Thursday, April 28, 2011

Why can't we all just get along?: My take on Callahan and DeLong's Macroeconomic History

Gene Callahan points us to an oldie-but-goodie from Brad DeLong on the history of economic thought. Gene writes:

"DeLong clarifies something that only became apparent to me last year: the deepest divide in macro is between those who believe that general overproduction is possible and those who think that only sectoral imbalances can occur. The list of adherents to the latter view is interesting here: "Think of Karl Marx, Friedrich Hayek, Ludwig von Mises, Andrew Mellon, Robert Lucas, et cetera."

That's right: Marx."

Gene has corrected me on Marx in the past - I do not know Marx in detail although I certainly think I've read overproductionism in him before. I'll have to re-check that. But the more fundamental point is that the "fight of the century" has really been over the general glut. In a lot of ways its an extension of the earlier fight that Adam Smith fought over zero-sum thinking on trade. The vulgar mercantilists (there were some good ones) lived in a zero-sum world and they did not think that you could grow the pie from specialization and exchange. In a similar way, the general glut deniers operate off of zero-sum game thinking on the economy. How many times have you heard someone say "every dollar the government spends is a dollar that the private sector can't spend"? We just recently heard Stephen Landsburg say that, did we not? Classical assertions that we can't fall below the production possibilities frontier are the mirror image of mercantilist assertions that we can't move the production possibilities frontier further out. This zero-sum economics is bad economics. Smithian, Malthusian, and Keynesian economics dispels this notion of the zero-sum game.

But my title - "why can't we all just get along" - laments this tendency to pit sectoral shifts against general gluts. I noticed a line in Papola's video that he has brought up in conversation with me a lot in the past - that because some sectors are worse than others there can't be a general glut (see 4:54). Why would anyone think this? At any point in time - boom or bust - some industries are doing well and some aren't. In the midst of these sectoral situations, all sectors together can be better off than they would have been or worse off than they would have been. There's nothing in the claim that the economy is generally worse off than it would be that excludes the prospect of sectoral downturns.

So why do John Papola and others seem to think these ideas contradict each other? Why is this the fight of the century? Can't we conceive of both sectoral and macroeconomic processes and figure out what's more relevant at any given time?

Nothing is stopping general glutters from accepting sectoral downturns. You will never, ever hear a Keynesian or any monetary disequilibrium theorist for that matter say "it's impossible to have downturns that hit some sectors worse than others". You'll never hear it. You will occasionally hear people say that general gluts can't happen. That's zero-sum economics, and it's been proven wrong empirically and theoretically time and time again. We need more Smithian and Keynesian economics, but I don't think that means we need less Hayek or Lucas. It simply means that this paradigm shift needs to be more completely integrated and we've got to stop this balkanization of the discipline that is always looking for grand ideological fights.


  1. DeLong: "In general, spending works to spur the economy, and the government's money when spent is as good as anybody else's."

    What's wrong with this statement?

  2. All autonomous spending can have a multiplier effect. Now, when resources are being fully utilized one user is going to compete and potentially crowd out another user. Furthermore, we know that political allocation has a lot of inefficiencies associated with it, and the multiplier effect has to be weighed against these as well.

    DeLong knows all this.

    Read the very next paragraph after the sentence you quote.

    Nothing is "wrong" with this statement, so long as you don't read context into it as a substitute for reading his entire set of lecture notes, which other readers can find here:

  3. What's wrong with the statement is that government spends taxes on boondoggles like ineffective high speed rail or giant tax breaks for crap GM Volts. I say, let unutilized resources fall in value until someone buys them instead of propping them up by choosing to reward political allies. You can't have it both ways, Keynesian; either government spending in a recession is so helpful that it can make us richer by paying people to build giant caskets or "political allocation has a lot of inefficiencies associated with it." What inefficiencies? In a recession governments can spend money an ANYTHING and it will make us wealthier. As long as interest rates are low, it doesn't matter WHAT government spends money on because the most efficient spending is whatever spending is fastest. It's the perfect excuse to do what they want to do anyway.

    How many times have you heard someone say "every dollar the government spends is a dollar that the private sector can't spend"? (sic)

    It should read "every dollar the biggest gang spends is coerced and probably is being shunted to political allies."

  4. FYI

    If you're going to make this break point then Hayek shouldn't be on the list. He didn't believe in a strict form of Say's law where no general gluts are possible. He believed that both general underproduction and general overproduction were possible. That's why in some of his stuff the economy isn't on the PPF curve, it's shifted beyond it (general shortage) or below it (general glut).

    As far as I know few pre-Keynesians believed in a strict form of Say's law.

  5. argh - OK I've lost two comments now.

    I'm just sticking to my cut-and-paste. Keynes writes this in Ch. 2, and I think it is relevant to your point:

    "Contemporary economists, who might hesitate to agree with Mill, do not hesitate to accept conclusions which require Mill’s doctrine as their premise. The conviction, which runs, for example, through almost all Professor Pigou’s work, that money makes no real difference except frictionally and that the theory of production and employment can be worked out (like Mill’s) as being based on ‘real’ exchanges with money introduced perfunctorily in a later chapter, is the modern version of the classical tradition. Contemporary thought is still deeply steeped in the notion that if people do not spend their money in one way they will spend it in another.[11] Post-war economists seldom, indeed, succeed in maintaining this standpoint consistently; for their thought today is too much permeated with the contrary tendency and with facts of experience too obviously inconsistent with their former view.[12] But they have not drawn sufficiently far-reaching consequences; and have not revised their fundamental theory."

  6. Keynes may be right about Pigou. But that complaint doesn't extend to Hayek or Mises or many others. When Mises discusses the "money relation" or "demand for money compared to supply" that is his way of accounting for the fact that aggregate demand can't be steady at all time.

  7. I'm getting out of what I know best. I don't know Mises well, and while I know Hayek, I don't have a broad knowledge of him.

    So if I were interested in reading about where Mises and Hayek think that increased money demand can lead to (stable?) output below full employment, where would I look?

  8. To Current: Mises and all ABCT are in fact zero sum game. For them demand for money (in form of interest) just causes the shift between temporal diference of goods production.

    So in short they accept shifts of the productivity frontier but these may be only temporary. They state that overproduction of consumption goods has to result in neglect of the investment goods.

  9. DK,

    You should have a look at "Fabricating the Keynesian Revolution: Studies of the Inter-war Literature on Money, the Cycle, and Unemployment", by David Laidler

  10. vimothy -
    Laidler is good - I haven't read the whole book but I've read other things by him and am familiar with the argument.

    Again - without even having read the book itself - what I'm familiar with from Laidler provides and excellent geneaology of the General Theory... but also very, very strange. This whole idea that the revolution was "fabricated" is bizarre to me. Keynes cited lots of interwar "underworld" economic influences. He had a whole chapter devoted to detailing a couple of them - what he liked in them and what he didn't like, etc. He never denied what he received from Marshall - Marshall is not just held up as a "Classic" in the early chapters - he's also throughout the book in footnotes and references. The early Keynesians make these points about proto-Keynesians too. Lawrence Klein devotes lots of space to it in his book. Joan Robinson does, etc. My reaction to Laidler is "this is great stuff - but who is guilty of "fabricating"?". Certainly I'm sure Laidler identified some influences that weren't specifically noted by Keynes himself - but regardless, a good place to start in writing a book like Laidler's would be the General Theory's own bibliography!

  11. DK,

    "So if I were interested in reading about where Mises and Hayek think that increased money demand can lead to (stable?) output below full employment, where would I look?"

    In Hayek see "The Constitution of Liberty" p.282-285 (Routledge version)...

    "This means that when at any time people change their minds how much cash they want to hold in proportion to the payments they make (or, as the economists calls it, they decide to be more or less liquid), the quantity of money should be changed correspondingly. However we define 'cash,' people's propensity to hold part of their resources in this form is subject to considerable fluctuation both over the short and over long periods, and various spontaneous developments (such as, for instance, the credit card and the traverlers' check) are likely to affect it profoundly. No automatic regulation of the supply of money is likely to bring about the desirable adjustments before such changes in the demand for money or in the supply of substitute for it have had a strong and harmful effect on prices and employment."

    There has always been a big debate about whether Hayek was a MET guy like Horwitz in the 20s and 30s, or a sort of proto-Rothbardian. I don't really know, and I find that whole debate rather boring. Hayek's early books are good for their treatment of the causes of the business cycle, not for their treatment of recessions.


    Lot's of people claim ABCT works this way, though it's not really true. Mises didn't hold that the demand for money is constant, or related closely to interest.

    Read "The Theory of Money and Credit" and you'll find a very different character than the portrayal many of the articles of give.


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