This answers maybe 60% of Bob Murphy's "Krugman Kontradictions"

Krugman writes: "It’s worth pointing out, by the way, that while conservatives have seized on European sovereign debt for vindication, the euro story is very different from the story conservatives were originally telling. Italian rates are high because of solvency concerns, while the original right-wing story for interest rates was all about competing for private funds, not worries about repayment."

By all means take issue with the analysis, but I don't think it usually amounts to a contradiction.

Great Question from Ryan Murphy

"How many 1930s debates am I going to live through this decade?"

Nick Rowe, Joe Stiglitz, and Jean-Baptiste Say

I had plans to write a big long post about Say's Law, prompted by Nick Rowe's excellent criticism of a Joe Stiglitz Vanity Fair piece that a lot of people are scratching their heads over*. But I'm having a little trouble writing it because honestly I have trouble thinking about Say's Law, gluts, monetary disequilibrium, etc.

It's not that I don't understand the concepts and how they all fit together, I just never quite understood the preoccupation with Say's Law and these sorts of ideas. I certainly never understood why anyone would believe the Law itself (as it's come to us - I should clarify - Say said lots of things at lots of different times), but I've also never quite understood why people would think that supplying excess demand for money itself is necessarily a solution to the problems we really care about. So rather than post determinately, I'm just going to raise a bunch of questions that you all can solve decisively for me in the comment section while I'm taking my math exam.

First I never quite understood why we care whether markets clear or not. There are microeconomic reasons to care associated with efficiency, but from a macroeconomic perspective it seems largely irrelevant. I'll take a full employment labor market that doesn't clear over a clearing labor market significantly below full employment. I'll also take a developed Western democracy with lots of problems with clearing markets over an undeveloped banana republic where everything clears.

Most crucial to my interests is that the phenomenon we follow so closely and call "unemployment" is not inherently about a clearing labor market. The CPS surveyors don't go around asking what peoples' reservation wages are and then only count them as "unemployed" if their reservation wages are at or below the market wage. That's ridiculous. The social fact we claim to care so much about is the people who are to the right of the labor market equilibrium (whether that equilibrium clears the market or not) who show some appreciable interest in working. So again - what is the concern with markets clearing and "excess supply" and "excess demand"? In a market-clearing sense, unemployment doesn't have to be "excess supply", despite our regular conflation of those terms.

Say's Law also bothers me because it seems so static, when the actual activities of human beings depend on more than a contemporaneous balancing of the scales. The usual discussions that go on about monetary disequilibrium act as if investment demand is low because money demand is high - a whack-a-mole theory of recessions where when you push down demand in one area it pops up somewhere else, and money plays this special role of being (1.) fixed - at least base money, and (2.) a transmission mechanism to make a glut "general". It follows, then that if you get money right so there's no more excess demand for money, then there will be no more deficient demand for anything else. But this acts as if the economy is just a big self-regulating, self-organizing calculator - determining a bunch of relative prices that the weird qualities of money can throw out of whack sometimes. But this is a very limited view about what human economic behavior consists of. We're not just price-equalizers. We also anticipate and plan for the future, so any reasonable market equilibrium needs to be intertemporal. Deficient investment demand now is very likely to be a response to excess supply of a good in the future (or equivalently, deficient demand for a good in the future), and have nothing at all to do with any monetary disequilibrium. Currrent demand for investment goods is intimately tied to future supply of consumer goods. Indeed, that's practically the definition of "investment good". In that case, a depression could be general if there is a general expectation of lower future demand than previously anticipated without any excess demand for money at all. Excess demand for money could be the source of a general depression, but it doesn't have to be when you realize that Say's Law or monetary disequilibrium is really an intertemporal equilibrium.

None of this is to denigrate monetary disequilibrium or concerns about an excess demand for money. I am not one to downplay concerns about excess demand for money. But these are some of the reasons why I've never been able to fully jump on board with this idea that monetary policy is by itself a silver bullet. They're underdeveloped concerns, I know, but they're also not concerns that are really spoken to by the usual explanations of monetary disequilibrium that we all know.

As I noted yesterday, I see monetary disequilibrium in the way that I think Keynes did - as a "limiting factor", but not as an "operative factor". This means I am 100% on board with Sumner/Glasner/Rowe and am second to no one in validating the wisdom of going off the gold standard in the 1930s. But I still have a big concern that while that is going to improve things, it might not get us where we want to be.

*I want to say two things about Stiglitz. First - I hope Arnold Kling mounts a spirited defense of Stiglitz, because this is essentially Kling's theory of the Great Depression. I also hope that all the libertarians that cheer Kling also defend Stiglitz and throw some thoughts in. Too often I see people praise PSST and technological unemployment when it comes out of Kling's mouth but mock it when it comes out of someone else's. Second, I do want to draw attention to this comment on Nick's blog defending Stiglitz: "Stiglitz is telling a story that, in principle, cannot be modeled by the kind of highly abstract story. A structural change is not the same as a short period reallocation of incomes due to changes in productivity. This is what Marshall knew that economists today seem to not know. See his "Distribution and Exchange." And that is a lesson that Keynes very clearly learned from Marshall (but Pigou didn't) but that Keynesians seem to have not learned from Keynes."

David Glasner on Keynes, Hayek, Cassel, and Hawtrey

This is one of the best blog posts I've read in a while - one of those posts that really drives home the value-added of the blogosphere. I don't agree entirely with all of it, so let's take it piece by piece. It essentially makes two points: that the Keynes v. Hayek mania is ridiculous, and that Cassel and Hawtrey deserve more credit than Keynes and Hayek

Keynes v. Hayek

I strongly agree with Glasner here. I consider this blog (and myself) pro-Keynes and pro-Hayek. I like them both a lot, and while they obviously disagreed on specific points, I don't see Keynes as a whole as conflicting with Hayek as a whole. For some reason, though, people have latched on to this idea that they are polar opposites. This mentality has existed beneath the surface for a while. Keynes has always been a pariah in Austrian circles, and Hayek (before Friedman took his place) has always been a sort of short-hand for reactionary economics among left-wingers. But I'm not sure that ever defined the men for people like it has in the last couple years. And while it's been bubbling up all over the place, we really have two people to "thank" for this development: Russ Roberts and John Papola with the Keynes v. Hayek rap, which I suppose could be credited with making people familiar with the names "Keynes" and "Hayek" who weren't before. But I think it also needs to be credited with lowering the quality of the discussion at the same time that it broadened scope of the discussion.

Roberts and Papola will often protest that there's nothing "wrong" with what they had Keynes say, and they'll note that Skidelsky gave it the thumbs up. This is mostly true. You had a few Keynesian buzzwords thrown in with definitions that were passable with an acknowledgement that some poetic license was involved. The problem is precisely what Glasner puts his finger on in his post: "As I observed in September after watching the first Keynes-Hayek debate, we can still learn a lot by going back to Keynes’s and Hayek’s own writings, but all this Keynes versus Hayek hype creates the terribly misleading impression that the truth must lie with only one side or the other, that one side represents truth and enlightenment and the other represents falsehood and darkness, one side represents pure disinterested motives and the other is shilling for sinister forces lurking in the wings seeking to advance their own illegitimate interests, in short that one side can be trusted and the other cannot."

It's not that any of Keynes's words were "wrong" (although I would have written it differently), it's that he was advocating top-down solutions, he was getting special favors from government, he was acting like he could (and he wanted to) plan people's lives, he was a jerk to Hayek, he was on the side of the cronies and crooks, he was irresponsible, he was indifferent about war, etc. It wasn't the economics that was the problem. There wasn't a whole lot of economics in the videos (particularly the second one). It was that Roberts and Papola are pounding the story that Keynesianism is the anti-bottom up, illiberal, cronyist, cheating side. Papola continues to protest to me in correspodence that he's presenting an entirely legitimate view of Keynes, but Russ Roberts has come out and said it's all about ideology for him, an admission that should probably have made even more of an impact on people than it did. This presentation of the history of economic thought as a clash of the titans needs to stop. My assessment is it's doing far more harm than good.

Cassel and Hawtrey

Glasner goes on to talk about who he thinks really ought to be recognized instead of Keynes and Hayek: Gustav Cassel and Ralph Hawtrey. I found this discussion interesting, in part because I know Keynes was so influenced by Cassel and I think considered himself on the same page as Casssel (I don't know if Keynes knew Hawtrey very well, but he may have). Cassel and Keynes were brought to Berlin together in the 20s to advise the German government, and a lot of Keynes's Tract on Monetary Reform (1923) draws on Cassel's work from a few years earlier.

Keynes agreed on the monetary sources of the depression as far as I'm aware, and he agreed with the Hawtrey-Cassel solution of leaving the gold standard, and indeed he celebrated these departures in the early 1930s. I don't think it's quite right to draw this sharp line that Glasner does.

Keynes's point on the gold standard was that money was a "limiting factor" rather than an "operative factor" (this comes out in his letter to Roosevelt, but also more clearly on pages 230-236 of the General Theory). Tight money could drive economies into depression for all the reasons that Keynes and many other economists at the time laid out, and that money would have to be loosened to enable a recovery. But Keynes's broader point was that the level of output and employment is a function of investment demand, which itself is function of entrepreneur's expectation of future yields. I think it's wrong to see the General Theory as a theory of recessions - I think it ought to be read as a theory of the determinants of output and employment. There's discussion in it of the problems associated with golden fetters, but that alone doesn't give you a theory of output and employment, which is the book's object.

I've never personally seen any substantial disagreement between Keynesianism and market monetarism. I think there's something to be said for monetary policy becoming relatively less effective in a liquidity trap (something Glasner isn't entirely in disagreement with himself), but that hasn't lead any prominent Keynesians to disagree with market monetarists, just as Keynes was right there with Cassel and Hawtrey advocating and then praising the exits from the gold standard in the 1930s.

I would put it this way: Contrary to Say's Law, money opens the door to general gluts, and general gluts can cause depressions. Keynes recognized this quite clearly, and as a result advocated what today is called market monetarism. But Keynes rejected Say on a more fundamental level, pointing out that even when purchases and sales were balanced, the balance might not be struck at a full employment level. Was he right? That's a tough call. The Depression didn't end in 1933, and there's pretty strong reason to believe increased (public) investment demand in the early 1940s determinantly put an end to it. That seems to be a mark in Keynes's favor (although, of course, not a mark against Cassel and Hawtrey... there's no need for Scott Sumner to make a Keynes-Cassel rap!). But perhaps if devaluation continued even more vigorously it could have all been over and done with in 1934. Maybe. What's a good test? Anyone? Does comparing today to the 1930s offer a good test of whether the Cassel-Hawtrey strategy alone could have addressed the problem?


btw - anyone not following Glasner's blog should be.

Fred ENGELS, not Douglass

I'm just googling a few things to get squared away for my history of thought final tonight, and I stumbled across "The Uncyclopedia". Never seen it before. My favorite was the Karl Marx entry's picture. I never thought of it before, but the hair does look very similar.

UPDATE: OK, I liked the line at the beginning about religion being a way of getting people off opium, and the picture, but a lot of this is pretty stupid...

That Keynes quote

An emailer brought to my attention that Greg Ransom apparently did a google book search on Keynes's "if the facts change I change my mind, what do you do sir?" quote, and sorted on date. He dates the printing of the uncited quote to 1940, which is earlier than I've ever heard it (I always heard it was first printed in the Harrod biography).

For some reason people get really worked up about the uncited nature of this quote (even Brad DeLong at one point, if I remember). Others take it to be a sign of "fickleness" or unsteadiness on Keynes's part. I find that view especially bizarre because the whole point of the quote is to say that what appears fickle to a critic isn't fickle at all if you realize that the ground has moved beneath you!

Anyway - I've always liked it, and see no reason to doubt it. It certainly sounds like something Keynes would say. We know he allegedly said it when discussing the import tariff at the Treasury in the early 1930s. Clarke calls it a "Cambridge oral tradition", which is probably where Harrod picked it up - he had been at Cambridge briefly, certainly was in contact with the department, and certainly talked with all sorts of people for the book. Since Harrod is dead, Robinson is dead, Pigou is dead, and everyone in the room at the Treasury that day is dead, I'm not sure what the point of fussing over it more than that is. Note that it's attributed (citing Harrod or whoever you want), and keep your eyes peeled if you're going through papers and correspondences at the time to see if anyone mentions it. Even then it will still be attributed.

Perhaps I would make an atrocious historian but I personally don't see much more to it than that.

Kling on Lerman

Arnold Kling discusses some recent posts by my Urban Institute colleague and American University professor, Bob Lerman (here and here). The posts are on the new poverty measures and the concept of "poverty" as a relative concept. This seems to bother Kling - it doesn't bother me quite as much, perhaps because I've never taken talk of "ending poverty" seriously. Kling is of course right - if poverty is a relative measure, then we can never "end" it. But if poverty is an absolute measure, all you need to do to "end" it is wait a little while and let economic growth do its work. Do we think there's nothing we'd like to improve in people's lives (in this country) just because "absolute" poverty as we knew it previously is mostly done with? Clearly not. Our sense of deprivation is relative, so our measure of it ought to be as well. It seems to me the question "are we above subsistence?" sets the bar way too low. Anyway - aside from the relative/absolute measure issues that Kling talks about, Bob goes into a lot of interesting details about the specific factors that have changed and whether they make sense.

I saw Bob recently and he informed me he's making me a co-author on a paper on apprenticeship, because he pulled in a lot of the work I did last year on long-term care apprenticeships - so I may see that, contribute more to it, and have updates to share soon. Bob is a labor economist that does a lot with human capital investments, so I imagine I'm going to continue to work with him and perhaps have him on my dissertation committee.

Tyler Cowen makes a good point on ABCT (let's abstract from Hayek for a second)

Reviewing Wapshott's book, he writes:

"For all his brilliance, Hayek didn’t—at the critical time—have a good enough understanding of the dangers of deflation. He didn’t fully realize the extent of sticky wages and prices and, more deeply, he didn’t see that ongoing deflation would render the “calculation problem” of a market economy more difficult."

The "at the critical time" aside should do away with any need to argue about Hayek on NGDP targeting - a discussion that has never interested me all that much. The part I like is bolded.

A lot of Austrians seem to look at recessions like pressing the reset button on the economy. I've noted before in responses to Steve Horwitz (here and here) that this is exactly the opposite of how we ought to think about things. In the first link I write:

"Keynesians argue that the price distortion occurs in the bust, not the boom. Interest rates are too high, and the Austrians are embracing this distortion of the price mechanism as normal. When you hear Keynesians talk about stimulus, they don't usually talk about how it gives people jobs directly (although if you can do that on worthwhile projects like building roads and schools of course that's nice). When Brad DeLong talks about stimulus, for example, he always refers to its benefit as being the provision of high quality assets for which there is an excess demand. The point is to eliminate the price distortion in the interest rate, so that investors can once again engage in specialization and exchange."

This leads to some concerns about ABCT I've been hinting at a lot lately - concerns that I still don't feel I have adequately answered. I fully accept ABCT insofar as I accept that the capital structure changes with the interest rate. But from my perspective, the interest rate is "too high" during recessions so it seems to me that our biggest distortionary problem is in the bust. Austrians don't even seem to accept this possibility or address it. It's taken as an article of faith when things are "natural" and when they aren't.

If Austrians keep pretending people in the mainstream don't get specialization and exchange, or that they don't get profit and loss or that they don't get why we need to disaggregate (i.e. - if they take the Roberts/Papola approach), ABCT isn't going to get anywhere with the mainstream. The mainstream already gets all this, guys, and self-righteously re-explaining it to them is not going to get you anywhere.

The interest rate dynamics of malinvestment are also relatively straightforward. You're not going to have a hard time at all explaining that to the mainstream (and that's something that is probably genuinely new to a lot of them - this is your comparative advantage).

The place you're going to hit a roadblock is when you implicitly assume that recessions are periods where we work out the distortions of the growth years, when everyone else is assuming that the recession is the distortion.

Arnold Kling does a good job wrapping up the recent Keynes v. Hayek arguments (mostly)

He writes of Warsh:

"I think he genuinely believes that modern mainstream macroeconomics has ignored Hayek, and if you want to debate that as a factual issue, I think I would rather argue on Warsh's side [me too, obviously - I've been taking this to be a debate about the factual issue, after all].

My problem with framing things as Keynes vs. Hayek or what have you is that it turns what should be an argument over an ideas into an ad hominem. Also, energy that might otherwise go into arguing the merits of idea X instead goes into arguing over whether idea X is what Keynes or Hayek really meant."

I agree with this last sentiment too. And not only does it turn it into an ad hominem but it presupposes that the two men are incompatible which is a really bad way to approach them. This is the Russ Roberts/John Papola "bottom up/top down", "steer markets/set them free" mentality. It's not healthy. I think part of the reason we get into "whether idea X is what Keynes or Hayek really meant" is that a lot of people in this debate our interested in intellectual history. So for us, whether they really meant it matters - not as an alternative to the idea itself but in addition to the idea itself.

But we're never entirely free from these tendencies. I was surprised after all that to see this at the end of Kling's post: "Above all, I saw how impossible it is for top management at firms to have the sort of information and control that is casually assumed in mainstream economic models." I did a double-take when I read that. Normally when we repeat over and over again that information problems are real and we need to take them into account and people don't always have the information they need we get dismissed as being obsessed with market failure as excuses for guv'ment to come in!!! Now we're the ones that assume managers have complete information and control??? Kling here is describing how he came to appreciate Austrian economics. If I had to put a name on worrying about this sort of problem I would call it "information economics" and I would associate it with Joseph Stiglitz, not the Austrian school.

Anyway - like Kling said - focus on the ideas! But then Arnold, if you want us to do that, don't make me do double takes like this again by artificially pitting mainstream economists and Austrian economists against each other when they appreciate the same point!!!

Interesting looking articles in the QJAE

This one is relevant to the arguments about Hayek.

This one looks interesting too - discussing whether Austrians preach to the choir and whether that's a good or bad thing.

I haven't heard back on my R&R to QJAE - perhaps they'll turn to it now that this issue is out.