Cafe Hayek - Latest Comments in Boudreaux on the business cycle

Re: Boudreaux on the business cycle

Bill Stepp — Wed, 15 Apr 2009 13:52:03 -0000

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.

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 13:06:19 -0000

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.

Re: Boudreaux on the business cycle

S Andrews — Wed, 15 Apr 2009 12:58:37 -0000

quantam mechanics

You are overstating your case.

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 12:50:22 -0000

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.

Re: Boudreaux on the business cycle

Sam Grove — Wed, 15 Apr 2009 12:26:30 -0000

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.

Re: Boudreaux on the business cycle

Guest — Wed, 15 Apr 2009 09:19:15 -0000

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.

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 08:55:33 -0000

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.

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 08:48:27 -0000

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 :)

Re: Boudreaux on the business cycle

Bill Stepp — Wed, 15 Apr 2009 07:59:13 -0000

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.

Re: Boudreaux on the business cycle

Guest — Wed, 15 Apr 2009 07:53:49 -0000

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.

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 07:25:02 -0000

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 :)

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 07:22:52 -0000

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."

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.

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 07:13:41 -0000

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.

Re: Boudreaux on the business cycle

Sam Grove — Wed, 15 Apr 2009 07:12:42 -0000

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.

Re: Boudreaux on the business cycle

BoscoH — Wed, 15 Apr 2009 07:08:41 -0000

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.

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 07:02:10 -0000

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.

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 06:38:47 -0000

Geoff -

RE: the specific point of "that you see fit just as well".

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 06:22:50 -0000

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.

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 06:15:54 -0000

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.

Re: Boudreaux on the business cycle

Geoff — Wed, 15 Apr 2009 05:16:35 -0000

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?

Re: Boudreaux on the business cycle

Guest — Wed, 15 Apr 2009 05:16:14 -0000

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.

Re: Boudreaux on the business cycle

Daniel Kuehn — Wed, 15 Apr 2009 04:46:25 -0000

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.

Re: Boudreaux on the business cycle

Bill Stepp — Wed, 15 Apr 2009 04:35:55 -0000

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.

Re: Boudreaux on the business cycle

indianajim — Wed, 15 Apr 2009 04:13:59 -0000

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).

Re: Boudreaux on the business cycle

Martin Brock — Wed, 15 Apr 2009 04:05:40 -0000

If Don and Russ weren't baby boomers themselves, we might discuss the reality of the situation more.