Monday, February 6, 2012

Glad to hear Krugman talking like this too

At several points I've talked about how the point of monetary and fiscal policy's job is to end the distortion of market allocation caused by the liquidity trap - that it is in the depression that market signals are distorted.

Brad DeLong is one of the few bloggers to agree with me explicitly on this point.

Now it looks like Krugman is using the same sort of reasoning when he talks about the liquidity trap as a price floor. That's exactly what it is.

My one quibble with Krugman's post is this line: "But free-market oriented economists, of all people, should understand that you can’t just decree higher returns without paying a price in economic disruption."

We are free market economists, Paul. You, me, Brad DeLong, Karl Smith, Christina Romer. Matt Yglesias is a free market commentator on these issues. David Glasner, Scott Sumner, and Milton Friedman are free market economists with a lot of good thinking in common. Don't give up that term - don't dissociate yourself from it. We think what we do because we understand the efficiency and the progress implicit in a market economy. Maybe the austerians that disagree with us are free market economists too - I'm willing to grant that. But they are free market economists who are wrong and we are free market economists who are right on this. If we said the government had to plan allocation for things to be efficient, then we would not be free market economists. But that's not what we've said and we should never give up this ground.

Before I've used the analogy of a little kid with a hammer running around and banging in screws with his hammer. You don't look at that kid and say "wow he has a deep appreciation for hammers - look at how confidently he resorts to the use of his hammer to solve his problems". You don't say that to a kid - you teach the kid how to use the right tool for the right job and you teach him why it's not respecting the hammer to use it on every problem he comes across. It's the same with austerians. Just because they cite markets marginally more than we do doesn't mean they respect free markets more than we do.

I refuse to cede that ground.

And understanding that market signals are being distorted right now is critical to understanding why we should refuse to cede that ground.


  1. "We are free market economists"

    Now *that* is funny.

  2. Markets fail - help free markets™

    Who knew basic Venn diagrams could be so troublesome? Austrian and most American Keynesian economists fit in one circle; command economy planners fit in another.

    The hammer example is great, Daniel, and reminds me of this recent Family Circus. RIP Bil Keane.

  3. I'm sorry, but if you think that the market is suffering from a defect during a recession, and that the market cannot correct it on its own (or that the government could more efficiently do it), then I would say your not a free market economist. Maybe a market economist, or some other term, but free market economist? Nah.

    Saying austerians cite markets marginally more than you guys do is ridiculous. Austerians talk about how the economy can fix itself during a recession, "Expansionists" (for lack of a better term) talk about why an economy can't fix itself during a recession. Austerians cite markets as support that government is needed. Expansionists cite markets as support that government is needed. There is a clear divide, not a muddled distinction.

    Not that I'm branching you under the term "Neoclassical", but sometimes I find that people assume Neoclassical economics is a laissez faire school of economic ideas. I've heard this idea mostly from Post Keynesian books I've read, generally with a very dismissive approach. While Neoclassicals often praise the efficiency of the market in the micro (its just the macro and those damn sticky prices that cause problems), I've been in many a neoclassical classes, and boy can they like hell criticize the market for apparent (and often impossible to correct flaws). Perfect competition, asymmetric information, positive externalities, negative externalities, public goods, etc etc.

  4. Patch, what's ridiculous is seeing people consistently refuse to see the facts in anything but two flavors of their own special choice. Keynes' most famous quote explicitly admits that markets can fix themselves ("in the long run..."), while the motto I quoted above admits that markets can fail, without sharing any of Keynes' concern for the repercussions of that failure.

    The treatment of a market failure is what appears to be the more reasonable distinction between the two camps, if we have to generalize away all the subtleties to make some Austrians (interesting that you adopt Krugman's morph of the term, by the way) happy.

    In that light there are clear advantages to the Keynesian approach - trading the possibility of a slightly bothersome tax burden for government-led expansion to overcome insufficient market demand of a level of known severity.

    Clearly, to be fair to either side we have to admit that the differences (on the Austrian side, mainly, I think) are more varied and subtle, because on the issue you choose there isn't any obvious win for austerity. For example, I know that Bob Murphy hates taxes on ethical grounds (and who doesn't?). On the other hand, so do many MMTheorists.

    Maybe it's just my political science background that leads me to choose terminology recognizing that a free market doesn't need to be totally free to run riot - in tandem with curbs on civil liberties (which everybody, in practice, actually acknowledges). Trying to rub out this distinction is a good way to blind yourself to the reason for having the distinction in the first place - trying to classify a market as free or non-free based on the possibility of government intervention or the level of democratically agreed-upon regulations is highly misleading. I choose not to select arbitrary categories for political points, but because they are useful to the actual task of categorizing. How 'bout you?

    If you want an alternate to a free economy, it is a command economy - and it doesn't make sense to talk about government intervention or democratically valid regulations in such a case, because the character of government and regulations in such a system is totally different, not being based obviously on democratic principles.

  5. I'll post a response in the new thread.


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