Slightly off-topic, I would love to hear the two of you discuss the idea of the 'paradox of thrift.' It was mentioned in a podcast a couple months ago and I',m very interested in your thoughts on it.
S Andrews
· 8 months ago
I second the opinion of someone who commented on econtalk that Roger Garrison be interviewed on the same topic
Daniel Kuehn
· 8 months ago
"I don't see a lot of attention paid in macroeconomics to coordination"
Really? I think of "coordination failure" as as much a macroeconomic endeavor as a microeconomic one.
Still listening... good stuff
Daniel Kuehn
· 8 months ago
So I have a tough time understanding this logic... non-Austrians almost to a man agree that monetary policy can distort the economy and cause recessions. Austrians do too, and prioritize that cause over most (all?) others. So how is admiting that a lot of this recession should be laid squarly at the feet of Greenspan's Fed bolstering the Austrian case any more than any of the other schools of thought?
I don't doubt there is an uptick in interest in the Austrian school - but I have to take issue with the idea that this vindicates the Austrian school OVER other schools of thought.
indianajim
· 8 months ago
Daniel wrote:
"I don't doubt there is an uptick in interest in the Austrian school - but I have to take issue with the idea that this vindicates the Austrian school OVER other schools of thought."
Obviously Daniel know little about the Austrian school.
Daniel, if you take a look at Roger Garrison's power point on capital based macro you might be able to post more reasonably on this topic:
www.auburn.edu/~garriro/ppsus.ppt
Daniel Kuehn
· 8 months ago
indiana jim -
No, I understand it quite well. And I do wish Keynesians had a capital theory that was as well laid out as the Austrian theory.
What I'm saying is that lots of people point to monetary expansion at the wrong time as a source of recessions. The fact that Greenspan was largely (although obviously not exclusively) at fault for this recession therefore does nothing to bolster the Austrian school against the New Keyensian school.
Daniel Kuehn
· 8 months ago
*that was an overstatement - I probably don't understand it too thoroughly... but I understand it enough to strongly appreciate it - and it doesn't change my argument that Austrians aren't the only ones that point to the money supply.
indianajim
· 8 months ago
Daniel,
Garrison's presentation together with Don's discussion should make it clear to you the following Austian point: when the composition of captial purchases gets skewed by interventionist monetary policy and governmental encouragements to financials to make loans "too" freely, then expect to see the boom/bust cycle.
Daniel, were you listening to Don's discussion? Didn't you hear him make the important point the while in most macro models capital is a "black-box" called "K", whereas Austrians worry about what the composition of the capital is? If you don't remember this, listen to the discussion again, and then, since you missed how this connects to Garrison's powerpoint, look at it again too. Then, I expect that given my assessment of your abilities, you will be fully able to post reasonably here. (Whether you will or not is another matter; maybe you are one of these folks who just likes to argue rather than try to advance knowledge.)
Daniel Kuehn
· 8 months ago
indiana jim -
Please don't talk down to me like that. I'm no expert on the Austrian school, but I know everything you just responded with. And as I said above, I wish the Keynesian black box would incorporate the Austrian insights about capital (as a modeling technique, I don't have a problem with simplifying the capital structure - but obviously that comes with costs).
You are completely missing my point.
I understand quite clearly WHY Austrians think artificial increases in the money supply will cause a recession. What I'm saying is that New Keynesians (not sure what the old Cambridge don would have said exactly... but the new ones) AGREE that artificially increasing the money supply can cause a recession. Monetarists also agree that artificially increasing the money supply can cause a recession.
So when you step back and say "Gee, Greenspan pushed us into a recession", who's argument do you bolster?
The Austrians, AND the New Keynesians, AND the Monetarists. You don't make the Austrian school more correct than the New Keynesians, because everyone acknowledges this point.
And this is one of my bigger problems with Austrian business cycle theory - not that I disagree with it. Far from it! I agree with pretty much every element of Austrian business cycle theory. I'm just not convinced that that's an anywhere near complete consideration of what causes business cycles (and in all honesty, I doubt thoughtful Austrians think it's a complete theory).
But you certainly can't identify Austrians as being the winner from recent events. They are right on at least one element of this crisis - and they share that accuracy with many, many other schools of thought.
Which is fine! Science is about understanding things - it's not a pissing contest. It's OK that a lot of people correctly identified artificial expansions of the money supply as a source of recessions.
S Andrews
· 8 months ago
AGREE that artificially increasing the money supply can cause a recession. Monetarists also agree that artificially increasing the money supply can cause a recession.
I am clearly no expert on ABCT. However, I think ABCT is more nuanced than your stated understanding of it. It is not the money supply expansion per se that causes the boom-bust cycle, it is the manipulation of a very important price, one that signals very important system wide information: available savings of real resources - time preference a.k.a interest rate.
S Andrews
· 8 months ago
If every economist understands the ill effects of monetary expansion, Fed will not be setting interest rates at 0, or pumping banks with reserves, pumping money into failed institutions or pumping money through make work programs. Clearly, they don't understand ABCT.
S Andrews
· 8 months ago
Kudlow, that neocon supply-side keynesian keeps on touting monetary expansion as "mustard seeds" of "growth".
Sam Grove
· 8 months ago
Monetarists also agree that artificially increasing the money supply can cause a recession.
What is meant by "artificially" in your statement.
How is it determined when an increase in the money supply is artificial vs "natural"?
In other posts you claimed that at Cafe Hayek, the discussion was not so much economics oriented, but was rather politically/ideologically oriented.
I will modify that to make it more accurate (in my view).
At Cafe Hayek, our political/ideological assumptions are explicit as opposed to Keynesian/mainstream discussion where the political/ideological assumptions are implicit.
Daniel Kuehn
· 8 months ago
S Andrews -
I'm sure it's more nuanced than what I'm stating, but I do understand that it has to do with the nature of the malinvestments that occur when borrowers pursue projects with increasingly diminishing returns. I understand the mechanism for the malinvestments is that capital is not homogenous, as many other macro models assume it is (not all, obviously - there are lots of macro models that identify several different kinds of "k's", and macro models certainly acknowledge that there is a diminishing marginal return to k, which is essentially a "malinvestment" argument that ignores what's in the black box).
All that is quite clear.
The point is they're not the only ones saying it - even if they are the only ones that express it in that much detail.
So... to reiterate... Austrians are no more vindicated by the source of this crisis than New Keynesians or monetarists or anyone else.
Daniel Kuehn
· 8 months ago
S Andrews -
RE: "If every economist understands the ill effects of monetary expansion, Fed will not be setting interest rates at 0, or pumping banks with reserves, pumping money into failed institutions or pumping money through make work programs. Clearly, they don't understand ABCT."
It's quite possible to understand the dangers of poorly timed monetary expansion and to differentiate between monetary expansion when there is a potential wage-price spiral and monetary expansion when there is no such risk. Does ABCT dictate that we treat monetary expansion in 2000 the same as monetary expansion in 2008 or treat monetary expansion in 1926 the same as expansion in 1931? I should hope not. Different conditions prevail then. I see know reason why anyone should feel the need to conclude the same thing about monetary expansion in these different time periods.
Daniel Kuehn
· 8 months ago
Sam -
RE: "What is meant by "artificially" in your statement.
How is it determined when an increase in the money supply is artificial vs "natural"?"
Well, all increases in the money supply based on Fed behavior are "artificial" (as opposed to changes in a private banks reserve ratio or newly mined gold, which would both be "natural"). The important word here is "can", though - not "artificial". Artificial increases in the money supply CAN cause a recession if those increases lead to malinvestment, which they may not always lead to.
RE: "At Cafe Hayek, our political/ideological assumptions are explicit as opposed to Keynesian/mainstream discussion where the political/ideological assumptions are implicit."
They're not always explicit! It feels like every day I have to point out "you don't conclude that because it's self evident - you conclude that because of an assumption you made but didn't verablize". I don't think there is one ideological assumption in Keynesian/mainstream discussions - it depends on the discussion! Some are implicit, some are explicit, some are conservative, some liberal.
The point is, though, you can believe in Keynesian dynamics and still be a liberal or a conservative or a libertarian. I'm not too familiar with the Austrian school yet, but it seems FAR more ideologically grounded than Keynesianism (either explicitly or implicitly).
indianajim
· 8 months ago
Daniel,
It is hard not to talk down to you when you write things like: "I'm not too familiar with the Austrian school yet, but it seems FAR more ideologically grounded than Keynesianism (either explicitly or implicitly).
Come on, a person with your abilities should realize how self-contradictory such statements are. Its like the joke about the US President who famously wanted "a one handed economist." (maybe your inner economist is surfacing??)
Methinks
· 8 months ago
It's quite possible to understand the dangers of poorly timed monetary expansion and to differentiate between monetary expansion when there is a potential wage-price spiral and monetary expansion when there is no such risk.
There could be another options. It's quite possible that they a.)understand how little they truly understand but must do something or b.)are pushed to act in a politically acceptable way. The Fed is not independent of politics just as "independent regulatory bodies" are not.
LowcountryJoe
· 8 months ago
maybe your inner economist is surfacing??
Ha! That sort of implies that tradeoffs, utility, incentives, cost vs. benefits, etc. are properly understood. For DK, are they?
Bill Stepp
· 8 months ago
Daniel Kuehn,
A key problem with monetarism is its almost single-minded focus on changes in the money supply, particularly the monetary base.
In understanding the recent boom-bust cycle, this is at most only part of the story, because banks accounted for only about 20-30 percent of new loans that fed the boom. The balance of the loans came from the so-called shadow banking system--hedge funds, pension funds, credit unions, and other non-commercial bank institutions.
During the downturn these lenders pulled back from the loan market more than the commercial banks did.
Monetarism, at least the version I learned in school, ignored this.
Monetarism also views capital as a blob, K, (similar to Keynesianism) and so is ill-equipped to understand changes in the composition of the capital structure (see Lachmann, "Capital and Its Structure") and, above all, changes in the plans of entrepreneurs and capitalists caused by Fed-induced changes in interest rates, and the effects these changes have on their economic calculations.
This is why the Austrian theory is so much better at understanding the business cycle. It focuses on market participants and processes, as opposed to the macroeconomic aggregates we see in Keynesianism and monetarism.
Another commentator above mentioned that economic coordination seems to be more a macroeconomic than microeconomic phenomenon, but the reality is that it applies to both conceptions. Macroeconomics, after all, consists fundamentally of microeconomic processes playing out across time and markets. Here again, we see the superiority of the Austrian approach to its rivals.
BoscoH
· 8 months ago
To say that Greenspan set interest rates too low after September 11 and the dot-com crash misses most of the point.
Yes, interest rates were too low. Money was too cheap. But why was it that, as Don said, "the nominal rate of interest was lying to investors"? Here's an explanation to throw out... Technology made the process of getting consumer and home loans much simpler and faster in a short amount of time. I can draw on my recollection of my parents' refinancing a home in the 1980s, purchasing a second home in the early 1990s, my purchasing of that 2nd home from them in 2001, and refinancing later in the decade. I can draw on my experience with credit cards. I can draw on experience seeing small business loans in the late 1980s and this decade not being simplified anywhere near as much. If I want to borrow $400K to buy a house, I can do it over the phone without complete documentation and meet a notary at a coffee shop within a few days. If I want to borrow $100K for a small business, I still have to prepare a business plan and meet with a banker, and he's going to know what brand of toilet paper I stock the company restroom with.
So maybe Greenspan and his crew didn't see the dramatic simplification of consumer and mortgage credit processes, and could not anticipate that such low interest rates would fuel a housing bubble, rampant speculation, and the resulting credit crunch when too many people were leveraged to the hilt. And more than likely, if that explanation is correct, it accounts for part of what happened, and other actions account for the rest. That's what's unique about the Austrian story.
Daniel Kuehn
· 8 months ago
indiana jim -
RE: "Come on, a person with your abilities should realize how self-contradictory such statements are."
No, it's not really contradictory at all. Liberals like Roosevelt were (more or less) Keynesian, and conservatives like Reagan were Keynesian. As far as I can tell, Austrians are consistently libertarian when it comes to ideology. Plus, Austrians talk a lot more about ethical issues than any other economic school of thought, which constrains their options ideologically.
It's not meant to be an insult - it's just the way it is, as far as I can tell.
Daniel Kuehn
· 8 months ago
Methinks -
RE: "The Fed is not independent of politics just as "independent regulatory bodies" are not. "
Absolutely. I'd be the last to argue that the Fed is above the possibility of error (in fact, I believe I have been arguing the opposite with respect to Greenspan), and often rushes to judgement. But the point is, as imperfect as the Fed is - we can't pretend that expansionary monetary policy is going to have the same effects in 1928, 1931, 2000, and 2008. Why won't it? Because the conditions in each of those years were very very different.
Bill -
Re: "A key problem with monetarism is its almost single-minded focus on changes in the money supply, particularly the monetary base"
I agree, which is why I think it's experienced some major renovation since it's heyday in the Volcker years.
RE: "This is why the Austrian theory is so much better at understanding the business cycle. It focuses on market participants and processes, as opposed to the macroeconomic aggregates we see in Keynesianism and monetarism."
I agreed with most of what you had to say until this. Keynesianism - especially the so called "New Keynesianism" - has an incredible array of microfoundational models. Austrian theory is great for the market participants and processes that it does consider - the capital structure. But all this talk of "Keynesian aggregates" gives the impression that Keynesianism is just the IS-LM model. It's not. I think we also need to differentiate "Keynesian" solutions (which are more tied to aggregates than they should be) from "Keynesian" explanations of booms and busts - which are every bit as conscious of the microfoundations as ABCT.
RE: "Macroeconomics, after all, consists fundamentally of microeconomic processes playing out across time and markets. Here again, we see the superiority of the Austrian approach to its rivals. "
I believe I mentioned this earlier - although I was agreeing with you - that coordination is as much a macro as a micro issue, not that it was more of a macro issue. I take strong strong issue with the idea that this is an Austrian strongpoint again! The very term "coordination failure" was popularized by the New Keynesians after all! Austrians have delved into the capital structure in far greater detail, but they're HARDLY the only ones think about macroeconomic problems as coordination problems. I don't understand this sense that Austrians are the only ones that do these things and they're the only ones who have been vindicated by this crash. I'm actually a big fan of ABCT - people are arguing with me as if I'm not - I'm just saying it's a much bigger world out there, and while Austrian capital theory is unique, the general insights of ABCT are not especially unique (except insofar as they directly pertain to the capital structure).
Daniel Kuehn
· 8 months ago
BoscoH-
RE: "RE: "And more than likely, if that explanation is correct, it accounts for part of what happened, and other actions account for the rest. That's what's unique about the Austrian story."
Excuse me? No, I just can't let you get away with that. Look - ABCT is great at explaining how this crisis started (not as great at how it got exascerbated... Keynes and Fisher are better at that). That's why I like ABCT!!!! But please don't try and tell me they were the only ones who saw the housing bubble coming. Dean Baker and Greg Mankiw both called it years ago - one liberal New Keynesian and one conservative New Keynesian (which again speaks to the ideological diversity of Keynesianism.
Isn't it possible for me to say "other people were on top of this too... or if they weren't on top of it, their models are still good at explaining it" and also say "but I still like ABCT".
Martin Brock
· 8 months ago
I enjoyed the discussion, but it doesn't address the current "crisis" well.
The Austrian theory of the business cycle seems to account well for the current "crisis", but we can't understand the crisis (or the Austrian theory of the business cycle) solely with reference to monetary policy generally and interest rates more specifically.
Money is credit. People extend credit presently for future purposes. We overextended credit in recent decades, because baby boomers (who are really baby busters) want to retire as well as their parents. Ignoring the role of demography in this process is incredible.
Martin Brock
· 8 months ago
If Don and Russ weren't baby boomers themselves, we might discuss the reality of the situation more.
indianajim
· 8 months ago
Daniel,
You can imply that Roosevelt and Reagan had the same views about economics, but it just ain't so. Just for starters, we never say any president so foolhardy as FDR, who famously (or infamously) despoil farm good and bury pigs because he thought that if only price could be driven up the economy would be fixed. Well, wait a minute, Obama's notion that government stimulus in unprecedented amounts will fix the economy may be as foolish. Back on point, Reagan was, thank God, no FDR on economics (unfortunately, Obama appear to be, more or less).
Bill Stepp
· 8 months ago
From the Wikipedia article "New Keynesian Economics":
Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. But the two schools differ in that New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume prices and wages are "sticky", which means they do not adjust instantaneously to changes in economic conditions.
Wage and price stickiness, and the other market failures present in New Keynesian models, imply that the economy may fail to attain full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using fiscal policy) or by the central bank (using monetary policy) can lead to a more efficient macroeconomic outcome than a laissez faire policy would. However, New Keynesian economics is less optimistic about the benefits of activist policies than traditional Keynesian economics was.
There is no such thing as a market failure, at least as this article uses that term.
On the free market, wages and prices are not sticky; they are always by definition and in practice (praxis?) at their free market levels. To the extent they are "sticky" that is because of labor unions (hello, GM and the other two Big Three-ers). The solution to that problem is to repeal the Wagner Act. (Wagner was one of the biggest political criminals of all time, along with Al Smith. Smith, btw, pioneered a lot of the New Deal nonsense in New York in the 1920s as an advisor to FDR. Why does NY have so many political criminals?)
The bottom line with NKE is that's it's just warmed over KE with some additional fallacies, which were called forth in an attempt to rectify Maynard's original fallacies. If you find a good NKE argument, please let us know the citation.
And a comment to Martin Brock: demographics has no business cycle implications. If boomers age, they retire. So what?
To the extent that demo matters, maybe it's because of the Social Securitiy scam, but that has no cyclical implications per se.
Daniel Kuehn
· 8 months ago
indiana jim -
RE: "Back on point, Reagan was, thank God, no FDR on economics (unfortunately, Obama appear to be, more or less)."
Of course he was - he had the benefit of hindsight, and the full literature on new classical, new keynesian, and synthesis macroeconomics to pull on... so he differed in some ways (most fundamentally in that he had a supply-side Keynesianism), but there is no way in the world Reagan was not a Keynesian.
Bill Stepp -
Wage stickiness is ONLY due to unions? Really?
One think that bothers me about the New Keynesianism is that it is a hodge podge of frictions. That's unsatisfying an inelegant, but I think it's ultimately more accurate than putting all your bets on "malinvestment". To reiterate - I completely buy ABCT - just not to the exclusion of a lot of the New Keynesian explanations.
RE: "On the free market, wages and prices are not sticky; they are always by definition and in practice (praxis?) at their free market levels."
By definition? If you're arguing from definition, how can anyone refute you? What possible reason is there to assume a priori that adjustment is always rapid? You're just assuming it is. I think the safer route is to say that adjustment is often quick, and often not quick, but we can't say that it is ALWAYS one or the other.
MnM
· 8 months ago
On the free market, wages and prices are not sticky; they are always by definition and in practice (praxis?) at their free market levels.
This seems to imply Pareto optimality. Pareto efficient markets, as far as I know, have never been observed. In a free market, markets approach optimality but never reach it due to the actions (and inaction) of market participants.
Geoff
· 8 months ago
Daniel,
I am interested in hearing more about the "New Keynsian" point of view. Could you enlighten me with the some of the other explanations that you see fit just as well as the Austrian theory of business cycles?
Daniel Kuehn
· 8 months ago
Geoff-
As I think I said before, the Keynesian story is a bit of a hodge-podge. That's a little unsatisfying, but not necessarily inaccurate.
I think the bedrock, old-school Keynesian view of business cycles is an accelerator-multiplier type explanation. I'm sure a simple google search of "accelerator multiplier" could give you a better explanation than I can provide here, but the idea is that increasing income levels accelerate the rate of capital accumulation, and decreasing income levels slow the rate of capital accumulation. By the same token, investments have a "multiplier effect", increasing the demand for their products and accelerating futher investment. This can create oscillations in the economy that are completely independent of any central bank decision making.
Keyensians also introduce wage stickiness and other price stickiness (which I guess is best thought of as a negative shock introduced into some sort of oscillator model that I described above). Things like "efficiency wages" and asymmetric information are used to explain departures from "full employment".
While I'm convinced by Keynesian ideas about how business cycles start (not to the exclusion of ABCT - I'm convinced by that too), I'm even more convinced by Keynesian explanations of how crises can accelerate. Keynesian wage-price spirals and Fisherian debt-deflation dynamics are especially convincing, I think, because the accelerator-multiplier effects get bigger as the pace of decline increases. The Keynesian explanation of how cycles get exascerbated isn't relevant to every recession (which is why Keynesians don't meet every recession with a demand for fiscal stimulus), but it is very important at a time like this (and in my mind, very interesting as well).
I don't know much Minksy, but Minsky offers a more behavioral Keynesian explanation (sort of a formalization of Keynes's "animal spirits" idea). Minsky talks about how confidence builds on itself and is self-fulfilling, which can again lead to booms and busts that are completely independent of central bank meddling. There was a great article in The Economist on Minsky two or three weeks back - it's worth reading into.
I am quite convinced by ABCT - I just don't think it stands alone as the only reasonable explanation of the business cycle and the current crisis. If central banks and fiat money are really so foundational to crises, where did 1873 or 1907 come from? There was no Fed back then! And if it's just the instabilities of a fractional reserve banking system that's the issue, then that sounds an awful lot like Keynes or Minsky to me!
I certainly hold Greenspan and the Fed accountable for this one, and I hold the Fed accountable for a great deal of other mischief... but I don't believe for a second that's the whole or even most of the story.
Daniel Kuehn
· 8 months ago
Geoff-
George Soros, interestingly enough, has a half-baked application of Godel's incompleteness theorem to finance that he calls "reflexivity". It's a little rough (at least in the version I read in his book "Underwriting Democracy"), but it's very intriguing and I think comes out as essentially a Minsky/Keynes/animal-spirits argument.
If anybody knows anything about applications of Godel to behavioral economics, or any other writing that Soros has done on that, I'd personally be very interested in hearing about it. It's a neat rendition of a fascinating mathematician/philosopher that otherwise doesn't have much to do with economics.
Daniel Kuehn
· 8 months ago
Geoff -
RE: the specific point of "that you see fit just as well".
Low interest rates certainly funneled more money into the housing market than it should have, but that would only explain an overinvestment in housing. Maybe the bubble was just overinvestment caused by price manipulation... I have a feeling that it also had to do with price expectations, which I think are better explained by accelerator effects and Minsky/behavioral effects. So I think in terms of explaining this current crisis, the two complement each other quite nicely.
Daniel Kuehn
· 8 months ago
Geoff -
And I might add to that last comment, you don't have to be an Austrian to recognize that low interest rates will funnel money into housing as opposed to other forms of capital.
Just because this asset heterogeneity isn't specified in all models, doesn't mean that the point is lost on non-Austrians.
BoscoH
· 8 months ago
Excuse me? No, I just can't let you get away with that. Look - ABCT is great at explaining how this crisis started (not as great at how it got exascerbated... Keynes and Fisher are better at that). That's why I like ABCT!!!! But please don't try and tell me they were the only ones who saw the housing bubble coming.
Daniel, I don't claim that anyone saw the housing bubble coming. I'll let the Austrian approach explain what happened this time around and hope that it can inform debate "next time". Perhaps we ought to be talking about how trillions in extra spending is going to shake up the structure of the economy now. It doesn't seem to be propping up housing prices, which means it doesn't seem to be solving the equity problem. I wonder what it's actually accomplishing.
Sam Grove
· 8 months ago
I don't think there is one ideological assumption in Keynesian/mainstream discussions
Of course there is. Step out of the water to see it.
The assumption is that the state may, and should, manage the market via monetary adjustments.
We free market advocates challenge that assumption. You don't even notice it.
Daniel Kuehn
· 8 months ago
BoscoH -
You said "that's what's unique about the Austrian story". What I'm saying that it's not unique to the Austrian story at all. I wasn't trying to illustrate that "these guys saw it too" - more that "their theories saw it too", and that Austrians are not as unique as many think they are.
Daniel Kuehn
· 8 months ago
Sam -
RE: "The assumption is that the state may, and should, manage the market via monetary adjustments.
We free market advocates challenge that assumption. You don't even notice it."
First, that's a slim "ideology" because such a variety of ideologies can fit into that. So no, it's not your ideology, but since virtually every other ideology can fall under that, that's quite "non-ideological". I do notice you don't agree with that - but your disagreement with it doesn't make Keyensianism a theory of one ideology.
Second, I would say that Keynesianism only says how the economy will respond if the state does intervene, it does not say that it should intervene. In that sense, it's not different from Classical economics insofar as it is "non-ideological".
Maybe there is a pure Austrian theory of economics. As I've said previously, I'm not too well informed about it. It seems to me, though, that the Austrian school provides a political philosophy and an economics wrapped into one. I'm not saying that's a bad thing - I'm saying the Keynesianism does not do that, which is evidenced in the fact that people from lots of different ideological backgrounds share a common Keynesian economics (in that regard, it is very similar to something like biology - Hitler, Stalin, Roosevelt, and (I assume) Ron Paul are all "Darwinians" because evolutionary biology is non-ideological). In the same way, Keynesianism is non-ideological and held to be true by people of all different kinds of ideologies.
Daniel Kuehn
· 8 months ago
Sam -
And what you don't seem to notice is that I'm more often than not a "free market advocate" too... these discussions just always seem to zero in on the areas where I'm not a free market advocate.
Except for the odd case of Florida produce, where I'm a free market advocate and you guys don't seem to be :)
MnM
· 8 months ago
Except for the odd case of Florida produce, where I'm a free market advocate and you guys don't seem to be :)
I don't think that's a fair reading of Don's or our arguments.
Bill Stepp
· 8 months ago
Low interest rates certainly funneled more money into the housing market than it should have, but that would only explain an overinvestment in housing. Maybe the bubble was just overinvestment caused by price manipulation... I have a feeling that it also had to do with price expectations, which I think are better explained by accelerator effects and Minsky/behavioral effects. So I think in terms of explaining this current crisis, the two complement each other quite nicely.
Low interest rates explain more than the bubble in housing. Lower-than-market interest rates also fueled bubbles in stocks, bonds, private equity, LBOs, commodities, consumer loans, and even the art market (see consumer loans).
Interest rates are a factor determining investments in all capital markets, not just the housing market.
You don't need an "accelerator effect"--whatever that is--to explain bubbles and busts. Indeed, that idea violates Occam's razor, at the very least.
The ABCT is enough.
Daniel Kuehn
· 8 months ago
MnM -
RE: "I don't think that's a fair reading of Don's or our arguments."
And I don't think that's a fair reading of the smiley face that I added at the end of that sentence :)
Daniel Kuehn
· 8 months ago
Bill Stepp -
Of course low interest rates are going to create more than housing bubbles - somebody pulled out housing bubbles, so that's what I mentioned. Didn't mean to confuse - I acknowledge it did more than that.
RE: "You don't need an "accelerator effect"--whatever that is--to explain bubbles and busts. Indeed, that idea violates Occam's razor, at the very least.
The ABCT is enough."
If you don't know what an accelerator is, how do you know if it violates Occam's razor? You don't need ABCT to explain booms and busts either - accelerator effects explain it. But the reason why it's good to pay heed to a number of explanations is that almost all objective observers agree that recessions have a number of sources - lots of different shocks and trends cause recessions. How is trying to jerry-rig one theory to fit all of them consistent with Occam's razor?
And even if you did attempt a "unified theory of business cycles", how does ABCT explain why American recessions after the creation of the Fed have been less regular and less severe than American recessions before the creation of the Fed? And why have the most severe recessions since the creation of the Fed occured when power on the Fed was decentralized to the member banks, and the less severe recessions have occured during the period when power was centralized in the Federal Reserve Board?
This isn't a refutation of ABCT - it's a refutation of the idea that that somehow solved the puzzle.
MnM
· 8 months ago
And I don't think that's a fair reading of the smiley face that I added at the end of that sentence :)
Ohhh! You meant it as joke. Sorry, man. I didn't get a lot of sleep last night.
Sam Grove
· 8 months ago
First, that's a slim "ideology" because such a variety of ideologies can fit into that. So no, it's not your ideology, but since virtually every other ideology can fall under that, that's quite "non-ideological". I do notice you don't agree with that - but your disagreement with it doesn't make Keyensianism a theory of one ideology.
There are many factions in very ideology, but sometimes it is helpful to simplify.
Austrians may even agree that certain government monetary interventions have certain effects.
However, it seems that most Keynesians have an expectation that government should step in to make corrections. This is an ideology. There may factions among Keynesians on details and other issues, but that seems fundamental.
Austrian's hold that government intervention, even when it may appear to work well, causes unseen effects that lead to other problems that seem to require further intervention.
Daniel Kuehn
· 8 months ago
Sam -
RE: "There are many factions in very ideology, but sometimes it is helpful to simplify."
It's a reasonable point, but you seem to be simplifying by saying that there are two ideologies: Sam's ideology and everybody else's! Interveners and non-interveners! If that's all you mean by an ideology, I guess you're right - but that isn't really saying much! The point is LOT'S of recognized, distinct ideologies - most generally "progressives" and "conservatives" - can be Keynesians. So, there is no one associated with Keynesianism. In this way, Keynesian economics is no more ideological than evolutionary biology, quantam mechanics, or psychoanalysis.
S Andrews
· 8 months ago
quantam mechanics
You are overstating your case.
Daniel Kuehn
· 8 months ago
S Andrews -
Haha! It's gone viral now!
You're right - I probably was overstating my case there. Quantam mechanics is generally aligned with labor unions ("mechanics" and all - you understand), while relativity is more of a conservative movement (which is odd because they normally complain that liberals are relativists).
Keynesianism, however, has been advocated/used by the labor movement, conservatives, and liberals - so still quite non-ideological.
Bill Stepp
· 8 months ago
And even if you did attempt a "unified theory of business cycles", how does ABCT explain why American recessions after the creation of the Fed have been less regular and less severe than American recessions before the creation of the Fed?
Less regular after the Fed?
These since 1970: '73-'74, '81-'82, '90-'91, '01-'02, '08-'10. They look fairly regular to me.
Less severe? The Great Depression was less severe than which pre-Fed depression?
The current one isn't done yet.
Depressions in the pre-Fed era were generally short and sharp, with a couple exceptions.
As for the Fed's centralization, I don't know that it matters much.
All Comments
Just finished listening to it, great discussion!
Slightly off-topic, I would love to hear the two of you discuss the idea of the 'paradox of thrift.' It was mentioned in a podcast a couple months ago and I',m very interested in your thoughts on it.
I second the opinion of someone who commented on econtalk that Roger Garrison be interviewed on the same topic
"I don't see a lot of attention paid in macroeconomics to coordination"
Really? I think of "coordination failure" as as much a macroeconomic endeavor as a microeconomic one.
Still listening... good stuff
So I have a tough time understanding this logic... non-Austrians almost to a man agree that monetary policy can distort the economy and cause recessions. Austrians do too, and prioritize that cause over most (all?) others. So how is admiting that a lot of this recession should be laid squarly at the feet of Greenspan's Fed bolstering the Austrian case any more than any of the other schools of thought?
I don't doubt there is an uptick in interest in the Austrian school - but I have to take issue with the idea that this vindicates the Austrian school OVER other schools of thought.
Daniel wrote:
"I don't doubt there is an uptick in interest in the Austrian school - but I have to take issue with the idea that this vindicates the Austrian school OVER other schools of thought."
Obviously Daniel know little about the Austrian school.
Daniel, if you take a look at Roger Garrison's power point on capital based macro you might be able to post more reasonably on this topic:
www.auburn.edu/~garriro/ppsus.ppt
indiana jim -
No, I understand it quite well. And I do wish Keynesians had a capital theory that was as well laid out as the Austrian theory.
What I'm saying is that lots of people point to monetary expansion at the wrong time as a source of recessions. The fact that Greenspan was largely (although obviously not exclusively) at fault for this recession therefore does nothing to bolster the Austrian school against the New Keyensian school.
*that was an overstatement - I probably don't understand it too thoroughly... but I understand it enough to strongly appreciate it - and it doesn't change my argument that Austrians aren't the only ones that point to the money supply.
Daniel,
Garrison's presentation together with Don's discussion should make it clear to you the following Austian point: when the composition of captial purchases gets skewed by interventionist monetary policy and governmental encouragements to financials to make loans "too" freely, then expect to see the boom/bust cycle.
Daniel, were you listening to Don's discussion? Didn't you hear him make the important point the while in most macro models capital is a "black-box" called "K", whereas Austrians worry about what the composition of the capital is? If you don't remember this, listen to the discussion again, and then, since you missed how this connects to Garrison's powerpoint, look at it again too. Then, I expect that given my assessment of your abilities, you will be fully able to post reasonably here. (Whether you will or not is another matter; maybe you are one of these folks who just likes to argue rather than try to advance knowledge.)
indiana jim -
Please don't talk down to me like that. I'm no expert on the Austrian school, but I know everything you just responded with. And as I said above, I wish the Keynesian black box would incorporate the Austrian insights about capital (as a modeling technique, I don't have a problem with simplifying the capital structure - but obviously that comes with costs).
You are completely missing my point.
I understand quite clearly WHY Austrians think artificial increases in the money supply will cause a recession. What I'm saying is that New Keynesians (not sure what the old Cambridge don would have said exactly... but the new ones) AGREE that artificially increasing the money supply can cause a recession. Monetarists also agree that artificially increasing the money supply can cause a recession.
So when you step back and say "Gee, Greenspan pushed us into a recession", who's argument do you bolster?
The Austrians, AND the New Keynesians, AND the Monetarists. You don't make the Austrian school more correct than the New Keynesians, because everyone acknowledges this point.
And this is one of my bigger problems with Austrian business cycle theory - not that I disagree with it. Far from it! I agree with pretty much every element of Austrian business cycle theory. I'm just not convinced that that's an anywhere near complete consideration of what causes business cycles (and in all honesty, I doubt thoughtful Austrians think it's a complete theory).
But you certainly can't identify Austrians as being the winner from recent events. They are right on at least one element of this crisis - and they share that accuracy with many, many other schools of thought.
Which is fine! Science is about understanding things - it's not a pissing contest. It's OK that a lot of people correctly identified artificial expansions of the money supply as a source of recessions.
AGREE that artificially increasing the money supply can cause a recession. Monetarists also agree that artificially increasing the money supply can cause a recession.
I am clearly no expert on ABCT. However, I think ABCT is more nuanced than your stated understanding of it. It is not the money supply expansion per se that causes the boom-bust cycle, it is the manipulation of a very important price, one that signals very important system wide information: available savings of real resources - time preference a.k.a interest rate.
If every economist understands the ill effects of monetary expansion, Fed will not be setting interest rates at 0, or pumping banks with reserves, pumping money into failed institutions or pumping money through make work programs. Clearly, they don't understand ABCT.
Kudlow, that neocon supply-side keynesian keeps on touting monetary expansion as "mustard seeds" of "growth".
Monetarists also agree that artificially increasing the money supply can cause a recession.
What is meant by "artificially" in your statement.
How is it determined when an increase in the money supply is artificial vs "natural"?
In other posts you claimed that at Cafe Hayek, the discussion was not so much economics oriented, but was rather politically/ideologically oriented.
I will modify that to make it more accurate (in my view).
At Cafe Hayek, our political/ideological assumptions are explicit as opposed to Keynesian/mainstream discussion where the political/ideological assumptions are implicit.
S Andrews -
I'm sure it's more nuanced than what I'm stating, but I do understand that it has to do with the nature of the malinvestments that occur when borrowers pursue projects with increasingly diminishing returns. I understand the mechanism for the malinvestments is that capital is not homogenous, as many other macro models assume it is (not all, obviously - there are lots of macro models that identify several different kinds of "k's", and macro models certainly acknowledge that there is a diminishing marginal return to k, which is essentially a "malinvestment" argument that ignores what's in the black box).
All that is quite clear.
The point is they're not the only ones saying it - even if they are the only ones that express it in that much detail.
So... to reiterate... Austrians are no more vindicated by the source of this crisis than New Keynesians or monetarists or anyone else.
S Andrews -
RE: "If every economist understands the ill effects of monetary expansion, Fed will not be setting interest rates at 0, or pumping banks with reserves, pumping money into failed institutions or pumping money through make work programs. Clearly, they don't understand ABCT."
It's quite possible to understand the dangers of poorly timed monetary expansion and to differentiate between monetary expansion when there is a potential wage-price spiral and monetary expansion when there is no such risk. Does ABCT dictate that we treat monetary expansion in 2000 the same as monetary expansion in 2008 or treat monetary expansion in 1926 the same as expansion in 1931? I should hope not. Different conditions prevail then. I see know reason why anyone should feel the need to conclude the same thing about monetary expansion in these different time periods.
Sam -
RE: "What is meant by "artificially" in your statement.
How is it determined when an increase in the money supply is artificial vs "natural"?"
Well, all increases in the money supply based on Fed behavior are "artificial" (as opposed to changes in a private banks reserve ratio or newly mined gold, which would both be "natural"). The important word here is "can", though - not "artificial". Artificial increases in the money supply CAN cause a recession if those increases lead to malinvestment, which they may not always lead to.
RE: "At Cafe Hayek, our political/ideological assumptions are explicit as opposed to Keynesian/mainstream discussion where the political/ideological assumptions are implicit."
They're not always explicit! It feels like every day I have to point out "you don't conclude that because it's self evident - you conclude that because of an assumption you made but didn't verablize". I don't think there is one ideological assumption in Keynesian/mainstream discussions - it depends on the discussion! Some are implicit, some are explicit, some are conservative, some liberal.
The point is, though, you can believe in Keynesian dynamics and still be a liberal or a conservative or a libertarian. I'm not too familiar with the Austrian school yet, but it seems FAR more ideologically grounded than Keynesianism (either explicitly or implicitly).
Daniel,
It is hard not to talk down to you when you write things like: "I'm not too familiar with the Austrian school yet, but it seems FAR more ideologically grounded than Keynesianism (either explicitly or implicitly).
Come on, a person with your abilities should realize how self-contradictory such statements are. Its like the joke about the US President who famously wanted "a one handed economist." (maybe your inner economist is surfacing??)
It's quite possible to understand the dangers of poorly timed monetary expansion and to differentiate between monetary expansion when there is a potential wage-price spiral and monetary expansion when there is no such risk.
There could be another options. It's quite possible that they a.)understand how little they truly understand but must do something or b.)are pushed to act in a politically acceptable way. The Fed is not independent of politics just as "independent regulatory bodies" are not.
maybe your inner economist is surfacing??
Ha! That sort of implies that tradeoffs, utility, incentives, cost vs. benefits, etc. are properly understood. For DK, are they?
Daniel Kuehn,
A key problem with monetarism is its almost single-minded focus on changes in the money supply, particularly the monetary base.
In understanding the recent boom-bust cycle, this is at most only part of the story, because banks accounted for only about 20-30 percent of new loans that fed the boom. The balance of the loans came from the so-called shadow banking system--hedge funds, pension funds, credit unions, and other non-commercial bank institutions.
During the downturn these lenders pulled back from the loan market more than the commercial banks did.
Monetarism, at least the version I learned in school, ignored this.
Monetarism also views capital as a blob, K, (similar to Keynesianism) and so is ill-equipped to understand changes in the composition of the capital structure (see Lachmann, "Capital and Its Structure") and, above all, changes in the plans of entrepreneurs and capitalists caused by Fed-induced changes in interest rates, and the effects these changes have on their economic calculations.
This is why the Austrian theory is so much better at understanding the business cycle. It focuses on market participants and processes, as opposed to the macroeconomic aggregates we see in Keynesianism and monetarism.
Another commentator above mentioned that economic coordination seems to be more a macroeconomic than microeconomic phenomenon, but the reality is that it applies to both conceptions. Macroeconomics, after all, consists fundamentally of microeconomic processes playing out across time and markets. Here again, we see the superiority of the Austrian approach to its rivals.
To say that Greenspan set interest rates too low after September 11 and the dot-com crash misses most of the point.
Yes, interest rates were too low. Money was too cheap. But why was it that, as Don said, "the nominal rate of interest was lying to investors"? Here's an explanation to throw out... Technology made the process of getting consumer and home loans much simpler and faster in a short amount of time. I can draw on my recollection of my parents' refinancing a home in the 1980s, purchasing a second home in the early 1990s, my purchasing of that 2nd home from them in 2001, and refinancing later in the decade. I can draw on my experience with credit cards. I can draw on experience seeing small business loans in the late 1980s and this decade not being simplified anywhere near as much. If I want to borrow $400K to buy a house, I can do it over the phone without complete documentation and meet a notary at a coffee shop within a few days. If I want to borrow $100K for a small business, I still have to prepare a business plan and meet with a banker, and he's going to know what brand of toilet paper I stock the company restroom with.
So maybe Greenspan and his crew didn't see the dramatic simplification of consumer and mortgage credit processes, and could not anticipate that such low interest rates would fuel a housing bubble, rampant speculation, and the resulting credit crunch when too many people were leveraged to the hilt. And more than likely, if that explanation is correct, it accounts for part of what happened, and other actions account for the rest. That's what's unique about the Austrian story.
indiana jim -
RE: "Come on, a person with your abilities should realize how self-contradictory such statements are."
No, it's not really contradictory at all. Liberals like Roosevelt were (more or less) Keynesian, and conservatives like Reagan were Keynesian. As far as I can tell, Austrians are consistently libertarian when it comes to ideology. Plus, Austrians talk a lot more about ethical issues than any other economic school of thought, which constrains their options ideologically.
It's not meant to be an insult - it's just the way it is, as far as I can tell.
Methinks -
RE: "The Fed is not independent of politics just as "independent regulatory bodies" are not. "
Absolutely. I'd be the last to argue that the Fed is above the possibility of error (in fact, I believe I have been arguing the opposite with respect to Greenspan), and often rushes to judgement. But the point is, as imperfect as the Fed is - we can't pretend that expansionary monetary policy is going to have the same effects in 1928, 1931, 2000, and 2008. Why won't it? Because the conditions in each of those years were very very different.
Bill -
Re: "A key problem with monetarism is its almost single-minded focus on changes in the money supply, particularly the monetary base"
I agree, which is why I think it's experienced some major renovation since it's heyday in the Volcker years.
RE: "This is why the Austrian theory is so much better at understanding the business cycle. It focuses on market participants and processes, as opposed to the macroeconomic aggregates we see in Keynesianism and monetarism."
I agreed with most of what you had to say until this. Keynesianism - especially the so called "New Keynesianism" - has an incredible array of microfoundational models. Austrian theory is great for the market participants and processes that it does consider - the capital structure. But all this talk of "Keynesian aggregates" gives the impression that Keynesianism is just the IS-LM model. It's not. I think we also need to differentiate "Keynesian" solutions (which are more tied to aggregates than they should be) from "Keynesian" explanations of booms and busts - which are every bit as conscious of the microfoundations as ABCT.
RE: "Macroeconomics, after all, consists fundamentally of microeconomic processes playing out across time and markets. Here again, we see the superiority of the Austrian approach to its rivals. "
I believe I mentioned this earlier - although I was agreeing with you - that coordination is as much a macro as a micro issue, not that it was more of a macro issue. I take strong strong issue with the idea that this is an Austrian strongpoint again! The very term "coordination failure" was popularized by the New Keynesians after all! Austrians have delved into the capital structure in far greater detail, but they're HARDLY the only ones think about macroeconomic problems as coordination problems. I don't understand this sense that Austrians are the only ones that do these things and they're the only ones who have been vindicated by this crash. I'm actually a big fan of ABCT - people are arguing with me as if I'm not - I'm just saying it's a much bigger world out there, and while Austrian capital theory is unique, the general insights of ABCT are not especially unique (except insofar as they directly pertain to the capital structure).
BoscoH-
RE: "RE: "And more than likely, if that explanation is correct, it accounts for part of what happened, and other actions account for the rest. That's what's unique about the Austrian story."
Excuse me? No, I just can't let you get away with that. Look - ABCT is great at explaining how this crisis started (not as great at how it got exascerbated... Keynes and Fisher are better at that). That's why I like ABCT!!!! But please don't try and tell me they were the only ones who saw the housing bubble coming. Dean Baker and Greg Mankiw both called it years ago - one liberal New Keynesian and one conservative New Keynesian (which again speaks to the ideological diversity of Keynesianism.
Isn't it possible for me to say "other people were on top of this too... or if they weren't on top of it, their models are still good at explaining it" and also say "but I still like ABCT".
I enjoyed the discussion, but it doesn't address the current "crisis" well.
The Austrian theory of the business cycle seems to account well for the current "crisis", but we can't understand the crisis (or the Austrian theory of the business cycle) solely with reference to monetary policy generally and interest rates more specifically.
Money is credit. People extend credit presently for future purposes. We overextended credit in recent decades, because baby boomers (who are really baby busters) want to retire as well as their parents. Ignoring the role of demography in this process is incredible.
If Don and Russ weren't baby boomers themselves, we might discuss the reality of the situation more.
Daniel,
You can imply that Roosevelt and Reagan had the same views about economics, but it just ain't so. Just for starters, we never say any president so foolhardy as FDR, who famously (or infamously) despoil farm good and bury pigs because he thought that if only price could be driven up the economy would be fixed. Well, wait a minute, Obama's notion that government stimulus in unprecedented amounts will fix the economy may be as foolish. Back on point, Reagan was, thank God, no FDR on economics (unfortunately, Obama appear to be, more or less).
From the Wikipedia article "New Keynesian Economics":
Two main assumptions define the New Keynesian approach to macroeconomics. Like the New Classical approach, New Keynesian macroeconomic analysis usually assumes that households and firms have rational expectations. But the two schools differ in that New Keynesian analysis usually assumes a variety of market failures. In particular, New Keynesians assume prices and wages are "sticky", which means they do not adjust instantaneously to changes in economic conditions.
Wage and price stickiness, and the other market failures present in New Keynesian models, imply that the economy may fail to attain full employment. Therefore, New Keynesians argue that macroeconomic stabilization by the government (using fiscal policy) or by the central bank (using monetary policy) can lead to a more efficient macroeconomic outcome than a laissez faire policy would. However, New Keynesian economics is less optimistic about the benefits of activist policies than traditional Keynesian economics was.
There is no such thing as a market failure, at least as this article uses that term.
On the free market, wages and prices are not sticky; they are always by definition and in practice (praxis?) at their free market levels. To the extent they are "sticky" that is because of labor unions (hello, GM and the other two Big Three-ers). The solution to that problem is to repeal the Wagner Act. (Wagner was one of the biggest political criminals of all time, along with Al Smith. Smith, btw, pioneered a lot of the New Deal nonsense in New York in the 1920s as an advisor to FDR. Why does NY have so many political criminals?)
The bottom line with NKE is that's it's just warmed over KE with some additional fallacies, which were called forth in an attempt to rectify Maynard's original fallacies. If you find a good NKE argument, please let us know the citation.
And a comment to Martin Brock: demographics has no business cycle implications. If boomers age, they retire. So what?
To the extent that demo matters, maybe it's because of the Social Securitiy scam, but that has no cyclical implications per se.
indiana jim -
RE: "Back on point, Reagan was, thank God, no FDR on economics (unfortunately, Obama appear to be, more or less)."
Of course he was - he had the benefit of hindsight, and the full literature on new classical, new keynesian, and synthesis macroeconomics to pull on... so he differed in some ways (most fundamentally in that he had a supply-side Keynesianism), but there is no way in the world Reagan was not a Keynesian.
Bill Stepp -
Wage stickiness is ONLY due to unions? Really?
One think that bothers me about the New Keynesianism is that it is a hodge podge of frictions. That's unsatisfying an inelegant, but I think it's ultimately more accurate than putting all your bets on "malinvestment". To reiterate - I completely buy ABCT - just not to the exclusion of a lot of the New Keynesian explanations.
RE: "On the free market, wages and prices are not sticky; they are always by definition and in practice (praxis?) at their free market levels."
By definition? If you're arguing from definition, how can anyone refute you? What possible reason is there to assume a priori that adjustment is always rapid? You're just assuming it is. I think the safer route is to say that adjustment is often quick, and often not quick, but we can't say that it is ALWAYS one or the other.
This seems to imply Pareto optimality. Pareto efficient markets, as far as I know, have never been observed. In a free market, markets approach optimality but never reach it due to the actions (and inaction) of market participants.
Daniel,
I am interested in hearing more about the "New Keynsian" point of view. Could you enlighten me with the some of the other explanations that you see fit just as well as the Austrian theory of business cycles?
Geoff-
As I think I said before, the Keynesian story is a bit of a hodge-podge. That's a little unsatisfying, but not necessarily inaccurate.
I think the bedrock, old-school Keynesian view of business cycles is an accelerator-multiplier type explanation. I'm sure a simple google search of "accelerator multiplier" could give you a better explanation than I can provide here, but the idea is that increasing income levels accelerate the rate of capital accumulation, and decreasing income levels slow the rate of capital accumulation. By the same token, investments have a "multiplier effect", increasing the demand for their products and accelerating futher investment. This can create oscillations in the economy that are completely independent of any central bank decision making.
Keyensians also introduce wage stickiness and other price stickiness (which I guess is best thought of as a negative shock introduced into some sort of oscillator model that I described above). Things like "efficiency wages" and asymmetric information are used to explain departures from "full employment".
While I'm convinced by Keynesian ideas about how business cycles start (not to the exclusion of ABCT - I'm convinced by that too), I'm even more convinced by Keynesian explanations of how crises can accelerate. Keynesian wage-price spirals and Fisherian debt-deflation dynamics are especially convincing, I think, because the accelerator-multiplier effects get bigger as the pace of decline increases. The Keynesian explanation of how cycles get exascerbated isn't relevant to every recession (which is why Keynesians don't meet every recession with a demand for fiscal stimulus), but it is very important at a time like this (and in my mind, very interesting as well).
I don't know much Minksy, but Minsky offers a more behavioral Keynesian explanation (sort of a formalization of Keynes's "animal spirits" idea). Minsky talks about how confidence builds on itself and is self-fulfilling, which can again lead to booms and busts that are completely independent of central bank meddling. There was a great article in The Economist on Minsky two or three weeks back - it's worth reading into.
I am quite convinced by ABCT - I just don't think it stands alone as the only reasonable explanation of the business cycle and the current crisis. If central banks and fiat money are really so foundational to crises, where did 1873 or 1907 come from? There was no Fed back then! And if it's just the instabilities of a fractional reserve banking system that's the issue, then that sounds an awful lot like Keynes or Minsky to me!
I certainly hold Greenspan and the Fed accountable for this one, and I hold the Fed accountable for a great deal of other mischief... but I don't believe for a second that's the whole or even most of the story.
Geoff-
George Soros, interestingly enough, has a half-baked application of Godel's incompleteness theorem to finance that he calls "reflexivity". It's a little rough (at least in the version I read in his book "Underwriting Democracy"), but it's very intriguing and I think comes out as essentially a Minsky/Keynes/animal-spirits argument.
If anybody knows anything about applications of Godel to behavioral economics, or any other writing that Soros has done on that, I'd personally be very interested in hearing about it. It's a neat rendition of a fascinating mathematician/philosopher that otherwise doesn't have much to do with economics.
Geoff -
RE: the specific point of "that you see fit just as well".
Low interest rates certainly funneled more money into the housing market than it should have, but that would only explain an overinvestment in housing. Maybe the bubble was just overinvestment caused by price manipulation... I have a feeling that it also had to do with price expectations, which I think are better explained by accelerator effects and Minsky/behavioral effects. So I think in terms of explaining this current crisis, the two complement each other quite nicely.
Geoff -
And I might add to that last comment, you don't have to be an Austrian to recognize that low interest rates will funnel money into housing as opposed to other forms of capital.
Just because this asset heterogeneity isn't specified in all models, doesn't mean that the point is lost on non-Austrians.
Excuse me? No, I just can't let you get away with that. Look - ABCT is great at explaining how this crisis started (not as great at how it got exascerbated... Keynes and Fisher are better at that). That's why I like ABCT!!!! But please don't try and tell me they were the only ones who saw the housing bubble coming.
Daniel, I don't claim that anyone saw the housing bubble coming. I'll let the Austrian approach explain what happened this time around and hope that it can inform debate "next time". Perhaps we ought to be talking about how trillions in extra spending is going to shake up the structure of the economy now. It doesn't seem to be propping up housing prices, which means it doesn't seem to be solving the equity problem. I wonder what it's actually accomplishing.
I don't think there is one ideological assumption in Keynesian/mainstream discussions
Of course there is. Step out of the water to see it.
The assumption is that the state may, and should, manage the market via monetary adjustments.
We free market advocates challenge that assumption. You don't even notice it.
BoscoH -
You said "that's what's unique about the Austrian story". What I'm saying that it's not unique to the Austrian story at all. I wasn't trying to illustrate that "these guys saw it too" - more that "their theories saw it too", and that Austrians are not as unique as many think they are.
Sam -
RE: "The assumption is that the state may, and should, manage the market via monetary adjustments.
We free market advocates challenge that assumption. You don't even notice it."
First, that's a slim "ideology" because such a variety of ideologies can fit into that. So no, it's not your ideology, but since virtually every other ideology can fall under that, that's quite "non-ideological". I do notice you don't agree with that - but your disagreement with it doesn't make Keyensianism a theory of one ideology.
Second, I would say that Keynesianism only says how the economy will respond if the state does intervene, it does not say that it should intervene. In that sense, it's not different from Classical economics insofar as it is "non-ideological".
Maybe there is a pure Austrian theory of economics. As I've said previously, I'm not too well informed about it. It seems to me, though, that the Austrian school provides a political philosophy and an economics wrapped into one. I'm not saying that's a bad thing - I'm saying the Keynesianism does not do that, which is evidenced in the fact that people from lots of different ideological backgrounds share a common Keynesian economics (in that regard, it is very similar to something like biology - Hitler, Stalin, Roosevelt, and (I assume) Ron Paul are all "Darwinians" because evolutionary biology is non-ideological). In the same way, Keynesianism is non-ideological and held to be true by people of all different kinds of ideologies.
Sam -
And what you don't seem to notice is that I'm more often than not a "free market advocate" too... these discussions just always seem to zero in on the areas where I'm not a free market advocate.
Except for the odd case of Florida produce, where I'm a free market advocate and you guys don't seem to be :)
I don't think that's a fair reading of Don's or our arguments.
Low interest rates certainly funneled more money into the housing market than it should have, but that would only explain an overinvestment in housing. Maybe the bubble was just overinvestment caused by price manipulation... I have a feeling that it also had to do with price expectations, which I think are better explained by accelerator effects and Minsky/behavioral effects. So I think in terms of explaining this current crisis, the two complement each other quite nicely.
Low interest rates explain more than the bubble in housing. Lower-than-market interest rates also fueled bubbles in stocks, bonds, private equity, LBOs, commodities, consumer loans, and even the art market (see consumer loans).
Interest rates are a factor determining investments in all capital markets, not just the housing market.
You don't need an "accelerator effect"--whatever that is--to explain bubbles and busts. Indeed, that idea violates Occam's razor, at the very least.
The ABCT is enough.
MnM -
RE: "I don't think that's a fair reading of Don's or our arguments."
And I don't think that's a fair reading of the smiley face that I added at the end of that sentence :)
Bill Stepp -
Of course low interest rates are going to create more than housing bubbles - somebody pulled out housing bubbles, so that's what I mentioned. Didn't mean to confuse - I acknowledge it did more than that.
RE: "You don't need an "accelerator effect"--whatever that is--to explain bubbles and busts. Indeed, that idea violates Occam's razor, at the very least.
The ABCT is enough."
If you don't know what an accelerator is, how do you know if it violates Occam's razor? You don't need ABCT to explain booms and busts either - accelerator effects explain it. But the reason why it's good to pay heed to a number of explanations is that almost all objective observers agree that recessions have a number of sources - lots of different shocks and trends cause recessions. How is trying to jerry-rig one theory to fit all of them consistent with Occam's razor?
And even if you did attempt a "unified theory of business cycles", how does ABCT explain why American recessions after the creation of the Fed have been less regular and less severe than American recessions before the creation of the Fed? And why have the most severe recessions since the creation of the Fed occured when power on the Fed was decentralized to the member banks, and the less severe recessions have occured during the period when power was centralized in the Federal Reserve Board?
This isn't a refutation of ABCT - it's a refutation of the idea that that somehow solved the puzzle.
Ohhh! You meant it as joke. Sorry, man. I didn't get a lot of sleep last night.
First, that's a slim "ideology" because such a variety of ideologies can fit into that. So no, it's not your ideology, but since virtually every other ideology can fall under that, that's quite "non-ideological". I do notice you don't agree with that - but your disagreement with it doesn't make Keyensianism a theory of one ideology.
There are many factions in very ideology, but sometimes it is helpful to simplify.
Austrians may even agree that certain government monetary interventions have certain effects.
However, it seems that most Keynesians have an expectation that government should step in to make corrections. This is an ideology. There may factions among Keynesians on details and other issues, but that seems fundamental.
Austrian's hold that government intervention, even when it may appear to work well, causes unseen effects that lead to other problems that seem to require further intervention.
Sam -
RE: "There are many factions in very ideology, but sometimes it is helpful to simplify."
It's a reasonable point, but you seem to be simplifying by saying that there are two ideologies: Sam's ideology and everybody else's! Interveners and non-interveners! If that's all you mean by an ideology, I guess you're right - but that isn't really saying much! The point is LOT'S of recognized, distinct ideologies - most generally "progressives" and "conservatives" - can be Keynesians. So, there is no one associated with Keynesianism. In this way, Keynesian economics is no more ideological than evolutionary biology, quantam mechanics, or psychoanalysis.
quantam mechanics
You are overstating your case.
S Andrews -
Haha! It's gone viral now!
You're right - I probably was overstating my case there. Quantam mechanics is generally aligned with labor unions ("mechanics" and all - you understand), while relativity is more of a conservative movement (which is odd because they normally complain that liberals are relativists).
Keynesianism, however, has been advocated/used by the labor movement, conservatives, and liberals - so still quite non-ideological.
And even if you did attempt a "unified theory of business cycles", how does ABCT explain why American recessions after the creation of the Fed have been less regular and less severe than American recessions before the creation of the Fed?
Less regular after the Fed?
These since 1970: '73-'74, '81-'82, '90-'91, '01-'02, '08-'10. They look fairly regular to me.
Less severe? The Great Depression was less severe than which pre-Fed depression?
The current one isn't done yet.
Depressions in the pre-Fed era were generally short and sharp, with a couple exceptions.
As for the Fed's centralization, I don't know that it matters much.