

    On your previous point, about being published in scholarly journals, etc., I also think you have somewhat of a point but there's an elephant in the room. One of the Austrians' main contentions (more-so with the neo-classical line of thought than Keynesian/neo-Keynesian in particular) lies with the methodologies (particularly of an econometric-centric variety) they employ or regard most empirically.

    To use a really bad analogy (and I'll put Austrians on the ass-end of this one so I don't appear too biased) it would be like wondering why creationists don't get published more in science literature with their biblical explanations. I'm not saying Austrians base their economic convictions on faith (although detractors will get a kick out of that) but to the point that mainstream methodologies are at least somewhat divergent regarding basic empirics, I think most Austrians just don't even attempt it. As you point out, maybe this is a mistake on their part. And Boettke (et al) have certainly led the charge on moving the school back into the mainstream.

    I think this is one area where Austrians' general libertarian sympathies (as many of them seem to be of that political bend) work against them. We try very hard to convince others (whether political, philosophical, or economic) to acknowledge our views - but we don't feel it to be of a particularly high cost to break rank and be outliers when preferred channels are exhausted. That may be a strength on philosophical grounds, but that certainly doesn't do us too much good on issues like economics. So I'll admit it's certainly an issue. How to go about resolving it (submitting to journals, etc.) without abandoning our contentions regarding methodology is a disconcerting question, however.

  28. Daniel,

    I just remember in the past you've thought I've denied that it's a network of people interacting.

    You've explicitly denied my argument. We had 30 comments struggling over the idea of composition. Shall I go find it? The whole brunt of your argument was something along the lines that an economy is non-reducible to its constituent parts because.... and that's where you stopped commenting.

  29. How to go about resolving it (submitting to journals, etc.) without abandoning our contentions regarding methodology is a disconcerting question, however.

    I've said this exact same thing, too. The problem isn't necessarily that journals are predisposed to be biased against Austro-libertarian work (although some are), it's a question of principle. You cannot arrive at sound Austrian conclusions (like ABCT) empirically without the necessary a priori homework. And I can't think of a single economics journal that would accept papers on topics like business cycle theory based solely on axioms of action and exchange.

    We stand little chance to get published because the journals require a methodology that we recognize as categorically flawed to deriving economic truths.

  30. Well wait a minute...

    I do think that aggregates can have (for lack of a better term) ontological significance. Aggregates can do lots of unexpected things if you only expect them to be the sum of their parts. This goes back to "private vices/public virtues" through Smith, through to Keynes. That I know we disagreed over and I don't need to re-fight that with you.

    But you connected that in your head with the idea that the economy is a network of individuals.

    I have always accepted that it's a network of individuals. It does not follow of necessity that aggregates aren't significant in their own right.

  31. re: "And I can't think of a single economics journal that would accept papers on topics like business cycle theory based solely on axioms of action and exchange."

    Right. They don't accept crayon drawings either.

    Look - I know that's overstated, but what exactly is your point? Scientific peers who are not convinced by ideas will give them bad reviews. You simply can't conflate that with people being unfair to you. If you think all your peers are wrong, OK - but science is a social effort. Convince them.

    There is a lot of good Austrian headway to be made in mainstream journals. There is a lot that can be done.

  32. Could you go into more detail on how Keynesianism is not dependent on central planning?

  33. Sam - I'm not sure on why anyone thinks it does depend on central planning, so sometimes I struggle with how exactly to answer this.

    This may help:

    Keynesian demand management does not work without the understanding that the price mechanism is best suited to optimize welfare.

  34. dkuehn - it looks like you favor the words intervention or management over "planning". But what of centrality?

  35. sure - some of the management is central.

  36. I'm reminded of this old slate article by Krugman.


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