Friday, May 13, 2011

Axel Leijonhufvud and the Post-Walrasians

I see someone has brought up the topic of Axel Leijonhufvud’s theories in a comment on a previous post.

Axel Leijonhufvud is a so-called “Post-Walrasian” (or disequilibrium Keynesian/coordination Keynesian), and – like Post Keynesians – he is critical of neoclassical synthesis Keynesianism based on neo-Walrasian theory. The leading economists in the Post-Walrasian movement are Don Patinkin (1922–1995) and Robert W. Clower (1926–2011), as well as Axel Leijonhufvud. What is most fascinating is that Robert M. Barro and Herschel I. Grossman made contributions to early Post-Walrasian thought, but moved away from it and became members of the New Classical school.

Leijonhufvud presented a bold new interpretation of Keynes’s General Theory and a critique of the neoclassical synthesis in On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory (New York and London, 1968).

Both Clower and Leijonhufvud became heterodox macroeconomists after the 1970s, and seem to share these common ideas:
(1) they criticise neo-Walrasian theory, and in particular the supposed market clearing mechanisms summed up in the metaphor of the “Walrasian auctioneer” who clears all markets;

(2) a dynamic disequilibrium approach to economics and interpretation of Keynes’s theory;

(3) the recognition that incomplete information of economic agents prevents market clearing mechanisms;

(4) we have an economic world of slow price adjustments and sometimes false price signals: the Walrasian assumption of instantaneously or near instantaneously adjusting prices is a myth, and once it is rejected we see there is no guarantee at all that decentralised market systems will coordinate economic activity to create full employment, and

(5) the idea that what is needed today is a reconstructed “Post Walrasian macroeconomics” which is derived from Marshallian microfoundations, not Walrasian microfoundations.
All in all, that is not a bad critique of modern economics, and there is a great deal here Post Keynesians can agree with. The Post-Walrasians believe that market economies can lead to unemployment equilibriums and that there are no automatic mechanisms for fixing this. They think that Keynes’ theories, properly understood, will have an important place in a future macroeconomics.

In the previous comment on my last post, I am told that if I “read more Axel Leijonhufvud” my blog would be much improved. I frankly think that most of what Leijonhufvud says is also said by Post Keynesians, but Post Keynesians do it better. For example, Leijonhufvud’s view on what causes recessions:
Leijonhufvud rejects interpretations based on wage rigidity, and he rejects explanations of depression that depend on monopolies, labor unions, and the like. These interpretations of involuntary unemployment imply that “if ‘competition’ could only be restored, ‘automatic forces’ would take care of the employment problem” ... Leijonhufvud notes that Keynes was critical of such explanations (Meltzer 1988: 267).
A very good discussion of the similarities and differences between Leijonhufvud’s thought and the Post Keynesians can be found in Littleboy (1997). In short, Leijonhufvud errs in thinking of the money supply as exogenous, and pays insufficient attention to uncertainty in the Keynesian/Knightian sense.

Finally, we can hear from the man himself. Here is an interesting interview with Leijonhufvud held at the Central European University (Budapest) during the Institute for New Economic Thinking conference (held from September 6–8, 2010). I note that Leijonhufvud’s comments on the poor state of private sector balance sheets at the moment (from 10.35) seem to approach the Post Keynesian concern with debt deflation.





BIBLIOGRAPHY

Leijonhufvud, A. 1968. On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory, Oxford University Press, New York and London.

Littleboy, B. 1997. “On Leijonhufvud’s economics of Keynes,” in G. C. Harcourt and P. A. Riach (eds). A ‘Second Edition’ of the General Theory (vol. 2), Routledge, London.

Meltzer, A. H. 1988. Keynes’s Monetary Theory: A Different Interpretation, Cambridge University Press, Cambridge.

30 comments:

  1. What do you think are the odds of a unified theory in economics coming up soon, given that people across various groups or schools of thought share so many ideas?

    Surely it matters what the ideas are, rather than what name they call it. It seems that elements of Post-Keynesian ideas have existed among other groups, and surely a Post-Keynesian can be happy enough if those ideas become mainstream, without giving credit to Post-Keynesians. ;)

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  2. The old American Institutionalists (like John Kenneth Galbraith), the Post Keynesians, the so-called Post-Walrasians/coordination Keynesians (like Leijonhufvud), and even some of the more intelligent New Keynesians, share a good many ideas in common, and if they all flowed into a "new consensus macroeconomics", that would be all well and good.

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  3. Related: http://nowandfutures.com/d3/Wicksell_Hayek_Keynes_Friedman,_Minsky.pdf

    ReplyDelete
  4. Aw, LK, now I feel bad that you mentioned John Kenneth Galbraith.

    This man once wrote in The New Industrial State (1950), "The mature corporation has readily at hand the means for controlling the prices at which it sells as well as those at which it buys", and then later, "Since General Motors produces some half of all the automobiles, its designs do not reflect the current mode, but are the current mode. The proper shape of an automobile, for most people, will be what the automobile makers decree the current shape to be".

    How wrong he was proven when General Motors market share fell to 25% from 50% as it withstood the assault of Japanese competition and as it recently filed bankruptcy.

    J. K. Galbraith's theories of a world where a corporation can have unlimited market power till perpetuity were disproven by history. Joseph Schumpeter, on the other hand, knew that future uncertainty and inability to predict customer response means that even the largest corporation could be dead tommorow. A&P Grocery Chain was once a retail giant, but was then overtaken by Wal Mart. A&P itself had broken through the threshold that Sears and Ward once had set for themselves.

    Clive Crook once spoke of him, "During the Second World War, Galbraith worked at the Office of Price Administration, fixing prices as part of that era's semiplanned economy. Unlike every other former central planner I have ever come across, in person or in print—whether it be from India's old Planning Commission (which Galbraith once advised), the Soviet Union's pre-perestroika Gosplan and its East European equivalents, Africa's agricultural marketing boards, Britain's assorted pre-1979 prices and incomes boards, you name it—Galbraith brought from that experience the view that there was much to be said for having bureaucrats fix prices. The experience seemed to dismay everybody else and to convert them to the view that markets do the job better. Galbraith thought, no, he had done pretty well."

    This man was riddled with confirmation bias, and would never see himself as wrong even as history and the facts changed, and even General Motors faltered.

    One of his former students in Harvard said, "Many years ago, when I was a college student, I took a course from John Kenneth Galbraith. On the first day of class, Professor Galbraith gave a brilliant opening lecture, after which the students gave him a standing ovation.

    Galbraith kept on giving brilliant opening lectures the whole semester. But, instead of standing ovations, there were now dwindling numbers of students and some of them got up and walked out in the middle of his lectures.

    Galbraith never got beyond the glittering generalities that marked his first lecture. After a while, the students got tired of not getting any real substance."

    John Kenneth Galbraith was a political philosopher and not an economist, and he was more concerned with achieving political ideals than with seeing from a value-free perspective whether those ideals were worth achieving.

    He was a standard paternalistic intellectual who believed he knew what was good for business without ever running a business himself.

    Worst. 20th century. Economist. EVER!

    I can't believe you credited THAT guy?

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  5. We will have to agree to disagree on John Kenneth Galbraith.

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  6. "Galbraith brought from that experience the view that there was much to be said for having bureaucrats fix prices. The experience seemed to dismay everybody else and to convert them to the view that markets do the job better. Galbraith thought, no, he had done pretty well."

    And he did a good job too, as the US was running a command economy. Just because free market fanatics had a tantrum over it doesn't prove much.

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  7. Ah, we are again back to an "agree to disagree" situation.

    Listen, we can agree that the US military-industrial complex had outproduced those of its enemies in order to win the war. That's a different story. In that sense, yes, Galbraith did a good job and served the military's needs.

    We can also agree on the fact that wartime price controls meant reduced production and supply of all consumer items. There was a very serious housing shortage during and after World War II, despite there being no shortage before World War II (see "Ceilings or Floors?" by George Stigler). American production of automobiles also stopped and wartime posters said: http://www.nh.gov/nhsl/ww2/images/ww15.jpg

    Use It Up
    Wear It Out
    Make Do
    Or Do Without

    Let's start asking the right questions.

    Were price controls useful for meeting wartime needs? Yes.

    Were price controls useful for meeting housing, automobile, and durable consumer good demand? No, they were not. It's why their production doubled after end of war and withdrawal of price controls.

    If Galbraith believed he managed to ensure affordable abundant housing for Americans in wartime, when they had to sleep several people in one room (see again Stigler's book), he is documentedly wrong.

    This has nothing to do with "free market fanatics", many of whom worked in the Office of Price Administration, such as the founder of the Foundation for Economic Education.

    My point is this. Galbraith was ridden by confirmation bias, because he was ideological. He lived long enough to be proven wrong on General Motors, but never retracted his past statements. He lived through times of fall in housing and automobile production under his own price controls, but he thought price controls were a good idea.

    Economists should not have confirmation bias and should not be ideological. Even Soviet economists - the ones who wrote The Turning Point changed their minds about their very own policies.

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    Replies
    1. You are wrong. In "A Life in Our Times", Galbraith recognizes as flawed his policy of price controls, so it is not a reason to dismiss Galbraith's work and label him as ideological.

      Instead, Galbraith made very important contributions to economic theory, I can give you 6 at least:

      (1) his institutional analysis of the Great Depression,

      (2) the 'dependence effect' that, along with Duesenberry's work, anticipated the Endogenous Preferences approach which is an example of the downward causation advocated by post-Keynesians against methodological individualism,

      (3) the characterization of monetary policy as a distributive and inequality-biased policy,

      (4) the acceptance of the role of great corporations in shaping society through political and economic power -another example of downward causation- and the concept of 'technostructure' which replaces the individual by the entreprenurial organization as the driving force in production and innovation and dismisses the role of methodological individualism,

      (5) the concept of market structure: an economy divided in two sectors, the one subject to market forces and the other with enough power to influence the whole economy, composed by great corporations and the government -so, he is not alien to Austrian concept of government failures-; this would lead to the concept of dual economies in developing countries,

      (6) his analysis of migration and education policies

      So, you just cannot dismiss Galbraith's work; I think post-Keynesians should pay more attention to Galbraith because he offered a sound institutionalist framework to micro-fundament post-Keynesian macro, based on emergent properties and downward causation and away from methodological individualism.

      Delete
  8. Prateek, old guys rarely change. Let me quote Rothbard:
    A famous example of that is Joseph Priestley, the late 18th century libertarian and physicist, who invented oxygen, and refused to believe it was really oxygen. He said, “No, no,” he was so locked into the Phlogiston Theory, so it’s only de-phlogisticated air. He refused to
    acknowledge the implication of his own invention, his own discovery. Incredible.

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  9. Why do you ignore the role Hayek played in A.L.'s thinking and instead exclusively discuss how similar his ideas were to Post-Keynesians? Political motivations perhaps?

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  10. "Why do you ignore the role Hayek played in A.L.'s thinking and instead exclusively discuss how similar his ideas were to Post-Keynesians"

    Cite some sources showing this alleged influence of Hayek on Leijonhufvud.

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    Replies
    1. Jan: Axel Leijonhufvud´s was first,inspired by what
      was taught in Swedish tradition by Stockholm school and especially by Gunnar Myrdal.It was the concept o circular cumulative causation,a sort of disequilibrium Keynesianism/Instituionalism one could say,that also Nicholas Kaldor embraced and developed together with his friend Gunnar Myrdal.It was the first formative influence on Leijonhufhuvud,alongside with the other disequilibrium Swedes way back to Knut Wicksell,so it was early in Leijonhufvud´s mind. The thought is described by Myrdal in this way:
      "The notion of stable equilibrium is normally a false analogy to choose when constructing a theory to explain the changes in a social system. What is wrong with the stable equilibrium assumption as applied to social reality is the very idea that a social process follows a direction – though it might move towards it in a circuitous way – towards a position which in some sense or other can be described as a state of equilibrium between forces. Behind this idea is another and still more basic assumption,namely that a change will regularly call forth a reaction in the system in the form of changes which on the whole go in the opposite direction to the first change.The idea I want to expound in this book is that, on the contrary, in the normal case there is no such a tendency towards automatic self-stabilisation in the social system.The system is by itself not moving towards any sort of balance between forces,but is constantly on the move away from such a situation. In the normal case a change does not call forth countervailing changes but,instead,supporting changes,which move the system in the same direction as the first change but much further. Because of such circular causation as a social process tends to become cumulative and often gather speed at an accelerating rate" (Myrdal, G.,1957,pp. 12–13 Economic Theory and Underdeveloped Regions, London:University Paperbacks, Methuen)

      Delete
  11. Lord Keynes, here Leijonhufvudtalks talks somewhat favorably about Hayek and the Austrian School:

    http://nowandfutures.com/d3/Wicksell_Hayek_Keynes_Friedman,_Minsky.pdf

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  12. http://www.cepr.org/pubs/policyinsights/PolicyInsight23.pdf

    "Operating an interest-targeting regime keying on the CPI, the Fed was lured into keeping rates far too low far too long. The result was inflation of asset prices combined with a general deterioration of credit quality (Leijonhufvud 2007a). This, of course, does not make a Keynesian story. It is rather a variation on the Austrian overinvestment theme."

    To deny he has any connection to Austrian econ, or that he has never been influenced by Austrian insights, shows how partisan you are.

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  13. "This, of course, does not make a Keynesian story. It is rather a variation on the Austrian overinvestment theme."

    Note the word "variation". It has similarities to Austrian theory, but is in no way an andorsement by Leijonhufvud of ABCT.

    And the Post Keynesian financial instability hypothesis is just as relevant - in fact even more so.

    "To deny he has any connection to Austrian econ, or that he has never been influenced by Austrian insights, shows how partisan you are."

    I never "denied" any such thing.
    The "Austrian" influence you cite is laughably weak.

    If anything, Leijonhufvud is more influenced by the Keynesian Minsky, then by any Austrian.

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    Replies
    1. Jan:Axel Leijonhufvud is surely more inspired by Minsky than Hayek.He often mention Minsky in interviews long before the recent crisis as influental inspirator.He also mention Erik Lundberg the main buisness cycle economist of the Stockholm school,as early inspiration,also what we now could be called a disequilibrium-Keynsian.Erik Lundberg was inspired by Wicksellian thoughts in early years and by Keynes in his doctoral thesis 1937 "Studies in the theory of economic expansion",and later called himself Keynsian it was no real discrepance by the Keynsianism and Stockholm school after the General Theory,it was embraced by them.Hayek never became a big name among Stockholm school,since he for them dealed with Wicksellian ideas they had either developed to something else or leaved as dead threads.The natural rate concept was not the big thing for them as for Hayek.They had past that.Axel Leijonhufvud was of course familiar with that discussion,and to i don´t think Hayek had much to offer
      that not expressed by Stockholm schoolars much earlier. That the generation after them,the economist that gave the "Nobel Prize" to Hayek,had more in common with him then such as Myrdal,Lundberg or Lindahl,is another story.It was a shift mainly ideological.But at that time had Leijonhufvud left for the US and studied for Modligiani and others,and made his own path,but his roots was surely not Hayekian.

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  14. LK, could you please explain to me one thing. As far as I can make out from your posts, Post Keynesians want more deficit spending (say, lower taxes) to increase private demand during a crisis. But more deficit spending means higher inflation (and permanently) which _decreases_ private demand back to what it was. I guess you prefer government to issue bonds rather than print money, but debts need to be paid off sooner or later, so again I can't see how you can avoid inflation. Either you print new money or actually increase taxes (and higher than before) to pay the debts off. I mean, it's either inflation or taxes, at the end of the day those are _the_ only two ways you can finance government demand, and both _decrease_ private demand. After all, if government financed its whole spending by printing money, that would simply be a special (extreme) case of deficit spending, wouldn't it (at zero tax income). In other words, there is no free lunch, if goverment consumes, it must always descrease private consumption, no matter how low or high taxes you have, unless you believe goods fall from heaven.

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  15. "But more deficit spending means higher inflation (and permanently) which _decreases_ private demand back to what it was."

    That is a complete non sequitur. Yes, inflation tends to happen in many periods of strong economic growth. Inflationary periods happened in the 19th century too.
    This doesn't decrease demand.

    Either you print new money or actually increase taxes (and higher than before) to pay the debts off.

    Government debt can get paid off just by restoring full employment and seeing tax revenues soar as the budget goes back into surplus.

    And with robust GDP growth the debt to GDP ratio falls to insignificant levels, just as happened in virtually all major countries after WWII.

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  16. inflation tends to happen in many periods of strong economic growth

    Sure, in our FRB environment, when ecomic growth is driven by priate bank money supply inflation (or open market, whatever), then we also have price inflation (that's basically the boom period, before the bust), unless productivity increases equally fast (as it was in the 20s), but that's not the inflation I have in mind.

    The inflation I have in mind is, if you do deficit spending by lower taxes, government spending remains intact, correct, but private spending increases, so total spending increases, which must cause price inflation and total real demand back to what it was.

    Also, even though you can increase government debt temporarily, eventually you have to pay for it somehow, and both ways I can think of (printing money or higher taxes) always _decrease_ private demand, and decrease it to a level even lower than it had been before you started the whole deficit spending (at least until you pay the debts off).

    In other words, seems like your strategy is no different than any other Keynesian, you believe the temporary increase in total spending (not real demand really, because of inflation) can restore real GDP growth (rather than inflationary boom) and then higer tax incomes automatically pay off government debts. Would that be correct description?

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  17. "Also, even though you can increase government debt temporarily, eventually you have to pay for it somehow, and both ways I can think of "

    Already told you how: by normal movements in the revenue from taxes (at the same tax level). As economic activity rises, so do tax revenues. As strong econonic growth occurs, and real GDP surges (and hence tax revenues), the burden of debt falls and falls, making the "cost" of servicing it insignificant, and this is (as I said above) just what happened after WWII.

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  18. "Also, even though you can increase government debt temporarily, eventually you have to pay for it somehow, and both ways I can think of (printing money or higher taxes) always _decrease_ private demand,"

    Even if a government increases taxes and changes fiscal policy in a period when the economy has hit full employment and high capacity utilization, with inflationary pressures, the demand contract in the future period is precisely what the economy needs after it has undergone a period of robust real GDP growth and strong growth in output.

    This is called Keynesian macroeconomic management, and smooths out the volatility of business cycles, setting the economy up for a new period of real GDP and output growth.

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  19. Furthermore, in recessions or depression or periods of high unemployment/low capacity utilization, deficit spending just results in a rise in employment, output and capacity utilization, not inflation.

    The whole premise of your comment is a bizarre and ignorant assumption that when a government engages in Keynesian stimulus, its eocnomy is already at what the neoclassicals call full employment equilibrium.

    In other words, you're using a invalid quantity theory of money view of inflation, which ignores the state of the real economy.

    http://socialdemocracy21stcentury.blogspot.com/2010/07/quantity-theory-of-money-critique.html

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  20. The whole premise of your comment is a bizarre and ignorant assumption that when a government engages in Keynesian stimulus, its eocnomy is already at what the neoclassicals call full employment equilibrium.

    Nowhere have I made such assumption. Yes, keynesian methods do create temporary spending/employment/production bubbles, but they do _not_ increase total real demand, more below.

    As economic activity rises, so do tax revenues

    I think you believe that government can increase total real demand merely by increasing nominal expenditures, be it government or private, but this is erroneous. First of all, government does not produce (government just provides a framework to produce), so increased government real demand must always decrease private real demand accordingly (same as what happens when you add a new guy to society that consumes but does not produce). What happens with private nominal spending can have no permanent effect on that fact whatsoever. When you have fixed real government demand, you can even decrease all taxes to zero and you still do not increase neither private nor total real demand by one iota.

    It comes from the simple empirical observation that real goods do not magically fall from the sky (one of the "fantasy world" Austrian assumptions actually). Someone has to produce real goods, and someone is going to produce them only when they expect they can trade them for some other real goods. Keynesian tricks in the form of higher nominal spending do indeed temporarily dupe people into thinking there are real goods out there waiting and people indeed temporarily increase production/employment, but that's just boom-bust cycle (stagflation being sort of well managed boom-bust cycle), no real growth there whatsoever.

    Hence, activity caused by increased nominal spending (private, public, whatever) while government real demand is left intact can only be inflationary and temporary bubble so the tax revenue increase is also inflationary. Nominal tax revenues do increase with inflation, but real tax revenues don't. There can obviously be real tax income increase because of real GDP growth, but real GDP growth has nothing to do with stagflations or bubbles that keynesian methods produce.

    Basically, from what I can make out, keynesians (any variation) try to increase nominal demand (government, public, whatever) thinking erroneously they are increasing real demand. Keynesian government gives some group of people more money nominally (eg lower taxes). Yes, they start spending more and initially some other people start producing more, duped into thinking that it is some real new demand, on top of existing government demand (which is left intact). Finally inflation kicks in and we are back at square one, except with government debt.

    If government spending itself was lowered, together with lower taxes, then the new private nominal demand would indeed be new private real demand, because government would simply be appropriating less. Total demand would increase, but not because of higher nominal expenditures, but because there would be less parasitic consumption so society becomes more efficient.

    the burden of debt falls and falls, making the "cost" of servicing it insignificant, and this is (as I said above) just what happened after WWII

    Government simply wasn't inflating enough back then :)

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  21. "Yes, keynesian methods do create temporary spending/employment/production bubbles, but they do _not_ increase total real demand,"

    They are not "prouduction bubbbles", but real growth in output and GDP. You assume the myth of ACBT.

    "but that's just boom-bust cycle ... boom-bust cycle), no real growth there whatsoever."

    No "real growth"? Ridiculous.

    "Hence, activity caused by increased nominal spending (private, public, whatever) while government real demand is left intact can only be inflationary and temporary bubble so the tax revenue increase is also inflationary."

    Again, I have already dealt with this:

    "in recessions or depression or periods of high unemployment/low capacity utilization, deficit spending just results in a rise in employment, output and capacity utilization, not inflation.

    The whole premise of your comment is a bizarre and ignorant assumption that when a government engages in Keynesian stimulus, its eocnomy is already at what the neoclassicals call full employment equilibrium.

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  22. real growth in output and GDP

    This keynesian assumption is out of thin air and wishful thinking, it simply does not follow. My guess it's some legacy of the keynesian magic multiplier, broken window fallacy or some other fairy tale. Keynesian stimulus is merely an increase in _nominal_ spending, be it private or public, so it can have no _permanent_ effect on real demand/output/GDP. Temporary bubble-like, yes.

    deficit spending just results in a rise in employment, output and capacity utilization, not inflation

    Yes, but it's as permanent as the time it takes for the nominal increase in spending to permeate the economy with inflation. When you do it with proper restrictions, you get stagflation. When you "liberalize" fiat credit enough, you get boom-bust.

    The whole premise of your comment is a bizarre and ignorant assumption that when a government engages in Keynesian stimulus, its eocnomy is already at what the neoclassicals call full employment equilibrium.

    But my analysis would still be valid even if there were just 2 people employed out of all 300 million. Are you saying neoclassical full employment equilibrium also covers such extreme case? Okay, so I guess I do assume it :)

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  23. I mean, when you think about it, keynesian assumptions are pretty wild. Previously you have said that with decreased spending prices do not fall because they are sticky. Instead, there is a drop in employment/output. Now you say with increased spending prices do not increase. Instead, there is increase in employment/output. In other words, prices never change, whatever spending (and money supply?) there is. In other words, supply and demand law? No, no, rubbish. In the "real" keynesian world, prices have been bestowed on us by a devine force once and for all and now we need to struggle for eternity with keynesian stimuluses and antistimuluses to keep demand and supply in synch with the devine. Wow. One thing is for certain. There will be always a huge demand for keynesian economists in a keynesian world, sort of a never ending job, clever, clever.

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  24. "Now you say with increased spending prices do not increase. Instead, there is increase in employment/output."

    One of your typical caricatures. To make it clear for you:

    In recessions or depression or periods of high unemployment/low capacity utilization, the major effect of deficit spending is to raise employment, output and capacity utilization, and not simply inflation.

    When employment and capacity utilization become high, then an economy will start to experience the type of inflation you imagine with a quantity theory of money model.

    Inflation is complex phenonenon. Changes in the level of prices depend very much on real factors, as well as monetary ones. For example, the following factors could tend to decrease the level of prices:

    1. the falling prices of specific goods through increasing productivity or output;
    2. an appreciating exchange rate;
    3. a rise in cheaper imports into a country;
    4. falls in the prices of imported basic commodities that are factor inputs;
    5. changes in the velocity of circulation of money;
    6. higher unemployment (= less demand for goods and services), and
    7. a fall in extension of bank credit.

    In reality, all or some of these factors listed above could operate to cause either a zero inflation rate (which Japan actually had in 1996 and 2004) or a fall in average prices (deflation), even when the money supply is still actually increasing.

    And when you have huge unemployment and idle resources, there is huge space for businesses merely to increase production and employment in response to increased demand.

    http://socialdemocracy21stcentury.blogspot.com/2010/04/austrian-theory-of-inflation-myths-and.html

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  25. "Previously you have said that with decreased spending prices do not fall because they are sticky."

    Wrong once again.
    I say that prices are not perfectly or significantly flexible in the way imagined by Walrasians, neoclasscals and Austrians like you.

    That doesn't they don't move downward, but that we live in a world, as Leijonhufvud says above, of slow or imperfect price adjustments and sometimes false price signals.

    You would do better to get your opponents's positions clear, instead of straw man arguments.

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  26. The factors you list are basically all true except point six; when companies spend less on salaries, the savings do not magically vaporize, you seem to assume that employees have some sort of monopoly to create real demand out of salary money; if salaries are not paid, you assume them to remain idle, and no deflation, no, no!. It's just one absurdity piled on top of another with keynesianism.

    As for all the other factors, you completely miss my point because I have nowhere said that inflation can only arise from deficit spending or even that it always arises from deficit spending. I have merely said that inflation must arise from deficit spending, ceteris frakking paribus.

    For instance, US had low price inflation in the 20s, even though FED was inflating money supply, because of your first factor (productivity increase). Bust had to come anyway and Mises/Hayek were predicting it from early 20s while all other economists were sure it would never happen again now that they had FED (so by early 30s eg basically all London School economists became Misesians/Hayekians, until The General Theory). That's the power of scientific ceteris frakking paribus analysis which you try to run away from all your life.

    The whole price stickness thing just proves you have no clue how the market works. No seller ever _wants_ to get less than the current market price. No buyer ever _wants_ to pay more than the current market price. In this sense, all prices are sticky as hell. But the law of supply and demand does not depend on what prices people _want_, otherwise it would not be called a law in the first place. Even if you reject self-evident assumptions and claim to adhere to empirical observation limited to as you understand it, that's okay because you can observe prices easily thirded over a few months, most powerful cartels and whatnot notwithstanding, so price stickness is baloney both theoretically and empirically.

    If I were to construct keynesian theory myself, the belief in your point six seems indeed crucial, combined obviously with the rejection of the law of supply and demand in determining prices (complete rejection both ways).

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  27. "so price stickness is baloney both theoretically and empirically."

    That says it all, really.
    Your are comments devoid of basic facts about the real world.
    You probably should be congratulated, given you uphold the proud Misesian tradition of shunning empirical evidence.

    E.g.,

    Carlton, D. W., "The Rigidity of Prices," American Economic Review 76 (1986): 637-658.

    Blinder, A. S. "Why Are Prices Sticky? Preliminary Results from an Interview Study," American Economic Review (1991): 89-96.

    ReplyDelete