I take issue with O’Driscoll’s analysis, as follows:
(1) O’Driscoll states that “all efforts to stimulate the economy with monetary and/or fiscal policy have failed.” What does he think happened in 2009 when the US rapidly emerged from one of the most severe recession in decades with fiscal stimulus? One can see here how the GDP contraction was reversed by Q3 2009:http://www.tradingeconomics.com/united-states/gdp-growthWhat is the Austrian explanation of this?
Of course, there certainly has been a failure of fiscal policy: it has not been large enough. Current fiscal policy, while insufficient to stimulate the economy back to full employment, is nevertheless keeping the economy on life support, and preventing a severe debt deflationary recession/depression.
(2) It is true that quantitative easing has failed to significantly stimulate aggregate demand. However, that is what any good Keynesian would tell you anyway: monetary policy is a feeble tool for aggregate demand expansion, especially when you are mired in a diseased economy with excessive private debt, barely staving off outright debt deflationary collapse. We currently in a “lost decade,” much like Japan in the 1990s. Japan also gives us a stark lesson in what not to do: in 1996–1997, the Japanese Prime Minister Ryutaro Hashimoto turned to contractionary fiscal policy and austerity, including personal income and national sales tax increases. This plunged Japan back into recession and the lost decade persisted until the early 2000s. That is what the advocates of fiscal austerity would inflict on America and Europe.
(3) O’Driscoll appears to subscribe to the nonsense idea of “crowding out” in current circumstances. This is similar to the absurd New Classical idea of Ricardian equivalence, which I have debunked here.
BIBLIOGRAPHY
Davidson, P. 1989. “The Economics of Ignorance or Ignorance of Economics?,” Critical Review 3.3/4: 467–487.
Davidson, P. 1993. “Austrians and Post Keynesians on Economic Reality: Rejoinder to Critics,” Critical Review 7.2/3: 423–444.
O’Driscoll, G. P. and M. J. Rizzo, 1996 [1985]. The Economics of Time and Ignorance (2nd edn), Routledge, Oxford, UK.
One reason that Ricardian equivalence still is unimportant in criticising stimulus is that even if it is true, then the taxpayer may save the extra income to pay for increased future taxes if he thought the stimulus programs would be permanent and would raise his taxes for every single year in the future.
ReplyDeleteSince a stimulus is a temporary rise in spending, which will be gone by the next year, it doesn't make sense to say that Ricardian equivalence proves stimulus has no effect.
Speaking of "The Economics of Time and Ignorance", Michael Emmett Brady has reviewed that work before. You might want to read it, Lord Keynes.
ReplyDeletehttp://www.amazon.com/review/R25I26NGH79Y3I
(1) The Austrian position is that if you do see increases in various economic statistics, this improvement is not "real" in the sense of the economy really being purged of malinvestment brought about by past credit expansion and artificially low interest rates. Government spending programs only delay the needed corrections because it makes the malinvestment seem like it is coordinated investment on account of it remaining profitable. For example, suppose credit expansion and artificially low interest rates brought about the construction of far more houses than could be sustained (sustained in the sense of affordability, adequate real savings, etc). Once the errors of this are revealed, then any government policy of spending money to "keep the housing boom going", which is perceived as the "new normal" that should not be lessened or corrected, may succeed in raising various home related economic statistics, but there wouldn't be a "real" recovery since the problem was too many houses being built relative to real savings, and not enough of other goods that are more urgently needed by the consumers were produced given the quantity of scarce resources. The government wants one thing, and the sovereign consumers by their spending patterns want another thing. Yes, even if most people who don't have houses would want one if you asked them, this psychological desire is different from what is economically possible given the state of the economy's ability to produce according to real consumer spending patterns and real savings.
ReplyDelete(2) Your analysis of Japan is flawed. Japan passed stimulus package after stimulus package, 10 in all throughout the 1990s alone, and RAISED national debt to incredible proportions, in the process distorting the economy and making any given stimulus less and less effective. Just like "monetary policy" has a limit to how much it can goose various economic statistics, so too, as "any any good Austrian" will tell you, does "fiscal policy" have a limit to how much it can goose various economic statistics. When an economy is too distorted BECAUSE of fiscal policy and going deeper and deeper into debt, the more the government borrows and spends, the more the economy resembles what the productionless government values, and not what the sovereign consumer and savers value, then the more the economy will contain a continuous antagonism between the government and sovereign consumers and real savers, as the government makes decisions based on their values, political values, and the sovereign consumers keep making decisions based on their values, saving and consumption values, which are not the same.
ReplyDelete1/2
ReplyDelete(3) "Crowding out" does not disappear simply because in our economy the government can print any quantity of money it wants, nor does it disappear because some or all individuals decide to hold onto more of their money earnings longer than they did before whereas the government can just borrow, print and spend money because it's not their personal money at risk. Crowding out is, regardless if its espousers know about it or not, ultimately based on the scarcity of real resources and labor, NOT on the scarcity money and credit, nor on assuming uncertainty away, nor on the requirement of rational expectations among the population. Individuals, ALL individuals, are ALWAYS uncertain about the future, at ALL times. It cannot be a concept that comes and goes, wherefore the government is supposed to spend more and then less, and the more again, as uncertainty advances and recedes. Economic uncertainty is always present. It is a binary concept. It is either there or it is not. For humans, it is always there. It is a gross error in judgment to interpret "higher cash balances" as the result of "GROWING uncertainty" and then believe that because the government has the "power" to increase spending NOW, and increase economic statistics measured in money NOW, somehow means that the government is somehow overcoming uncertainty. For there is no greater knowledge gained of the future if instead of individuals holding more money as cash and spend/invest less NOW, the government instead borrows, prints, taxes and spends more money NOW. You are fallaciously excluding money for holding as part of the economic process. You are fallaciously presuming that if people hold more money and spend/invest less money, on the psychological basis that individuals think they might be fired tomorrow, is somehow uncertainty increasing, and that if government borrows, taxes, prints, and spends money, thus retaining the same nominal spending, this somehow lessens uncertainty. This is silly. It is silly because if the whole point of government stimulus is to react whenever individuals in the economy hold more cash and spend/invest less money, then surely the knowledge that people are holding more cash, and spending/investing less money, is just as real, just as learnable, just as measurable, just as objective, as would be any other level of cash holding, spending and investing.
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ReplyDeleteIf the government depends on the people learning what the government is doing, and learning that spending is rising, then surely it must follow that advocates of government stimulus must also accept that people can learn when their fellow economic actors increase their cash holding, and spend/invest less, which results in a lower level of spending. There is no difference in terms of what is economically possible between higher aggregate nominal spending or lower aggregate nominal spending. If spending is higher, then economic actors will bid up the prices of factors of production. If spending is lower, then economic actors will bid down the prices of factors of production. If you say that economic actors are subject to uncertainty and abstain from spending and investing when total nominal spending is lower, then they must also be subject to the same uncertainty and abstain from spending and investing when total nominal spending is higher. If you say no, with higher aggregate nominal spending uncertainty will lessen, then I will say by that same logic, uncertainty will lessen with lower aggregate nominal spending. If you say uncertainty is based on the level of aggregate spending, then you'd be making an incredibly fallacious claim on two levels. One, because it actually has nothing to do with aggregate nominal spending, and two, it's not even aggregate nominal spending that individual economic actors even take into account. They take into account their perpetually subjective expectations of future prices, and they make price bids for factors of production in the present based on those expected future prices. If you say their expectations can "improve" if expected future prices are higher on the basis of government stimulus, then by that logic, their expectations can also improve if expected future prices are lower on the basis of no government stimulus. Government stimulus won't change the economy from no spending, to spending. It will just change the economy from less spending, to more spending. But as any good Austrian will tell you, any level of aggregate spending is just as good as any other, once economic actors become accustomed to it through the learning process. If they can learn that spending is increasing more quickly because of government printing and spending, then surely they can also learn that spending is increasing less quickly because of no government printing and spending.
"Speaking of "The Economics of Time and Ignorance", Michael Emmett Brady has reviewed that work before. You might want to read it"
ReplyDeleteMore analysis of that review here:
http://socialdemocracy21stcentury.blogspot.com/2011/11/degrees-of-uncertainty.html
"Once the errors of this are revealed, then any government policy of spending money to "keep the housing boom going", which is perceived as the "new normal" that should not be lessened or corrected, may succeed in raising various home related economic statistics, but there wouldn't be a "real" recovery since the problem was too many houses being built relative to real savings"
ReplyDeleteA Post Keynesian policy isn't to "keep the housing boom going" at all. Some neoliberal governments have attempted to do this, of course.
But with respect to Post Keynesian theory and policy, this is a straw man.
"Your analysis of Japan is flawed. Japan passed stimulus package after stimulus package, 10 in all throughout the 1990s alone, and RAISED national debt to incredible proportions, in the process distorting the economy and making any given stimulus less and less effective"
ReplyDeleteRubbish.
(1) in 1996–1997, Japan turned to contractionary fiscal policy and austerity. Get your facts straight.
(2) They passed a number of fiscal stimulus, yes, but it was applied in a "stop-and-go" way, and the actual expansionary force of a number of the stimulus packages was exaggerated: see A. S. Posen, 1998. Restoring Japan’s Economic Growth, Institute for International Economics, Washington, D.C. pp. 29–54 and R. Katz, “The Truth About Japanese Stimulus, Fiscal pump-priming can work to revive the economy,” January 16, 2009, http://online.wsj.com/article/SB123203746820485953.html
Although some stimulus packages were weak/moderate only, the fiscal expanasion was sufficient to save Japan from a devastating debt deflationary depression. that was a great success.
The real lesson from Japan is:
(1) the bad debts/assets and non-performing loans must cleared from the financial system, and levels of private debt reduced
(2) the financial sector must be cleaned up to function properly
(3) failure to do this means an economy dependent on fiscal stimulus for a decade or more to stop recession/depressionm whiel teh private sector delevers.
Japan's mistake was not doing (1) and (2) early and then failing to use large fiscal policy for a number of years in the early 1990s to fix its economy.
It fiscal policy was, however, better than nothing.
Only the severely deluded Austrian/libertarian, with the flawed ABCT, can have any reason to think depression is somehow "necessary" for recovery.
"Crowding out is, regardless if its espousers know about it or not, ultimately based on the scarcity of real resources and labor, NOT on the scarcity money and credit"
ReplyDeleteYes, real resources are the issue: they are relatively abundant during severe depressions and recessions, or even during periods where the economy is suffering high unemployment, low capacity utilization and weak growth.
These resources, like labour, are idle. Your overlong rant above has no force.
"If you say their expectations can "improve" if expected future prices are higher on the basis of government stimulus, then by that logic, their expectations can also improve if expected future prices are lower on the basis of no government stimulus"
ReplyDeleteIt is real demand and expectation of future demand that is one factor that drives investment, not as in your caricature mere higher "expected future prices".
A Post Keynesian policy isn't to "keep the housing boom going" at all.
ReplyDeleteSure it is. That's why when the deflationary housing bust ensued, every Post Keynesian advocated for government spending targeting the "idle resources and unemployment" that arose in the housing industry after it busted.
(1) in 1996–1997, Japan turned to contractionary fiscal policy and austerity.
The lost two decades in Japan did not take place only in 1996-1997. And the ten stimulus packages past during the whole 1990s is not refuted by pointing to a single fiscal year 1996-1997. You're cherry picking one fiscal year and pretending that this explains twenty lost years? Rubbish.
(2) They passed a number of fiscal stimulus, yes, but it was applied in a "stop-and-go" way
All government "stimulus" programs are stop and go.
and the actual expansionary force of a number of the stimulus packages was exaggerated
Red herring. I don't care who exaggerated anything such that Posen felt the need to attempt to correct their exaggerations.
Although some stimulus packages were weak/moderate only, the fiscal expanasion was sufficient to save Japan from a devastating debt deflationary depression. that was a great success.
Ah yes, the tried and true appeal to counter-factual based on certain fallacious a priori assertions of end of the world scenarios. With that tactic, one can never be wrong.
The real lesson from Japan is:
Don't go into debt passing stimulus package after stimulus package.
Only the severely deluded Austrian/libertarian, with the flawed ABCT, can have any reason to think depression is somehow "necessary" for recovery.
Only the severely deluded Keynesians, with the flawed "aggregate demand" nonsense, can have any reason to think depression is somehow not necessary for recovery.
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ReplyDelete"Crowding out is, regardless if its espousers know about it or not, ultimately based on the scarcity of real resources and labor, NOT on the scarcity money and credit"
Yes, real resources are the issue: they are relatively abundant during severe depressions and recessions, or even during periods where the economy is suffering high unemployment, low capacity utilization and weak growth.
"Relatively abundant" with respect to what? Resources are always scarce relative to real consumer demand based on marginal wants.
The need for more wealth always outstrips the availability of wealth. There is no such thing as general over abundance of resources. There can only be partial over-abundance of some goods and a partial under-abundance of other goods. Too many houses, say, and not enough commercial buildings, say.
These resources, like labour, are idle.
They are idle because either they were malinvested due to the past credit expansion and artificially low interest rates, which put them in a partial overabundance relative to other goods, or they are resources the owners of which are waiting longer than 3 seconds before disposing of them or putting them to some use, which you mistakenly believe means they will always be idle and can never become used for anything unless the government prints and spends money.
"If you say their expectations can "improve" if expected future prices are higher on the basis of government stimulus, then by that logic, their expectations can also improve if expected future prices are lower on the basis of no government stimulus"
It is real demand and expectation of future demand that is one factor that drives investment, not as in your caricature mere higher "expected future prices".
Nonsense. Utter rubbish. It is not more aggregate demand that stimulates more investment. Entrepreneurs don't make investments based only on expected future demand. Entrepreneurs make investments based on the DIFFERENCE in two demands, namely, demand for output and demand for input.
If aggregate demand falls, then not only will revenues fall, but costs will fall as well, because costs are also a function of demand, namely, the demand for factors of production. This demand for factors of production is as much a part of aggregate demand as is demand for final output of production such as consumer goods.
If aggregate demand falls, then you cannot claim that only the prices of output falls. When people increase their cash balances, this reduces consumer demand, investment demand, and labor demand. All throughout this fall in demands, the DIFFERENCE between the two demands, output and input, will tend positive, since the difference is a function of time preference, which is always present.
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ReplyDeleteIf expected demand in the future falls from say $1 trillion to $900 billion, then this doesn't mean that there will be less investment in real terms or less labor hired in real terms. It means that the prices that entrepreneurs will be willing to pay now will fall from say $900 billion (thus earning a 10% profit margin on expected sales of $1 trillion), to $810 billion instead (thus earning the same 10% profit margin on expected sales of $900 billion).
If the demand for factor falls from $900 billion to $810 billion, then it is wrong to say that there will be a fall in real investment and employment. For PRICES FOR INPUTS are what's being decreased here. And they are decreased precisely because of the fall in expected future sales.
If expected future demand falls, it's not that entrepreneurs will make less real investment and hire fewer people in the present (unless of course they are a business owner who previously benefited from past goosing of the economy via inflation, which means they shouldn't have made that money in the first place doing what they are doing because they're doing the wrong thing vis a vis real consumer preference and savings, for example home builders 2001-2007), what entrepreneurs will do is bid a lower price for factors of production.
If the government does not stop the correction process by further inflation, and further economic distortions, and "idle resources and unemployment" develop during this correction process, it's because entrepreneurs need time to figure out the correct prices for them, given the new monetary conditions, exactly like they needed time to figure out the correct prices for resources and labor during inflationary booms. If entrepreneurs can rapidly increase their prices during an inflationary boom, then they can rapidly decrease their prices during a deflationary correction.
If they don't lower their prices and "take too long", then it's because they are now expecting the government to print and spend. But if they didn't expect the government to print and spend, then there would no longer be any reason to hold out for higher prices, so they will lower their prices sooner, as soon as they would increase their prices, or maintain their prices, given the knowledge that the government is going to print and spend.
In summary, entrepreneurs don't just take into account future demand for output. They take into account the DIFFERENCE between two demands, which given a fall in aggregate demand, has no reason to tend towards zero. The difference, profit, can remain positive, as aggregate demand falls, because both output and input prices can fall together.
It is silly to believe that if expected future demand rises by 5%, that it will generate more real investment and more employment, and if expected future demand falls by 5%, that it will generate less real investment and employment.
You are totally ignoring prices, for factors of production especially.
Now, to anticipate your likely response of "sticky wages!", I will only say that if there were no government intervention in the labor market, and workers could not remain on the dole for 99 weeks, and could not receive food stamps, and were not shut out of the labor market due to minimum wage laws, then the "stickiness" of wages to fall will certainly be eliminated, as workers choose work and earn less money, versus not working and receiving more money.
"That's why when the deflationary housing bust ensued, every Post Keynesian advocated for government spending targeting the "idle resources and unemployment" that arose in the housing industry after it busted."
ReplyDeleteTotally wrong. Using idle construction labour is utterly different from demanding a continuation of private debt-fulled asset price inflation in housing.
"They are idle because either they were malinvested due to the past credit expansion and artificially low interest rates ... etc.
ReplyDeleteA ridiculous red herring and evasion of the issue. Also, by resorting to this nonsense you underscore how you can't actually refute the existence of idle resources.
"Now, to anticipate your likely response of "sticky wages!", I will only say that if there were no government intervention in the labor market, and workers could not remain on the dole for 99 weeks, and could not receive food stamps, and were not shut out of the labor market due to minimum wage laws, then the "stickiness" of wages to fall will certainly be eliminated, as workers choose work and earn less money, versus not working and receiving more money."
ReplyDeleteDavid, sticky wages are just one part of the issue, No entrepeneur likes to sell at a loss. If previous to the depression I operate a business taking in $101 million in revenue-100 in total costs at 1% profit margins, and demand falls by 10%, I'm going to have to sell my wares at a loss, because the inputs were ALREADY PAID FOR...
Second, dont forget nominal debt contracts. Since time immemorial, debt has been villified in ancient societies. I dislike it not because its immoral per se, but because its sticky. even if wages were flexible debt burdens are not (under current arrangements) partial deflation of wages, holding other prices constant, as opposed to full and complete deflation of every factor price in the economy, is a disaster. Debt deflation is a real phenoomenon. I suggest you read stories of the Great Depression of innocent farmers who were illiquid, not insolvent, yet lost their homes ANYWAY THROUGH NO FAULT OF THEIR OWN WHATSOEVER due to tight monetary policy and the absurd ridiculousness that was the gold standard. Saying let them eat cake may sound nice, but rarely works out so well in practice.
Thirdly the money illusion is real. I bet you if you were to ask a layperson on the street "would you like a 5% raise and 10% higher prices, or a 5% cut in pay and 10% lower prices?... quick answer me in 3 seconds" The first instinct would be for them to choose option 1! despite them being worse off. (If theyre educated thats a different matter.) Getting a raise FEELS better and hence impels more productive, a lot of people, economists included, Lord Keynes included cant wrap theire minds around the concept of growdflation. (growth+ deflation)
The only way you could overcome these onjections would be to do as follows. have wage agreements automatically indexed, IN ADVANCE, to inflation and deflation, have nominal debt agreement no longer sticky, let the have a "deflator" clause in the arrangement. If I'm a creditor and my debtor is protected from deflation, I'll probably want something in return though, I'll want to be protected from inflation in exchange. No matter, debt will be neutral then, favoring neither creditors nor debtors. Youd have to get rid of the commitment to price stability by the Fed, which contributed indirectly to price stickiness. You'd have to get rid of all subsidies, UI, min wage laws everything, and FINALLY even assuming you did ALL that, youd have to educate people to combat the money illusion and its pernicious psychological tendencies. Then and only then, would it be safe to have deflation as a way to increase real cash balances, until then, I'll stick with market monetarism.
P.S.
i submitted my proposal of indexed debt, indexed wage agreements, and indexed everything else, to Lord Keynes a year ago at krugman in wonderland, but as usual, he didnt respond. I'm beginning to think he doesn't respond to new ideas he hasn't heard of before
"Crowding out is, regardless if its espousers know about it or not, ultimately based on the scarcity of real resources and labor, NOT on the scarcity money and credit"
ReplyDeleteYes, real resources are the issue: they are relatively abundant during severe depressions and recessions, or even during periods where the economy is suffering high unemployment, low capacity utilization and weak growth.
"Relatively abundant" with respect to what? Resources are always scarce relative to real consumer demand based on marginal wants."
Relatively abundant with respect to cash!. Cash,! Cash Cash Cash,! Cash! Cash! Cash!
"The need for more wealth always outstrips the availability of wealth. There is no such thing as general over abundance of resources. There can only be partial over-abundance of some goods and a partial under-abundance of other goods. Too many houses, say, and not enough commercial buildings,"
John Stuart Mill, way before Keynes, already dealt with the problem of the general glut. Its money that it! Since cash and money are used in every sector of the economy a shortage of cash will produce general overabundance of resources, combine that with with relatively sticky prices [prices can move downwards a little bit, if they don't move fast enough relative to cash balances it will still produce a depression (the usual Austrian response is to say "if prices are flexible' if already dealt with the enormous hurdles above)
You get a deflationary depression the money and risk free government bonds as the only thing that rise in price. If you include money in Say's Identity it works, if you neglect money, than Say' Law and even Says Identity is a sad joke.
We don't have malinvestments, we have overinvestment. Every sector was affected by downturn, a classic general glut. Oh and by the way, Bob Murphy's attempt to answer Krugman won't cut it. Why should there be ANY decline AT ALL in other sectors, forget about relative or absolute declines. If you admit the possibility of "secondary deflation: than you're a Hayekian/Selginite/garrisonian, on you're already on the road to sanity and redemption.
Until then, open your eyes and take a look at whats staring at you RIGHT IN THE FACE
Good Luck.
Ed.
P.S. When Austrians and "pete' aka 'major freedom." and you say fiscal stimulus has always failed and will always fail, based on incomplete evidence, its ungentlemanly. If you have a doctor that recommends 10 doses of vaccine to deal with violent illness, and you, brilliant genius that you are, take only three, and feel slightly better but still sick, say that the "vaccine failed" you'd be making a dumb catastrophic mistake. Same thing with the Keynesians. To be fair their advice wasn't really followed. Paul Krugman much as I hat to defend him keeps pounding that on his blog. Whats wrong with giving the benefit of the doubt? The nineteenth century wasnt a fair test of Austrianism, Neither was the 1930s Nice Keynsians like Daniel Kuehn try to be as fair as possible, why cant you be a gentleman and give them the same courtesy? That doesn't mean be a patsy. If the consesus of total monetary and fiscal stimulus is say, 8 trillion and the gov and central bank does that, and still theyre no recovery, THEN id be worried, and that would be a falsifier of both monetarism and Keynsianism.
But NOT if the gov and central bank only did 2 trillion and sat on their laurels.
"But we printed, borrowed an spent more than we ever did before!" WHO CARES!!! I really really, really, really, really, HATE this fallacy. Just because the forest fire has cooled somewhat, doesn't mean its gone out. its still going. You have to deal with the present and the future
"i submitted my proposal of indexed debt, indexed wage agreements, and indexed everything else, to Lord Keynes a year ago at krugman in wonderland, but as usual, he didnt respond. I'm beginning to think he doesn't respond to new ideas he hasn't heard of before "
ReplyDeleteI don't remember this, but even if all wages and prices were flexible and debt contracts flexible, you would still have involuntary unemployment:
http://socialdemocracy21stcentury.blogspot.com/2011/01/f-h-hahn-in-candid-moment-on-neo.html
Subkctive expectations and any asset with a store of value function redirecting money from purchasing of reproducible commodities abolishes Say's law.
"That's why when the deflationary housing bust ensued, every Post Keynesian advocated for government spending targeting the "idle resources and unemployment" that arose in the housing industry after it busted."
ReplyDeleteUsing idle construction labour is utterly different from demanding a continuation of private debt-fulled asset price inflation in housing.
Totally a red herring, and not even correct. First, it was not a private debt-fuelled asset price inflation, it was caused by the governmental central banking system. To call the Federal Reserve private is absurd. It is a government created entity whose monopoly is protected by, and whose legal tender is enforced by, the executive branch of government. Second, the collapse in home prices, and derivatives prices, and the bank failures that ensued, was in fact responded to by Post Keynesians in printing more and spending more, which is in fact a call to keep the boom going. That's what refusing to let aggregate demand fall back down implies. Just because Post Keynesians wanted the housing construction workers to go build more bridges to nowhere, that doesn't mean Post Keynesians didn't want the artificially high prices and spending to be maintained. Post Keynesians wanted the false boom to continue through more printing and spending.
"They are idle because either they were malinvested due to the past credit expansion and artificially low interest rates ... etc.
ReplyDeleteA ridiculous red herring and evasion of the issue.
No, it is a relevant argument because in order to know what the government should and should not do about idle resources, it is paramount to understand HOW THEY BECAME IDLE IN THE FIRST PLACE.
If they became idle on the basis of malinvestment due to credit expansion, then would it make any sense to say that the solution should be more credit expansion? Of course not. Would it make any sense to say that because the investment was made based on distorted information, would it make any sense to want to keep the resource in use, instead of being liquidated and put to more efficient uses that are in line with real consumer demand? No, of course not. But those are the solutions that Post Keynesians advocate, because they refuse to understand the reasons for why the resources are idle. Capital is heterogeneous, so it's not like you can just advocate that house construction equipment that is now idle, be instead used by the government to build more missiles.
Also, by resorting to this nonsense you underscore how you can't actually refute the existence of idle resources.
First, you haven't shown how it is nonsense, and second, I have already provided a refutation of the fallacious interpretation of idle resources you continue to spew out, by referencing William Hutt's "Theory of Idle Resources", which you almost certainly have not read, because you keep making the same mistakes about it.
False. Neither subjective expectations nor assets with stores of value eradicates Say's law. Say's law is the argument that general overproduction is impossible. It's just a refutation of a common misconception that some classicals made, and today is still made.
ReplyDeleteI don't remember this, but even if all wages and prices were flexible and debt contracts flexible, you would still have involuntary unemployment
That wouldn't be involuntary unemployment, that would be voluntary unemployment.
Hahn is wrong. A higher quantity of labor demanded based on a falling price of labor does NOT require an expectation of "greater" future sales. It only requires a GIVEN expectation of future sales, which is always present. Given an expectation of future sales, and given flexible wage rates, wage rates can fall to whatever extent is necessary to make investing in labor a profitable pursuit. The fear of course is that with low enough wage rates, real wages will fall. But this is not true. Wages are also a business cost. In free competition, lower costs push prices down, so no loss in real incomes, and in fact, would almost certainly be accompanied by higher real incomes, since there are more people in the workforce and fewer people on the dole being supported by those who are employed, which of course would reduce their real wages.
Any expected future demand is sufficient to employ the totality of wage earners, provided the price is labor is free to fall, which governments have historically hampered, through unemployment benefits at taxpayers' expense, food stamps, minimum wage laws, etc.
Edward:
ReplyDeleteYes, real resources are the issue: they are relatively abundant during severe depressions and recessions, or even during periods where the economy is suffering high unemployment, low capacity utilization and weak growth.
No, that's not the argument we're making. It's not that resources are relatively abundant during recessions. It's that resources are malinvested relative to consumer demand based on marginal wants. There is no such thing as a general overproduction of goods. There is only partial overproduction and partial underproduction of goods.
The problem wasn't that the resources that went into housing during the housing boom were "in excess" in general, it's that too many scarce resources went into housing, when they should have gone into the production of other things that did not get produced.
"Relatively abundant" with respect to what? Resources are always scarce relative to real consumer demand based on marginal wants."
Relatively abundant with respect to cash!. Cash,! Cash Cash Cash,! Cash! Cash! Cash!
That makes no sense! No sense no sense no sense no sense! No sense!
There is no such thing as too many resources and not enough cash. There are resources, cash, and incorrect prices, and incorrect investments.
The seeming cash shortage is the result of people increasing their demand for cash in order to raise its purchasing power. This would succeed if the government doesn't inflate in response. Once prices fall enough, once people's savings have accumulated to an adequate level, THEN the decline in spending and investing will level off.
Any quantity of dollars is just as good as any other based on individual choice, when it comes to questions of how much money is the right amount of money.
"The need for more wealth always outstrips the availability of wealth. There is no such thing as general over abundance of resources. There can only be partial over-abundance of some goods and a partial under-abundance of other goods. Too many houses, say, and not enough commercial buildings,"
John Stuart Mill, way before Keynes, already dealt with the problem of the general glut. Its money that it!
No, it's not money. It's partial overinvestment and partial underinvestment. There is no general glut.
Since cash and money are used in every sector of the economy a shortage of cash will produce general overabundance of resources
There is no such thing as a shortage of cash. People always want more cash. The desire to want more cash, given no inflation, will lower prices, until the desire for more cash levels off. There will always be a positive demand for cash, because that is inherent in the nature of money itself. Without a storage value, the commodity used for money ceases to be money.
combine that with with relatively sticky prices [prices can move downwards a little bit, if they don't move fast enough relative to cash balances it will still produce a depression (the usual Austrian response is to say "if prices are flexible' if already dealt with the enormous hurdles above)
Wages are MORE sticky because of minimum wage laws, pro-union legislation, and inflation, among other interventions.
If you want less sticky prices, then inflation is counter-productive. It just makes wages less likely to fall when they need to fall.
You get a deflationary depression the money and risk free government bonds as the only thing that rise in price.
You mean you get a needed correction.
Edward:
ReplyDeleteIf you include money in Say's Identity it works, if you neglect money, than Say' Law and even Says Identity is a sad joke.
Not at all. Say's law works with and without money.
We don't have malinvestments, we have overinvestment.
False. We have malinvestment, not overinvestment. The desire for more wealth in general is always greater than the ability to produce it.
Every sector was affected by downturn, a classic general glut.
That every sector is affected doesn't mean that there is a general overinvestment. It means that every sector had partial overproduction and partial underproduction.
Oh and by the way, Bob Murphy's attempt to answer Krugman won't cut it. Why should there be ANY decline AT ALL in other sectors, forget about relative or absolute declines.
Murphy answers that. The reason why all sectors are affected is because businessmen in all sectors are utilizing the same money and the same market of interest rates, which is distorted by the Fed system.
If you admit the possibility of "secondary deflation: than you're a Hayekian/Selginite/garrisonian, on you're already on the road to sanity and redemption.
Sure, I agree that massive deflation causes business failures. Who can deny that? The difference is that even if I agree that massive deflation causes widespread calamity, my solution is still no inflation and a free market in money production. In a free market, if people want more money, such that they are willing to curtail their purchases of other things in favor of more money production, then they will invest in more money production because it would be relatively more profitable, on account of their being a reduction in profits elsewhere, but not in money production.
P.S. When Austrians and "pete' aka 'major freedom." and you say fiscal stimulus has always failed and will always fail, based on incomplete evidence, its ungentlemanly.
When Keynesians and Edward, aka Ed, aka Mr. E, say that fiscal stimulus works and will always work, based on incomplete evidence, its ungentlemanly.
Edward:
ReplyDeleteIf you have a doctor that recommends 10 doses of vaccine to deal with violent illness, and you, brilliant genius that you are, take only three, and feel slightly better but still sick, say that the "vaccine failed" you'd be making a dumb catastrophic mistake.
Terrible analogy.
If you are drunk, and the doctor recommends that you incur the pain of withdrawal and sober up, and you, the incredibly bright sage that you are, drink more alcohol, hoping to avoid the pain and keep the party going, and say that soberness "fails" because it hurts, you'd be making a catastrophic mistake.
At some point, your liver is going to give out.
Same thing with the Keynesians. To be fair their advice wasn't really followed.
HAHAHAHAHAHAHA
Oh that's rich. The government prints and spends like crazy, but it's not following Keynes' advice, which is always "you didn't print and spend enough. Know how I know? The economy is still in the doldrums!"
Keynesians always refer to counterfactuals, and the logic behind their belief system is flawed up the wazoo.
Paul Krugman much as I hat to defend him keeps pounding that on his blog. Whats wrong with giving the benefit of the doubt?
I don't need to give the benefit of the doubt to something I know is wrong.
The nineteenth century wasnt a fair test of Austrianism, Neither was the 1930s Nice Keynsians like Daniel Kuehn try to be as fair as possible, why cant you be a gentleman and give them the same courtesy?
I am waiting for Kuehn to be a gentleman and admit that his position is that no matter what the government does, it's never Keynesianism, and the reason is because it makes economies worse, which they interpret as "not enough Keynesianism."
That doesn't mean be a patsy. If the consesus of total monetary and fiscal stimulus is say, 8 trillion and the gov and central bank does that, and still theyre no recovery, THEN id be worried, and that would be a falsifier of both monetarism and Keynsianism.
Consensus is not science. That's religion.
Obama's Keynesian advisers were predicting less unemployment WITHOUT the stimulus bill, than what actually occurred WITH the stimulus bill. If that's not being wrong, what is?
But NOT if the gov and central bank only did 2 trillion and sat on their laurels.
"Only 2 trillion." Wow.
"But we printed, borrowed an spent more than we ever did before!" WHO CARES!!! I really really, really, really, really, HATE this fallacy.
It's not a fallacy!
Just because the forest fire has cooled somewhat, doesn't mean its gone out. its still going. You have to deal with the present and the future.
Yes, just because the man has become more addicted to alcohol, and who needs to drink more to get the same buzz, let's keep giving him more and more alcohol to keep him drunk, that way, when he starts to sober up after having "only" a 24 case of beer and a 24 of vodka, let's say that the problem was that he didn't drink an additional 24 of beer, because 48 beers and a bottle of vodka is the "new" normal.
Then repeat the process until more alcohol ends up killing him.
$8 trillion would only have created an even larger false boom, which would have only created an even larger correction later on. We just went through the biggest collapse since the great depression, on the basis of around $2 trillion being created from around 2001 to 2006. You people are dangerous sociopaths when you call for $8 trillion now, which would have blown up an even larger bubble than the one that exists now on the basis of less inflation.
"No, it is a relevant argument because in order to know what the government should and should not do about idle resources, it is paramount to understand HOW THEY BECAME IDLE IN THE FIRST PLACE.
ReplyDeleteIf they became idle on the basis of malinvestment due to credit expansion"
(1) nonsense business cycle theory to the rescue!
(2) from the existence of malinvestments it doesn't follow that deflationary depression is the solution at all.
> Using idle construction labour is utterly
ReplyDelete> different from demanding a continuation of
> private debt-fulled asset price inflation
> in housing.
Totally a red herring, and not even correct. First, it was not a private debt-fuelled asset price inflation, it was caused by the governmental central banking system.
Oh, I see.
(1) private financial institutions had no role in driving the credit boom in Liar's loans, NINJA loans and so on.
(2) private financial institutions with freedom from effective financial regulation had no role in blowing the housing bubble.
You're good for a laugh, David/Major_Freedom.
"Post Keynesians wanted the false boom to continue through more printing and spending."
ReplyDeleteBegging the question with the nonsense of ABCT.
Your shift to talking about "housing construction workers to go build more bridges to nowhere" also shows you lost the original argument a long time ago: you're incapable of sticking to point. Instead endless red herrings are your predictable solution.
"No, it is a relevant argument because in order to know what the government should and should not do about idle resources, it is paramount to understand HOW THEY BECAME IDLE IN THE FIRST PLACE."
ReplyDelete"If they became idle on the basis of malinvestment due to credit expansion"
(1) nonsense business cycle theory to the rescue!
(2) from the existence of malinvestments it doesn't follow that deflationary depression is the solution at all.
(1) You haven't even shown an understanding of ABCT, let alone provided a proof that it is nonsense.
(2) From the existence and identification of the CAUSE of malinvestments, it certainly follows that the solution cannot be more of what caused the malinvestments in the first place, and independently we can know that the solution should be based on peace and not violence.
NOVEMBER 30, 2011 2:44 PM
Lord Keynes said...
> Using idle construction labour is utterly
> different from demanding a continuation of
> private debt-fulled asset price inflation
> in housing.
Totally a red herring, and not even correct. First, it was not a private debt-fuelled asset price inflation, it was caused by the governmental central banking system.
Oh, I see.
(1) private financial institutions had no role in driving the credit boom in Liar's loans, NINJA loans and so on.
(2) private financial institutions with freedom from effective financial regulation had no role in blowing the housing bubble.
You're good for a laugh, David/Major_Freedom.
NOVEMBER 30, 2011 2:57 PM
Lord Keynes said...
"Post Keynesians wanted the false boom to continue through more printing and spending."
Begging the question with the nonsense of ABCT.
Your shift to talking about "housing construction workers to go build more bridges to nowhere" also shows you lost the original argument a long time ago: you're incapable of sticking to point. Instead endless red herrings are your predictable solution.
Sorry, I screwed up the formatting here.
ReplyDeleteStarting at "NOVEMBER 30, 2011 2:44 PM" that should have been a new post.
Totally a red herring, and not even correct. First, it was not a private debt-fuelled asset price inflation, it was caused by the governmental central banking system.
Oh, I see.
The Federal Reserve System is not a free market institution, because it is not the product of peaceful exchange based on private property rights. It is based on government violence and abolition of free markets in money production.
(1) private financial institutions had no role in driving the credit boom in Liar's loans, NINJA loans and so on.
They had a role, but they were hyenas to the Fed's lions. The banks could not keep expanding credit if the Fed were not there to backstop it with constant inflation of reserves.
(2) private financial institutions with freedom from effective financial regulation had no role in blowing the housing bubble.
False. They did not have freedom from financial regulation. The financial sector is one of the most highly regulated sectors in the market.
You are actually claiming that the government played no role in the boom and bust? The Fed did not keep interest rates down to absurdly low levels? The Fed did not do this by high rates of inflating reserves, which serve as the ultimate foundation for credit expansion? The government did not try to use its political power to put people into houses they otherwise could not have afforded?
It's all a product of the free market? IN THE FINANCIAL SYSTEM CONTROLLED BY THE GOVERNMENT?
"Post Keynesians wanted the false boom to continue through more printing and spending."
Begging the question with the nonsense of ABCT.
No, that is not a statement about ABCT at all. It is what the Post Keynesians wanted. The Post Keynesians wanted more printing and more spending to keep the economy in a boom. That you want to LABEL the economy as "normal", or "in a false boom" is semantics and irrelevant to the fact that Post Keynesians called for more printing and more spending to keep the past state of the economy going, no matter if the economy has distortions, no matter if past spending was due to inflation and credit expansion. Post Keynesians believe, incorrectly, that total spending should never decline, even if individuals want to reduce their spending and increase their purchasing power and recuperate their lost savings through voluntary transactions.
You haven't shown that the ABCT is nonsense. Merely hand waving and dismissing it is not an argument.
Your shift to talking about "housing construction workers to go build more bridges to nowhere" also shows you lost the original argument a long time ago
But that is what you called for. If you think that is wrong, then you must consider yourself wrong.
You lost the argument a long time ago. Since then, you've only pretended you're still in it. This is just educating you time.
you're incapable of sticking to point.
I have stuck to the same points the whole time.
Instead endless red herrings are your predictable solution.
What red herrings?