Mario Rizzo is especially worth reading today.
Austrian Economics as Middle Ground
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Very interesting read – probably the best of Rizzo that I’ve seen reposted here.
I’m endlessly curious where these two straw men come from, though:
(1.) “The traditional Keynesian view is that if equilibrium obtains it will be a very bad one: depression.”
and this
(2.) “Keynes’s macroeconomics seems to be only about these secondary phenomena.”
Can anyone provide an explanation of where this understanding of Keynes emerged? Obviously Keynes has been polished over time. But I’m not sure when these two critiques ever held true. I like what Rizzo has to say about the source of this crisis in the Fed, too. And clearly a lot of people are drawing this conclusion. One advantage of Keynesian/monetary approaches to this in my mind is that they explain when and why low interest rates are problematic. On the monetarist side you have stuff like the Taylor Rule, which not only told us that Greenspan had rates way too low – it also is telling us now that Bernanke’s rates are not as expansionary as Greenspan’s rates, despite being nominally lower. Keynesians have a mechanism for distinguishing between the two instances too in the liquidity trap. The Austrian school (to my knowledge) has no such mechanism for analytically distinguishing between the expansionary or contractionary character of a nominal interest rate, so the predictable result is a general suspicion of central banking. So Rizzo makes an interesting case, but I think it would be improved by (a.) not glossing over and simplifying Keynes the way he does, and (b.) explaining a little more clearly why Austrian tools for understanding the inappropriateness of the Fed’s decisions under Greenspan were so much better honed than Keynesian or monetarist tools.
The way to think about it is this (I think):
ON POINT #2:
The Austrian analysis explains WHY the boom turns to bust. That “upper” turning point. The reason is because the inflation-driven boom must sustain itself on every more cheap credit as rising costs of production and the law of diminishing returns pressures the profitability of projects. As soon as the Central Bank drives up rates by shrinking the money supply to head off inflation, the inflation-driven plans fall apart and boom-time industries turn to bust.
Keynes’ explanation for the turning point was simply “animal spirits”. Moreover, keynesian analysis of the interest rate is limited to the demand for money or “liquidity preference” which, again, is dominated by random psychological forces with no bearing on entrepreneurial calculation, investment or the market process.
So Keynesians offer no credible upper turning point analysis.
ON POINT #1:
Instead, what Keynesian discussion of the paradox of thrift and price/wage stickiness attempts to explain is the downward spiral. Keynes posited that the market economy could remain in “unemployment equilibrium” or permanent unemployment because of infinitely sticky wages and prices. His distain for any and all savings as a leak in the circular flow of current income and investment is another oddity.
Keynes, like Marx, have no concept of the entrepreneur or capitalist as a person who saves or employs savings to build a productive capacity during which period of construction no profitable output can occur, thus the need for the savings in the first place. Workers earn a wage. Entrepreneurs consume capital initially so that they can hire the workers before the business has an income.
Keynes (and marx) have no theory of how the market economy could ever work. It’s a theory of a hydraulic system of “income” and “output” which was mysteriously dropped onto earth fully formed and in need of no change. The paradox of thrift, then, just like “liquidity preference”, are misunderstandings of two specific issues: a damaged and insolvent banking system which can’t translate savings into loanable funds and a heightened degree of uncertainty (think Knight) resulting from the downturn whose cause and turning point are explained well by Hayek but assumed away entirely by Keynes.
…but I’m a total amateur so I may have it wrong.
Daniel,
I don’t know whether you’re over my head or under it, but, if over it, I’m in big trouble.
Mario Rizzo is always worth reading, but would be more convincing if he didn’t try to win his arguments by banishing his critics.
So Cochran thinks we need more mathematics.
So does Daniel, so I know that can’t be right.
And Concentration Camp Krugman thinks the problem is formalism in macro theory.
Hey, leave my goddam formalism alone!
Would somebody please explain to me what macro economics is, how it differs from micro, and either or both of them from just plain economics.
Isn’t all economics both micro and macro, the macro effects of micro actions. How could there be macro without micro, the aggregation of individual actions without the individual actions.
And how could there be any problem at all if the always eager buyers and sellers were free to come together, if there weren’t any macro-masters coming between them?
And how could there be any problem at all without our macro masters coming between our always eager buyers and sellers.
RE: “I don’t know whether you’re over my head or under it, but, if over it, I’m in big trouble.”I hope neither!RE: “So Cochran thinks we need more mathematics.So does Daniel, so I know that can’t be right.”Define “we”? I think Cochrane probably needs less math, and you need more. And I certainly need more too.RE: “Isn’t all economics both micro and macro, the macro effects of micro actions. How could there be macro without micro, the aggregation of individual actions without the individual actions.”I agree. I think it’s just a convenient typology for organizing different questions – I wouldn’t read too much more into it than that. Nothing sacred about it – we managed to do good work for centuries without it, and we’ve been doing good work for decades with it.
Daneil,
You asked me to define we.
Everybody except you.
What I think Austrian Macro does best is to try and de-aggregate. Keynes loved to aggregate, the problem with aggregation is that it over simplifies and it hides. Austrian Macro probes more closer at the microfoundations, ala misallocation of capital instead of everyone waking up feeling bad (animal spirits).
Hopefully one the end results of this recession will be a reemergence of Austrain BCT and re emergence of the Hayekian triangle.
Daneil,
You wrote,
“I agree.”
Now I’m really worried.
You furthermore wrote, about the differentiation of micro and macro:
“I think it’s just a convenient typology for organizing different questions – I wouldn’t read too much more into it than that. Nothing sacred about it – we managed to do good work for centuries without it, and we’ve been doing good work for decades with it.”
You’re missing the point of it entirely. It is to justify soemething on the macro level that couldn’t be justified on the micro level, the bias for spending over saving.
We did indeed manage to do good work without it, but terrible with it, managing a golden age of freedom, peace, and progress without it, and the most terrible wars in the history of mankind with it.
RE: “You’re missing the point of it entirely. It is to justify soemething on the macro level that couldn’t be justified on the micro level, the bias for spending over saving.”First, no. Haven’t you heard of “microfoundations of macroeconomics”. It’s only probably the single greatest hurdle that a modern macro modeler has to deal with these days. Second, no. What about the Solow growth model? That priveleges savings over spending, does it not? There’s absolutely no reason why concern with aggregates priveleges anything or that it inspires ignorance of disaggregated phenomena.RE: “and the most terrible wars in the history of mankind with it.”What exactly are you thinking of? Korea? Vietnam? When I think of the most terrible wars in history, I think of WWI and WWII, which predate macroeconomics as an inquiry distinct from microeconomics (well – I suppose it emerged as a distinct pursuit in the mid-40s, but the point is you can hardly attribute WWII to it. For that matter, I don’t think you can attribute any subsequent wars to it either!!!!).
I personally would rather live in the second half of the twentieth century than any other time in history. Other times have their charms – but taking it all together I think it’s pretty clear what I’d choose.
The false dichotomy between keynesianism and monetarism has been created to divert fools from the true debate. Liberty vs tyranny.
True, because the answer for both keynesians and monetarists is — more state intervention.
“Keynesians don’t know and don’t care what the fundamental causes of the recession are.”More like: don’t know and don’t WANT to know. “Animal spirits” is a black box too big. It gives them all the degrees of freedom they need to subvert reality in whatever way suits their ends.
“They hate us because of our freedom.”