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Saturday, December 24, 2011

The Scale of Obama’s 2009 Stimulus

What was the actual size of the American Recovery and Reinvestment Act (ARRA, Public Law 111-5), enacted on February 17, 2009? This is a subject causing some confusion. We must remember that this was the second stimulus enacted after the $168 billion Bush stimulus in 2008 (about 1% of GDP).

Here are the facts:
(1) The original estimate in early 2009 by the Congressional Budget Office (CBO) was $787 billion over 10 years.

(2) There have been subsequent revisions of the size.

(3) In January 2010, the CBO revised its estimate to $862 billion, partly because unemployment benefits were costing more than estimated.

(4) By August 2010, the January figure was revised downward to $814 billion over 10 years.

(5) In February 2011, the figure was revised to $821 billion over 10 years.
So currently it is $821 billion over 10 years, and about 70% had been spent by the end of September 2010. That is roughly $300 billion in 2009 and $300 billion in 2010. This was in a roughly $14 trillion US economy (or $14.25 trillion [2009 est.] and $14.66 trillion [2010 est.]), so that overall size of the stimulus in each year is roughly 2% of GDP .

Meanwhile, one sees hordes of ignoramuses who bandy the figure of $800 billion about as if it was all spent in one year. That is false.

And, as always, we have the question of to what extent the stimulus was offset by
(1) state and local austerity, and
(2) deleveraging (for example, many people got a tax cut: did they mostly use this to pay down debt or spend it on consumer goods?).
This will have to be taken into account.

The effect of the stimulus was that the US emerged from recession in Q3 2009, and has not had a negative quarter of growth since:
http://www.tradingeconomics.com/united-states/gdp-growth
It was widely said in early 2009 that the stimulus was not enough to close the output gap, and this is entirely correct. The US was in many ways one of the hardest hit by the financial crisis and demand shocks, so the high level of unemployment that has resulted is not surprising.

In my opinion, the New Keynesians have badly underestimated the potential GDP/GNP of the United States: the US is the largest economy on earth and has a vast unemployment problem. By U-6 (a better measure), unemployment soared to 18% in 2009. This, with massive unused resources and idle capacity (not to mention other nations ready and willing to sell goods to the US), makes for a huge aggregate demand deficiency.

By contrast, other nations have also used Keynesian stimulus, and have managed to keep unemployment levels relatively low with positive GDP growth: e.g., South Korea, China, Singapore, Australia, Germany, Sweden, Norway, and Belgium, to name a few. In fact, if there was any honesty to right wing, conservative or libertarian analysis of economic conditions over the past 3 years, they would be talking about the astonishing success of global Keynesianism. US libertarians and Austrian commentators in particular are contemptibly and laughably ignorant of what goes on outside the United States, where a vast number of other countries have used Keynesian stimulus with success.

There is no doubt whatsoever that global monetary and fiscal interventions have prevented a new Great Depression, which can be seen in the global data compiled by Barry Eichengreen and Kevin O’Rourke (comparing various relevant world statistics from 2008-2011 with 1929-1933). From 2008-2009, world industrial production, world trade, and the value of equity markets were falling off a cliff at a rate as bad as 1929-1932 (and in some cases at a rate even worse than 1929-1930). From 2009 onwards, there has been a remarkable recovery in world industrial production and world trade: the reason is that today we had governments that acted to stop financial systems from collapsing and to stimulate aggregate demand. In the 1930s, governments did not do this, and a global depression resulted.

Today, very few countries have had a depression in the proper sense of a contraction in real GDP/GNP of 10% or more. The only nations where this has happened are countries like Ireland, Greece, Latvia, Lithuania, and Estonia, in which savage austerity has been pursued and Keynesianism rejected.


LINKS

Dean Baker, “Keynes and the Current Crisis,” 7 December 2011.
http://www.cepr.net/index.php/blogs/cepr-blog/keynes-and-the-current-crisis


Paul Krugman, “On the Inadequacy of the Stimulus,” September 5, 2011
http://krugman.blogs.nytimes.com/2011/09/05/on-the-inadequacy-of-the-stimulus/


Economists Who Make the Third Stimulus Honor Roll
http://www.cepr.net/index.php/press-releases/interactive-press-releases/economists-who-make-the-third-stimulus-honor-roll/

32 comments:

  1. "By contrast, other nations have also used Keynesian stimulus, and have managed to keep unemployment levels relatively low with positive GDP growth: e.g., South Korea, China, Singapore, Australia, Germany, Sweden, Norway, and Belgium, to name a few."

    Question:
    (1) Did these countries go into recession at all?
    (2) If they did, links to Keynesian policy?

    ReplyDelete
  2. I assume (correct me if I am wrong), you're an Austrian?

    Answers:

    (1) Australia technically escaped a recession, by swift countercyclical fiscal policy.

    Most of the others did have recessions, as far as I remember.

    (2) If you mean by your second question: were the recessions explained by the Austrian business cycle theory (ABCT), no, they weren't.

    The ABCT is a nonsense theory that collapses owing to

    (1) the non-existence of a unique natural rate of interest;

    (2) the non-existence of real world equilibrium states and the alleged tendency to equilibrium required by Hayekian versions of ABCT;

    (3) the fact that credit flows went to consumer goods spending, not capital goods investment, as required by ABCT.
    --------

    In fact, Hayek's version of the ABCT can hardly even be considered an "Austrian" theory at all: it's essentially a neoclassical theory using Walrasian equilibrium theory via Wicksell, one that is severely undermined as well once the role of uncertainty and subjective expectations are considered, a point that Paul Rosenstein-Rodan once made to the Austrian Ludwig Lachmann (who was Hayek's research assistant in the 1930s):

    "Lachmann: Talking to Paul Rosenstein-Rodan, who was then a lecturer at University College, London--not technically in the London School of Economics--but he gave a course on the history of economic thought to which all of us who were research students then went. It was Rosenstein-Rodan who in discussing Austrian trade cycle theory with me said, "Ah yes, but whatever happens in the business cycle is in the first place determined by expectations." And then he told me of the work that had been done in Sweden."

    http://mises.org/journals/aen/lachmann.asp

    ReplyDelete
  3. I've noticed Russ Roberts of Hoover.org and Mercatus is desperate to prove the CBO wrong about the stimulus.

    I think it's because he's paid to sell the neoliberal package of deregulation, privatization, low taxes, austerity, free market fundamentalism etc. etc.

    ReplyDelete
  4. @Lord Keynes,

    Oh, no, I'm a Keynesian. My economics textbook was written by Mr. Krugman and since my Macro/Micro classes I've been reading him and those he points me towards.

    I was just under the impression that the recession was a "First World Problem" sans Australia.

    ReplyDelete
  5. I see. Yes, the recession was a first world problem spreading out from America.

    But of course since there were housing bubbles in many countries, in addition to domestic bank holdings of Collateralized debt obligations (CDOs) such as asset backed seucurities, so the collapse of domestic real estate bubbles also determined the extent to which each country was affected by recession.

    I suppose the factors were:

    (1) collapse of US housing bubble
    (2) defaulting US mortgages
    (3) crisis in value of CDOs
    (4) US financial crisis spreading to global financial systems
    (5) Demand shocks
    (6) each country's own demand shocks from collapse of its own housing bubble
    (7) the extent of how quickly macro stability was affected by policy responses.

    ReplyDelete
  6. 1 of 2

    Lord Keynes:

    1. Government spending hampers the recovery process by replacing investment in accordance with real consumer preferences with unsustainable government printing, borrowing and taxation.

    2. Your "understanding" of ABCT is fatally flawed. The economic principles behind the process of ABCT does NOT require a single natural interest rate. The only reason why the original espousers used a single rate was as a PLACEHOLDER for the rate or rates that do not exist and thus we cannot see due to central bank policy. It is for analytical convenience and for pedagogical purposes. It is not necessary to ABCT that there is in the real world a single natural interest rate. During the central bank created housing bubble, the fact that one person got an unnaturally low 2.34% interest rate while another person got an unnaturally low 2.45% interest rate, which would have been a natural 4.5% interest rate, say, and a 4.65% interest rate, say, had the central bank NOT artificially reduced the interest rates, is not all of a sudden made irrelevant on the basis that the theoretical exposition of ABCT as laid out by Mises and Hayek presumed a single natural rate of 4.6% for both mortgage borrowers. The entire ABCT is not contradicted by the introduction of more than one natural rate. The point of the theory is that the central bank artificially reduces the interest rate or interest rates BELOW what they otherwise would have been had the central bank not engaged in their monetary policy. The belief that more than one natural rate "blows up" ABCT is about the dumbest claim ever about the theory. It is grasping at straws. Sraffa did not even show how the introduction of multiple natural interest rates "refutes" ABCT. And, quite expectedly, you have not shown even the slightest hint at understanding the implications of introducing multiple natural interest rates. Your continued repeating "ABCT presumes a single natural interest rate, which does not exist, hence ABCT is wrong" is proof you can't actually refute it.

    Furthermore, ABCT does not require "real world equilibrium states". The "tendency towards equilibrium" is meant to refer to the fact that the profit and loss (price) system acts as a perpetual "corrective" mechanism whereby investor actions that are not in line with consumer preferences are punished, and investor actions that are in line with consumer preferences are rewarded.

    ReplyDelete
  7. 2 of 2

    Lord Keynes:

    For a reason that only a mind warped by Keynesian dogma could "comprehend", you are clearly utterly incapable of understanding the importance of ECONOMIC CALCULATION. The concept is completely over your head. You never integrate it in any of your silly diatribes. You will NEVER understand economics if you continue to be so deluded into believing that you must shoehorn in aggregate concept laden Keynesian dogma into understanding a market economy that does operate according to the assumptions you have.

    Finally, you clearly don't understand ABCT at all when you assert that the theory requires that credit expansion flow into capital goods and not consumer goods. As Garrison, Rothbard, and many other Austrians have clearly explained, it is precisely because not all credit expansion goes into capital goods that the business cycle is generated. The classic ABCT presumed that credit expansion causes a boom in the "upper stages" of production, the capital intensive stages, which cannot last. But much like the introduction of multiple natural rates, the ABCT is such a powerful tool that it can EASILY accommodate explaining how credit expansion causes a boom in the "lower stages", the consumer goods stages. When this occurs, then just like not enough resources are released from the consumption stage to make the boom in the capital goods stages sustainable, so too is it the case that if credit expansion causes a consumer goods boom, then not enough resources are released from the "upper stage" capital goods industries to make the consumer boom sustainable.

    The economy is not just two stages of investment and consumption. One of the main powers of the ABCT is that it points out the fact that within the capital goods stage, there are MORE stages. The Keynesians don't see this because they're too busy with crude aggregates like "investment". They don't see that within "investment", there are multiple stages of investment. So with a sense of irony, while you're busy trying to claim that ABCT is refuted if multiple natural interest rates are introduced, you still cling to the crude unrealistic assumption that there is only one natural investment stage, where all capital throughout time and throughout sectors are lumped together into one homogeneous aggregate called "K".

    As Robert Murphy explained in his "Sushi" article, credit expansion can stretch the economy from "both ends" so to speak. Consumer goods can be boomed in one direction, while the "upper" capital goods stages are boomed in the other direction, which leaves the "middle" capital goods stages without enough resources to be sustained.

    ReplyDelete
  8. "It is for analytical convenience and for pedagogical purposes. It is not necessary to ABCT that there is in the real world a single natural interest rate. "

    Cite me one actual Austrian economist presenting a published account of ABCT who says this.

    "The point of the theory is that the central bank artificially reduces the interest rate or interest rates BELOW what they otherwise would have been had the central bank not engaged in their monetary policy."

    Below what one!!??
    You can't refer to a lowering of the single central bank rate below multiple interest rates unless they were all higher, which does not have to be the case at all if as Sraffa showed there are as many natural rates as commodities.

    ReplyDelete
  9. "The belief that more than one natural rate "blows up" ABCT is about the dumbest claim ever about the theory. It is grasping at straws. Sraffa did not even show how the introduction of multiple natural interest rates "refutes" ABCT."

    Yes, he did. And Robert P. Murphy shows why:

    http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-sraffa-hayek-debate.html

    Your belief that multiple rates is not devastating to ABCT might have some merit if only you can cite actual Austrian economists who have expounded a version of ABCt using multiple rates. No such work exists. Nor have you ever be cited one.

    "As Garrison, Rothbard, and many other Austrians have clearly explained, it is precisely because not all credit expansion goes into capital goods that the business cycle is generated. .... ABCT is such a powerful tool that it can EASILY accommodate explaining how credit expansion causes a boom in the "lower stages", the consumer goods stages. When this occurs, then just like not enough resources are released from the consumption stage to make the boom in the capital goods stages sustainable, so too is it the case that if credit expansion causes a consumer goods boom, then not enough resources are released from the "upper stage" capital goods industries to make the consumer boom sustainable."

    LOL.. Show me where Garrison or anyone else expounds a theory of ABCT where credit flows go to consumer loans.

    ReplyDelete
  10. "When this occurs, then just like not enough resources are released from the consumption stage to make the boom in the capital goods stages sustainable, so too is it the case that if credit expansion causes a consumer goods boom, then not enough resources are released from the "upper stage" capital goods industries to make the consumer boom sustainable."

    The same unrealistic assumption of an economy with no idle resources, no ability to import factor imputs or consumer goods, no unemployment, no unused stocks of raw materials, no idle capacity: despite your protestations to the contrary, this is just an idiotic assumption of equilibrium underlying your hollow defences.

    ReplyDelete
  11. "Furthermore, ABCT does not require "real world equilibrium states".

    The Hayekian versions do:

    "Hicks to Hayek, November 27, 1967
    “... We have (a) full employment, (b) static expectations, (c) ‘equilibrium’ at every stage, so that demand = supply in every market, prices being determined by current demand and supply. Add to these the Wicksell assumption, of a pure credit economy and we clearly find that if there were in lags, the market rate of interest cannot be reduced below the natural rate in an equilibrium position; ....

    Hayek to Hicks, December 2, 1967

    I accept assumption (a), full employment. I am not sure that I quite know what (b) ‘static expectations’ means, but if it means that at each stage of the process everybody acts in the expectation that future prices will be the same as present prices, I accept that too – though we shall see that these expectations must be disappointed.

    Of (c) I can accept that at each stage in every separate market demand = supply in the sense that at the ruling price all buyers and sellers buy and sell as much as they want to buy at that market, but not in the sense that any change in the supply which a change in price will bring about in the course of time has already taken place or that prices correspond to the marginal costs at which producers now begin to produce.

    Nor need there [be] at any but the initial stage an overall equilibrium between the different markets, because a change of price necessary to secure equality between demand and supply in any one market will make at the next stage a change of other prices inevitable as a result of the changed receipts in the first market being spent.

    Let us now start with a system in full stationary equilibrium: constant prices and no net saving or investment and no changes in the supply of factors or tastes and a constant flow of money (which may be a token or partly credit money) ..."
    (HHayek, F. A. von, 1999. Collected Works of F.A. Hayek, Volume 6: Good Money, Part II: The Standard, Routledge, London. pp. 100–102).

    Also:

    "The theory which Hayek had developed in the 1920s and 1930s belongs to the monetary over-investment school of business cycle theory. In a nutshell, the core of the monetary over-investment approach is the attribution of the cyclical development of the economy to an endogenously caused deviation from a state of general equilibrium and the later restoration of that state as a result of economic necessity."

    See U. Witt, 1997. “The Hayekian Puzzle: Spontaneous Order and the Business Cycle,” Scottish Journal of Political Economy 44: p. 46.

    "While Mises's apodictic apriorism did not require Mises to derive empirical hypotheses, it is quite clear, e.g., from Hayek (1933) that he aimed at empirically meaningful propositions about the business cycle.4 For this reason, he was forced to identify general equilibrium in some way or other with
    an empirical state of the economy, and his theory indeed seems to suggest the state of the markets in the pre-upswing stage of the business cycle."


    See U. Witt, 1997. “The Hayekian Puzzle: Spontaneous Order and the Business Cycle,” Scottish Journal of Political Economy 44: p. 46.

    -------

    You're essentially either (1) a shameless liar or (2) a buffoon who doesn't even understand the theory you're attempting (in vain) to defend.

    ReplyDelete
  12. Lord Keynes:

    "It is for analytical convenience and for pedagogical purposes. It is not necessary to ABCT that there is in the real world a single natural interest rate."

    "Cite me one actual Austrian economist presenting a published account of ABCT who says this."

    Why? This is not necessary for supporting the validity of my arguments. They stand on their own, regardless of who else agrees or disagrees with it.

    "The point of the theory is that the central bank artificially reduces the interest rate or interest rates BELOW what they otherwise would have been had the central bank not engaged in their monetary policy."

    "Below what one!!??"

    It's not one! It's many.

    "You can't refer to a lowering of the single central bank rate below multiple interest rates unless they were all higher, which does not have to be the case at all if as Sraffa showed there are as many natural rates as commodities."

    You're hopelessly confused. It's not the single Fed funds rate that goes below multiple interest rates. It's what brings the lower Fed Funds rate about that is important. In order to bring down the Fed Funds rate, the central bank increases the supply of reserves in the banking system. These reserves are the foundation (BTW, it doesn't matter about the order, that is, the bank would inflate and then gets its reserves topped up, or it gets its reserves topped up and then it inflates) from which loans of all maturities are created.

    It is the more or less constant increase in reserves that serves to push down the interest rates on loans of all maturities. The interest rates on these loans are pushed down below what they otherwise would have been had the central bank NOT increased bank reserves.

    Therefore, it is not necessary that there be one natural interest rate. The point of ABCT is that the central bank, by increasing reserves, results in the banking system issuing loans whose interest rates are pushed down from where they otherwise would have been had loans been financed by real savings only.

    ReplyDelete
  13. Lord Keynes:

    "The belief that more than one natural rate "blows up" ABCT is about the dumbest claim ever about the theory. It is grasping at straws. Sraffa did not even show how the introduction of multiple natural interest rates "refutes" ABCT."

    "Yes, he did."

    No, he didn't. All Sraffa said was that he cannot see how there would be one natural interest rate. Then he stopped. He didn't explain how it serves to undercut ABCT in any way.

    "And Robert P. Murphy shows why:"

    No, he didn't show why. All Murphy showed was that ABCT in its classical form is incomplete. Murphy didn't abandon ABCT because he too knows that the introduction of more than one natural rate doesn't at all threaten the core of ABCT in any way, shape or form.

    "Your belief that multiple rates is not devastating to ABCT might have some merit if only you can cite actual Austrian economists who have expounded a version of ABCt using multiple rates. No such work exists. Nor have you ever be cited one."

    Utterly false. Total rubbish. The "merit" of an argument is not improved nor is it declined if Austrian economists have published their own articles or papers on this.

    The burden of proof is on you to show how the introduction of multiple natural interest rates does what you claim it does, which is show that it makes the ABCT untenable.

    "As Garrison, Rothbard, and many other Austrians have clearly explained, it is precisely because not all credit expansion goes into capital goods that the business cycle is generated. .... ABCT is such a powerful tool that it can EASILY accommodate explaining how credit expansion causes a boom in the "lower stages", the consumer goods stages. When this occurs, then just like not enough resources are released from the consumption stage to make the boom in the capital goods stages sustainable, so too is it the case that if credit expansion causes a consumer goods boom, then not enough resources are released from the "upper stage" capital goods industries to make the consumer boom sustainable."

    "LOL.. Show me where Garrison or anyone else expounds a theory of ABCT where credit flows go to consumer loans."

    LOL, you're making false claims and I am correcting you. It's your responsibility to make sure you actually understand the theory that you wish to address.

    If you want a good source for Garrison, then look at his popular powerpoint slides. In those slides, he shows the "Hayekian triangle" and what happens when credit expands. He shows the consumer goods stage boom and the upper capital goods stages boom, with a shortage in the middle stages. He doesn't explain ABCT with capital goods boom only.

    ReplyDelete
  14. Lord Keynes:


    "Furthermore, ABCT does not require "real world equilibrium states"."

    "The Hayekian versions do:"

    No, they don't. If you had bothered to READ Hayek, specifically "Prices and Production", you would have known that he wrote these assumptions as simplifications, not as assumptions or models of the real world.

    He wrote:

    "It was destined in the first instance to provide an instrument for theoretical analysis, and to help us to isolate the active influences, which money exercised on the course of economic life. It refers to the set of conditions, under which it would be conceivable that events in a monetary economy would take place, and particularly under which, in such an economy, relative prices would be formed, as if they were influenced only by the "real" factors which are taken into account in equilibrium economics. In this sense the term points, of course, only to a problem, and does not represent a solution. It is evident that such a solution would be of great importance for the questions of monetary policy. But it is not impossible that it represents only one ideal, which in practice competes with other important aims of monetary policy."

    "The necessary starting point for any attempt to answer the theoretical problem seems to me to be the recognition of the fact that the identity of demand and supply, which must necessarily exist in the case of barter, ceases to exist as soon as money becomes the intermediary of the exchange transactions. The problem then becomes one of isolating the one-sided effects of money — to repeat an expression which on an earlier occasion I had unconsciously borrowed from von Wieser — which will appear when, after the division of the barter transaction into two separate transactions, one of these takes place without the other complementary transaction." - Prices and Production, pg 130.


    "I accept assumption (a), full employment. I am not sure that I quite know what (b) ‘static expectations’ means, but if it means that at each stage of the process everybody acts in the expectation that future prices will be the same as present prices, I accept that too – though we shall see that these expectations must be disappointed."

    Hayek "accepts full employment" not because he thinks the real world is always at full employment, or that for the purposes of ABCT it requires full employment.

    ReplyDelete
  15. "Hayek "accepts full employment" not because he thinks the real world is always at full employment, or that for the purposes of ABCT it requires full employment."

    You're a joke. Also, I note you completely ignore the explicit statement of Hayek:

    "Nor need there [be] at any but the initial stage an overall equilibrium between the different markets, "

    More explicit statement by Hayek of the equilibrium:

    “it is my conviction that if we want to explain economic phenomena at all, we have no means available but to build on the foundations given by the concept of a tendency toward an equilibrium. For it is this concept alone which permits us to explain fundamental phenomena like the determination of prices or incomes, an understanding of which is essential to any explanation of fluctuation of production. If we are to proceed systematically, therefore, we must start with a situation which is already sufficiently explained by the general body of economic theory. And the only situation which satisfies this criterion is the situation in which all available resources are employed.” (Hayek, Prices and Production in Hayek 2008: 225).

    “As it is sometimes alleged that the ‘Austrians’ were unaware of the fact that the effect of an expansion of credit will be different according as there are unemployed resources available or not, the following passage from Professor Mises’ Geldwertstabilisierung und Konjunkturpolitik (1928, p. 49) perhaps deserves to be quoted: ‘Even on an unimpeded market there will be at times certain quantities of unsold commodities which exceed the stocks that would be held under static conditions, of unused productive plant, and of unused workmen. The increased activity will at first bring about a mobilisation of these reserves. Once they have been absorbed the increase of the means of circulation must, however, cause disturbances of a peculiar kind.’ In Prices and Production, where I started explicitly from an assumed equilibrium position, I had, of course, no occasion to deal with these problems. (Hayek 1975 [1939]: 42, n. 1).

    "My present task is to fill in the details of that rough sketch and to show what happens in the interval before a new equilibrium is attained."

    Hayek, F. A. 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala. pp. 265-266.

    ReplyDelete
  16. "Why? This is not necessary for supporting the validity of my arguments. They stand on their own, regardless of who else agrees or disagrees with it."

    Your previous statement:

    "Yes, there is a rather large burden on Austrians to publish a more modern exposition of ABCT that takes into account the assumption of multiple natural interest rates.

    As it stands, it is incomplete in its details"


    http://socialdemocracy21stcentury.blogspot.com/2011/09/abct-without-unique-natural-rate-of.html?showComment=1316780322443#c4592654599806622369

    So we have established:

    (1) current ABCT is "incomplete in its details"

    (2) There aren't any serious modern Austrian economists producing a ABCT with multiple rates

    It follows logically that all current versions of the theory are false because ALL of them use a unique natural rate of interest.

    http://socialdemocracy21stcentury.blogspot.com/2011/09/abct-without-unique-natural-rate-of.html

    ReplyDelete
  17. Lord Keynes:

    "Hayek "accepts full employment" not because he thinks the real world is always at full employment, or that for the purposes of ABCT it requires full employment."

    "You're a joke."

    As shown, you're ignorant.

    "Also, I note you completely ignore the explicit statement of Hayek:"

    "Nor need there [be] at any but the initial stage an overall equilibrium between the different markets,"

    Again that's not a model of the real world market. It's a simplification only.

    "More explicit statement by Hayek of the equilibrium:"

    "it is my conviction that if we want to explain economic phenomena at all, we have no means available but to build on the foundations given by the concept of a tendency toward an equilibrium. For it is this concept alone which permits us to explain fundamental phenomena like the determination of prices or incomes, an understanding of which is essential to any explanation of fluctuation of production. If we are to proceed systematically, therefore, we must start with a situation which is already sufficiently explained by the general body of economic theory. And the only situation which satisfies this criterion is the situation in which all available resources are employed.” (Hayek, Prices and Production in Hayek 2008: 225)."

    And Mises called this an indispensable mental tool, not a model for the real world market.

    "As it is sometimes alleged that the ‘Austrians’ were unaware of the fact that the effect of an expansion of credit will be different according as there are unemployed resources available or not, the following passage from Professor Mises’ Geldwertstabilisierung und Konjunkturpolitik (1928, p. 49) perhaps deserves to be quoted: ‘Even on an unimpeded market there will be at times certain quantities of unsold commodities which exceed the stocks that would be held under static conditions, of unused productive plant, and of unused workmen. The increased activity will at first bring about a mobilisation of these reserves. Once they have been absorbed the increase of the means of circulation must, however, cause disturbances of a peculiar kind.’ In Prices and Production, where I started explicitly from an assumed equilibrium position, I had, of course, no occasion to deal with these problems. (Hayek 1975 [1939]: 42, n. 1)."

    Mises was wrong. The real world market, as has been painfully obvious by any cursory observation of the co-existence of credit expansion and unemployment, has shown that credit can expand even while there are unemployed people and idle resources. This means credit MUST be going into non-idle sectors, affecting the capital structure.

    ReplyDelete
  18. Lord Keynes:

    "Why? This is not necessary for supporting the validity of my arguments. They stand on their own, regardless of who else agrees or disagrees with it."

    "Your previous statement:"

    This doesn't answer my question of why citing Austrians is necessary for supporting my arguments.

    "So we have established:"

    Yes, we have established that:

    (1) current ABCT is "incomplete in its details", but the core principles have not been refuted.

    (2) There aren't any serious modern Austrian economists producing a ABCT with multiple rates, which is strong evidence that there is no serious need to do so, since the core of the ABCT is intact. Remember, the "natural interest rate" in ABCT is an unobservable counter-factual. It is a simplified placeholder that can easily accommodate multiple natural rates if that is what in fact exists in a free market economy. At the end of the day, all that is necessary is to add an "s" in every place that "natural interest rate" exists in writing. Everything else still holds. Nothing else is in need of any change whatsoever.

    The reason you haven't seen an update on this is because Sraffa's critique just isn't a strong argument against ABCT. It's a minor detail, that while showing ABCT is in need of some minor updating, doesn't make ABCT a theory that is untenable until someone goes and adds an "s" to all the cases of "natural interest rate".

    "It follows logically that all current versions of the theory are false because ALL of them use a unique natural rate of interest."

    ABCT is not "false." It's just that one of the classic assumptions of ABCT is false. But changing this assumption to multiple rates is not necessary for the understanding of ABCT to apply to real world cases.

    You do realize that the poor souls who have had the unfortunate experience of coming across your internet rants are laughing their asses off at how you actually believe you have a "gotcha" with this natural interest rate versus rates fetish, don't you?

    You should worry about learning the concept of economic calculation above all else, because it is central in Austrian theory, and as it stands, you still don't get it.

    ReplyDelete
  19. "And Mises called this an indispensable mental tool, not a model for the real world market."

    Ridiculous red herring: we are talking about HAYEK's ABCT, not Mises's version of it.

    The issue was starting point of Hayek's ABCT:

    And the only situation which satisfies this criterion is the situation in which all available resources are employed.” (Hayek, Prices and Production in Hayek 2008: 225)."

    You can't refute this clear, explicit statement by Hayek: so you turn to hand waving red herring.

    ReplyDelete
  20. "The real world market, as has been painfully obvious by any cursory observation of the co-existence of credit expansion and unemployment, has shown that credit can expand even while there are unemployed people and idle resources. This means credit MUST be going into non-idle sectors, affecting the capital structure."

    (1) the real conception of interest rates underlying ABCT is absurd. The natural rate conceived as a rate where loans are made in natura is irrelevant to a monetary world.

    In time period x there is no reason whatsoever why consumers will forgo all the resources needed by capitalists for factor inputs/capital goods production in that same period x. The belief that there will be some perfect meshing of plans is idiotic.

    (2) Given that you point to the fact that investment - even that primarily using idle resources - also causes secondary inflationary effects, there is no reason why investment in a world deviod of fiduciary media will not also cause secondary inflationary effect ("price distortions").

    Yet this is supposed enough to rule out investment activity.

    The whole basis of your theory is up in smoke.

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  21. "ABCT is not "false." It's just that one of the classic assumptions of ABCT is false."

    LOL.. A theory with a blatantly false assumption underlying its whole analysis is ... nevertheless true.

    Applause, please.

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  22. "You should worry about learning the concept of economic calculation above all else"

    The economic calculation problem - if you are talking about the debate between Mises/Hayek and various socialists - is about the viability of command economies with no price system.

    You throw up yet another stupid red herring: Hayek's ABCT is about alleged price distortions in economies where the vast majority of production is done privately, not about production in a communist country where all capital goods are owned by the state and production done by central planners.

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  23. " the real conception of interest rates underlying ABCT is absurd. The natural rate conceived as a rate where loans are made in natura is irrelevant to a monetary world."

    I see that you still believe that repeating this hilarious statement many, many times makes it true. While you are about it, could you please define the term "rate of interest" and in particular the Austrian concept "Pure rate of interest"? It will be (I am sure) very instructive considering the statement of yours that I have highlighted.

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  24. "While you are about it, could you please define the term "rate of interest" and in particular the Austrian concept "Pure rate of interest"?

    I'm not talking about Mises's originary rate above or the pure time preference theory of the interest rate; I'm talking Hayek's natural rate, relevant to Hayekian versions of ABCT.

    Hayek:

    "Put concisely, Wicksell’s theory is as follows: If it were not for monetary disturbances, the rate of interest would be determined so as to equalize the demand for and the supply of savings. This equilibrium rate, as I prefer to call it, he christens the natural rate of interest. In a money economy, the actual or money rate of interest (“Geldzins”) may differ from the equilibrium or natural rate, because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks.

    Now, so long as the money rate of interest coincides with the equilibrium rate, the rate of interest remains “neutral” in its effects on the prices of goods, tending neither to raise nor to lower them. When the banks, however, lower the money rate of interest below the equilibrium rate, which they can do by lending more than has been entrusted to them, i.e., by adding to the circulation, this must tend to raise prices;"


    From the 2nd edn of Prices and Production (1935) in Hayek, F. A. von, 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala. p. 215.
    -----

    If you don't know how to define the pure time
    preference theory of the interest rate or Mises's originary rate, then go and read Mises or Rothbard and stop wasting my time.

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  25. "the rate of interest would be determined so as to equalize the demand for and the supply of savings."

    "because the demand for and the supply of capital do not meet in their natural form but in the form of money"

    Good points. So what is the "demand for capital" and the "supply of capital" as used by Hayek? Since Hayek is talking of the two "meeting", where do they meet? I mean, in which market do they meet?

    Incidentally, I have read Mises and Rothbard and do not need lessons from you. I was just trying to understand how you have developed your "argument".

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  26. More specifically, could you please elaborate on what, in your dismissal of ABCT, have you assumed about the equalising of "demand for savings" and supply of savings"? What is the "savings" that is being mentioned? What is the market in which "demand for savings" and "supply of savings" are "equalised"? What are the determining factors of the schedules of "demand for savings" and "supply of savings" in this market? How is the interest rate then determined in this market?

    Do elaborate because it will help understand the process by which you have dismissed ABCT.

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  27. "So what is the "demand for capital" and the "supply of capital" as used by Hayek? Since Hayek is talking of the two "meeting", where do they meet? I mean, in which market do they meet?"

    The market for capital goods conceived as a loan market:

    http://socialdemocracy21stcentury.blogspot.com/2011/12/hayeks-natural-rate-on-capital-goods.html

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  28. "The market for capital goods conceived as a loan market:"

    So what comes under the market for capital goods? I'll give you options. Does land come in? Does labour come in? Do capital goods come in? Do non-durable capital goods come in? Do elaborate because that will help me understand if you (and by extension Sraffa) have understood Hayek right. As of now, it looks like you are clearly labouring under an erroneous interpretation of Hayek.

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  29. "the rate of interest would be determined so as to equalize the demand for and the supply of savings."

    What according to your interpretation does Hayek mean by savings? Net savings or gross savings?

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  30. "The market for capital goods conceived as a loan market:"

    More specifically, does the entire system of production come under the market for capital goods or is it just the loanable funds market where capitalists borrow money for investment?

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  31. If you're referring to the Austrian distinction between

    (1) "goods of the first order" (consumption goods), and

    (2) "higher order goods" (producer goods or capital goods), where second order goods are used directly to produce first-order goods, and then so on:

    first-order goods
    second-order goods (produce first order goods)
    third-order goods (produce second-order goods)
    etc.,

    I'm well aware of that.

    I am also aware of Hayek's definition in The Pure Theory of Capital:

    “The term capital itself, in so far as it is required to describe a particular party of the productive process, will accordingly be used here to designate the aggregate of those non-permanent resources which can be used only in this indirect manner to contribute to the permanent maintenance of the income at a particular level.”

    F. A. von Hayek, 2007. The Collected Works of F. A. Hayek. Volume 12. The Pure Theory of Capital (ed. L. H. White), University of Chicago Press, Chicago and London. p. 75.

    If you have any actual criticism to make, then make it.

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  32. "More specifically, does the entire system of production come under the market for capital goods or is it just the loanable funds market where capitalists borrow money for investment? "

    If you're asking how do firms/businesses buy factor inputs/capital goods:

    (1) using money from retained earnings
    (2) borrowing from banks or other non-bank financial institutions or other sources
    (3) issuing corporate bonds
    (4) new equity issues.

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