tag:blogger.com,1999:blog-6245381193993153721.post4398930095946872787..comments2024-03-28T17:08:15.784-07:00Comments on Social Democracy for the 21st Century: A Realist Alternative to the Modern Left: It’s 2011 and Still No HyperinflationLord Keyneshttp://www.blogger.com/profile/06556863604205200159noreply@blogger.comBlogger26125tag:blogger.com,1999:blog-6245381193993153721.post-88762003719893637772011-02-03T06:14:39.594-08:002011-02-03T06:14:39.594-08:00Prateek, it's same in Europe here, neoliberal ...Prateek, it's same in Europe here, neoliberal is always used pejoratively whenever it is publicly used, no politician ever wants to be called neoliberal. It's funny because "liberal" here means free marketers, but even they never call themselves "neoliberal", always just "liberal". And "keynesian" is pretty much neutral.Joanna Liberationhttps://www.blogger.com/profile/03683439858840562847noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-2099372007319408042011-01-16T03:10:52.360-08:002011-01-16T03:10:52.360-08:00What exactly is this word "neoliberal"? ...<i>What exactly is this word "neoliberal"? </i><br /><br />"Neoliberal" refers to the mainstream economic policies that were adopted by governments and international institutions (like the IMF, World Bank and World trade organization) after 1980.<br /><br />In terms of macroeocnomic theory, it refers to the "new consensus macroeconomics" - what you find taught in university economics departments - that emerged from Milton Friedman's monetarism, the New Classical economics, and the "New Keynesian" economics. It is essentially a resugence of neo-Walrasian neoclassical theory. Its policy mix is often described as "globalization" or the "Washington consensus."<br /><br />This displaced the neoclassical synthesis Keynesianism and (non-neoclassical) Post Keynesianism that was dominant from 1945 to about 1979.<br /><br />Classical Keynesianism came in 2 forms. <br /><br />I advocate the <i>non-neoclassical</i>, heterodox Post Keynesianism tradition.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-27035223509803769372011-01-16T02:51:56.965-08:002011-01-16T02:51:56.965-08:00I'll look these up, thanks.
What exactly is t...I'll look these up, thanks.<br /><br />What exactly is this word "neoliberal"? I keep seeing columnist Alexander Cockburn using it. Indian magazines also use it as some broad all-encompassing word for everything they dislike.<br /><br />I am sure there was once some specific concrete meaning of this word, but these days, it's like what George Orwell says - people want to use words instead of specific statements to avoid debate. Here in India, everything bad is neoliberal, so when a journalist calls something neoliberal (like government storage of food), it automatically becomes a bad thing, with no further elaboration needed.Prateek Sanjaynoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-76326785086110123052011-01-15T23:06:00.259-08:002011-01-15T23:06:00.259-08:00Franklin … Roosevelt of the United States was not ...<i>Franklin … Roosevelt of the United States was not a literate on finance, and without having known moral hazard and adverse selection, he approved guarantee of bank deposits. It led to $200 billion being used to bail out banks in the 1980s savings-and-loans crisis.</i><br /><br />Your knowledge of history is inaccurate. Roosevelt’s system of financial regulation was very effective. It was modified and attacked by New Classical and neoliberal ideologues after about 198o, and was made deeply dysfunctional.<br /><br />The main legislative acts were as follows:<br /><br />Depository Institutions Deregulation and <br />Monetary Control Act (1980)<br /><br />Garn–St. Germain Depository Institutions Act (1982)<br /><br />These were major contributors to the Savings and Loan crisis.<br /><br />Further neoliberal acts that attacked Roosevelt’s system:<br /><br />Riegle-Neal Interstate Banking and Branching Efficiency Act (1994)<br /><br />Financial Services Modernization Act of (1999), also called the Gramm-Leach-Bliley Act <br /><br />Commodity Futures Modernization Act (2000).<br /><br />The SEC’s Voluntary Regulation Regime for Investment Banks (2004)<br /><br />See here:<br /><br />http://socialdemocracy21stcentury.blogspot.com/2009/11/financial-deregulation-and-origin-of.htmlLord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-62671997014935962282011-01-15T23:01:06.501-08:002011-01-15T23:01:06.501-08:00You're changing the subject. Your original com...You're changing the subject. Your original comment:<br /><br /><i>The interventions of today's crises may not cause problems now. Or the next year. Or in ten years. But if they cause another kind of severe problem in 20 years? Current technocrats do not pay the price for it</i><br /><br />Your argument appears to be that the <i>possible</i> bad and unforeseen consequences of an action in 10 or 20 years time is an argument against such action.<br /><br />If so, that would apply to <i>both</i> private and public decisions. <br /><br />E.g., a businessman may make a decision now and sell his business in 3 or 4 years and no longer be the owner of it, when the "<i>possible</i> bad and unforeseen consequences of his action" have effect 20 years later.<br /><br />And what sort of morality blames people for the <i>unforeseen and possible</i> bad consequences of an action in 10 or 20 years time??<br /><br />E.g., if I see a drowning man, and save that man, are you telling me am I morally to blame if that man commits murder 20 years after I rescue him??<br /><br />Of course I am not. To believe so is utterly ridiculous. <br />So, too, a private or public decision made today that has an utterly <i>unforeseen</i> bad consequence 20 years from now is not the moral fault of the original decision maker, whether it is a private businessman or government planner. The most that can be done is to take action in future decisions, if at all possible, to prevent such unforeseen bad effects.<br /><br /><i>Private decision making is different from public decision making, is it not?</i><br /><br />The differences are exaggerated. Public decision making has multiple mechanisms that make people accountable: courts, police, voters, newspapers, international legal principles and organizations, and private watchdogs. <br /><br /><i>The former concerns costs of mistakes to be borne by just the decision-maker and his affiliates.</i><br /><br />Wrong. Bad decisions by private businesses can have bad effects on thousands or even millions of people. These are called <a href="http://en.wikipedia.org/wiki/Externality" rel="nofollow">“negative externalities.”</a><br /><br />Witness the effects of liar’s loans, NINJA loans and reckless lending by banks on the property bubble in the US from 2001–2007. The huge bubble caused by this private activity caused a major financial crisis and recession, throwing millions out of work. And you say that “private decision making” only results in costs to “just the decision-maker and his affiliates”?Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-47407546337946885612011-01-15T21:25:08.911-08:002011-01-15T21:25:08.911-08:00Private decision making is different from public d...Private decision making is different from public decision making, is it not?<br /><br />The former concerns costs of mistakes to be borne by just the decision-maker and his affiliates. The latter concerns a cost to be borne by everybody but the decision-maker.<br /><br />My own parents have been running a small business for a decade, and they have been trying to raise funds from venture capital to expand it. The principle of conservatism is always at work, where we overestimate future costs and underestimate future sales in our projections shown to them. The investors do not commit any capital for more than six months to two years, and then they see whether we achieved any milestone, and then they see whether they will invest more or not at all. These investments keep coming in small amounts. That's because everything beyond the short term is uncertain, but what is certain is that there will be costs. So yes, private businesses are wary about what may happen in even five or ten years, which is why they don't commit to that period, but a smaller one.<br /><br />It's not sophistry or posturing. Franklin Delanore Roosevelt of the United States was not a literate on finance, and without having known moral hazard and adverse selection, he approved guarantee of bank deposits. It led to $200 billion being used to bail out banks in the 1980s savings-and-loans crisis. Not to mention all the gradually increasing losses to be covered by government in the 1960s. Just because Roosevelt wasn't alive to see it does not mean he should not have considered he will cause such a huge loss to taxpayers from such an expensive guarantee.Prateek Sanjaynoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-42965539829794386412011-01-14T20:58:22.781-08:002011-01-14T20:58:22.781-08:00I have recently seen this excellent post from L. R...I have recently seen this excellent post from L. Randall Wray on the New Economic Perspectives blog:<br /><br /><a href="http://neweconomicperspectives.blogspot.com/2011/01/pressures-on-paradigm-fall-of-new.html" rel="nofollow">http://neweconomicperspectives.blogspot.com/2011/01/pressures-on-paradigm-fall-of-new.html</a>Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-4793040116038874292011-01-14T20:23:08.612-08:002011-01-14T20:23:08.612-08:00The interventions of today's crises may not ca...<i>The interventions of today's crises may not cause problems now. Or the next year. Or in ten years. But if they cause another kind of severe problem in 20 years? Current technocrats do not pay the price for it.</i><br /><br />You are saying that you cannot do anything now for fear that there might <i>possibly</i> be some bad, unforseen problem in 20 or 30 years time??<br /><br />If this argument were remotely serious, it would cause all people (in private or public decision making) to stop doing ANYTHING whatsoever, for fear of possible unforseen consequences. No private investment would be possible or any private business activity at all, under such an argument. And even doing nothing would have "possible unforseen consequences" too, so that would not really help.<br /><br />For god's sake, you might as well make that this argument against leaving your own home ever agin, for fear that walking down to the local shop might cause "possible but unforseen consequences" 20 or 30 years from now.<br /><br />This is a ridiculous piece of sophistry.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-83172578529514852892011-01-14T19:52:11.478-08:002011-01-14T19:52:11.478-08:00As I understand, you are speaking of the unknown u...As I understand, you are speaking of the unknown unknowns?<br /><br />It's sort of similar to what is explained in finance, under "Variance At Risk". Some people were once asked to make a statement saying "I am 95% certain the value of X will be between L1 and L2." In the experiment, the 5% margin of error came up 45% of the time. They were wrong half the time about what they were completely sure about, because there were some things they did not know they knew. Some things they knew they knew, some things they knew they did not know, and some things not even that. It's not possible to calculate probabilities.<br /><br />And because there are unknown unknowns, we all just work by casuitry and taking reckless leaps. Sure, I buy that fully. But that can backfire in the direction of the technocrats, right? Even they don't know what they don't know.<br /><br />A businessman only loses his own wallet. The technocrats could cause great damage to thousands of households from an unknown factor suddenly coming in.<br /><br />The interventions of today's crises may not cause problems now. Or the next year. Or in ten years. But if they cause another kind of severe problem in 20 years? Current technocrats do not pay the price for it.<br /><br />eg. One economist pointed out that guarantee of bank deposits by government in the 1930s led to huge losses by banks covered by taxpayers in the 1960s, because of gradually rising bad lending practices.Prateek Sanjaynoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-15921396473605229092011-01-14T19:14:35.256-08:002011-01-14T19:14:35.256-08:00"All in all, the burden of proof does not lie...<i>"All in all, the burden of proof does not lie upon "free markets" or those who propose to do nothing.</i><br /><br />This is a non sequitur. If you're assuming here that the Austrian idea of pattern/plan co-ordination is true, then you're just <a href="http://en.wikipedia.org/wiki/Begging_the_question" rel="nofollow">begging the question</a> too.<br /><br />Well-designed interventions reduce uncertainty. <br /><br />Here is a perfect example.<br />Take the financial crisis of 2008: government interventions that prevented the collapse of the financial system and a depression reduced uncertainty.<br /><br />What was the financial crises? A crisis of confidence in the banks and the presence of extreme uncertainty, in that banks doubted the solvency of other banks. That is why they stopped lending to each other, and the interbank lending markets froze up in late 2008.<br /><br />The interventions restored confidence and liquidity, and interbank lending resumed.<br /><br />Keynesian government interventions, by and large, serve to reduce uncertainty too, say, by preventing debt deflation, severe economic contraction, and mass unemployment.<br /><br /><i>In other words, how can we know that the interventions will have better outcomes? </i><br /><br />By using either: <br /><br />(1) inductive arguments in support of Keynesian/interventionist policies (if you think induction can be defended rationally), or <br /><br />(2) the Popperian hypothetico-deductive method, with falsification (not verification) of Keynesian hypotheses by empirical evidence.<br /><br />My philosophical defense of government intervention can be found here:<br /><br /><a href="http://socialdemocracy21stcentury.blogspot.com/2010/12/risk-and-uncertainty-in-post-keynesian.html" rel="nofollow">http://socialdemocracy21stcentury.blogspot.com/2010/12/risk-and-uncertainty-in-post-keynesian.html</a><br /><br />The Austrians believe in <i>epistemological</i> uncertainty, not ontological uncertainty (as in Post Keynesian economics).<br />The Austrians think there is some kind of market process analogous to evolution by natural selection that produces pattern/plan co-ordination in the free market (their version of the neoclassical concept of “equilibrium”).<br />But in the face of ontological uncertainty and subjective expectations that argument just doesn’t work.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-81094720420346853552011-01-14T12:53:18.593-08:002011-01-14T12:53:18.593-08:00"So, to answer you question, free markets are..."So, to answer you question, free markets are not self-correcting, because of<br /><br />(1) ontological uncertainty<br />(2) Say's law does not work, and<br />(3) financial markets are unstable."<br /><br />I was always expecting something like this from Lord Keynes, thanks for the summary!<br /><br />I may add that (3) is a consequence of (1). Also, as far as I'm concerned, Kirzner tries to defend the free market with his theory of "entrepreneurial discovery" (I think it's not really a discovery, but more like a creation), so the free market's stability heavily relies on the *correct* decisions made by the entrepreneurs, and that may not be a very sound reason. But as Prateek Sanjay said:<br /><br />"All in all, the burden of proof does not lie upon "free markets" or those who propose to do nothing. The burden of proof lies upon those who propose to do something, and their task is going to be harder than those who propose to do nothing."<br /><br />In other words, how can we know that the interventions will have better outcomes? I think that in order to solve that, we need some kind of objective parameter, and there isn't.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-11734488598335458822011-01-14T06:58:53.172-08:002011-01-14T06:58:53.172-08:00It amuses me that believers in the Austrian Apocal...It amuses me that believers in the Austrian Apocalypse (hyperinflation) tend to dismiss other people's versions of doomsday, like the global warming apocalypse, as Chicken Little stuff. "No, we want the Apocalypse to support our beliefs, dammit! not those other guys' crazy notions!"Mark Plushttps://www.blogger.com/profile/03859046131830902921noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-4471448953261309992011-01-14T01:03:43.166-08:002011-01-14T01:03:43.166-08:00To the anonymous poster, I would simply point out ...To the anonymous poster, I would simply point out that there is no such thing as a guarantee of self-correction. Nobody can predict the future. Moreover, self-correcting in what sense? Edmund Burke, a politician, once said there is no such thing as a high price of wheat or a low price of wheat, there is just the price of wheat. Whether you like it or not is irrelevant; but the price of wheat being the price of wheat is just the reality of the situation.<br /><br />Now, this is more of metaphysics than economics, but utilitarian calculus is just impossible. A policy decision always has tradeoffs, and there is no way for anybody to argue that after a given course of action, everybody as a whole will be better off. We don't even know what the consequences will be, and they could be dangerous.<br /><br />All in all, the burden of proof does not lie upon "free markets" or those who propose to do nothing. The burden of proof lies upon those who propose to do something, and their task is going to be harder than those who propose to do nothing. (That's not to say doing nothing is the best option, but who in this world knows?)Prateek Sanjaynoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-47783181321275880912011-01-13T19:27:00.216-08:002011-01-13T19:27:00.216-08:00I was just wondering if you could explain why free...<i>I was just wondering if you could explain why free markets are not self correcting.</i><br /><br />Well, the neoclassicals think markets will tend to equilibrium and full employment, with their neo-Walrasian fables. But their theory is quite different from Austrian economics.<br /><br />The Austrians reject the neoclassical concept of equilibrium, but then sneak it in through the backdoor in the form of their concept of plan/pattern co-ordination.<br /><br />On why they are wrong, try reading this:<br /><br />http://socialdemocracy21stcentury.blogspot.com/2010/12/different-types-of-austrian-economics.html<br /><br />The fundamental uncertainty we face about the future renders their ideas about pattern co-ordination absurd.<br /><br />A longer answer would stress that Say's law is also a complete myth:<br /><br />http://socialdemocracy21stcentury.blogspot.com/2010/10/myth-of-says-law.html<br /><br />Moreover, unregulated financial markets in capitalist economies are inherently unstable, as argued by Hyman Minsky.<br /><br />So, to answer you question, free markets are not self-correcting, because of <br /><br />(1) ontological uncertainty<br />(2) Say's law does not work, and <br />(3) financial markets are unstable.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-9817542256897327232011-01-13T09:44:30.241-08:002011-01-13T09:44:30.241-08:00Hi. I'm constantly arguing with Austrians (lib...Hi. I'm constantly arguing with Austrians (libertarians) online but there is little in the way of criticism. I was just wondering if you could explain why free markets are not self correcting. Austrian claim they are. How are they wrong? Also, why are free markets destabilizing in the first place? Thanks in advance and thank you for this wonderful blog.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-71975789810077215432011-01-13T08:12:38.625-08:002011-01-13T08:12:38.625-08:00Yes yes, I can not deny that I was ingrained with ...Yes yes, I can not deny that I was ingrained with biases when I was young. You see, I was only 14 when I read Henry Hazlitt's Economics In One Lesson. Only 14! It was also in my teenage years that I read books by Thomas Sowell. I thought all economists were free marketers, and I thought all academic debate was only between within the scope of that. Many economics books for non-economics specialists had that bent.<br /><br />(I started feeling something was wrong when I first read Sowell say, "I know people who are blind or retarded who nevertheless have jobs. So you can imagine how much sympathy I have for able-bodied men who are begging on the streets.")<br /><br />I try to come out of it, and I try to disregard what may have already been put into my mind and start over. These days, I try to see what other schools think. One has to hear firsthand what other groups think, because each group has many strawmen about what the other group thinks.<br /><br />I regard myself as a layman in economics, being mostly an enthusiast of finance (CAPM, Black-Scholes,.etc), and I leave it to those actually learned in economics to teach me. Blogs like these are an excellent learning opportunity.Prateek Sanjaynoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-45235826170575148042011-01-13T07:45:55.331-08:002011-01-13T07:45:55.331-08:00Correction:
Moreover, real wages fell ...Correction:<br /><br /><b>Moreover</b>, real wages fell ...Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-4979698355711299962011-01-13T07:42:42.471-08:002011-01-13T07:42:42.471-08:00but could the unemployment in Australia have been ...<i>but could the unemployment in Australia have been caused by the wages being higher than the marginal product of unemployed workers?</i><br /><br />Not likely. The power of unions in that period was weak, not strong; and the state responded with violence and repression to the strikes, smashing the labour movement:<br /><br /><a href="http://books.google.com.au/books?id=YQc5AAAAIAAJ&pg=PA249&dq=%22real+wages%22+1890s+australia+union&hl=en&ei=IBovTYOqMo-6ugOn9bysCQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CC4Q6AEwAA#v=onepage&q&f=false" rel="nofollow">Rodney Maddock and Ian W. McLean, <i>Australian economy in the long run</i>, CUP Archive, 1987, p. 249</a><br /><br />http://en.wikipedia.org/wiki/Australian_labour_movement#1890s_Great_Strikes<br /><br />Wages were high by international standards because of labour <i>scarcity</i>, not union power.<br /><br />More, real wages fell in the 1890s - the labour unrest by unions were a <i>response</i> to their falling wages.<br /><br />There seems to be an Austrian, neoclassical or free market bent to your comments.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-1818002679992360952011-01-13T07:25:12.660-08:002011-01-13T07:25:12.660-08:00Besides that, I see that (apart from the Austrians...<i>Besides that, I see that (apart from the Austrians) nobody cares about such things as the "structure of production" and the "lengthening of production". </i><br /><br />Austrian business cycle theory (ABCT) is flawed.<br />There is no convincing reason to think ABCT explains the business cycle.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-3175579365180632002011-01-13T07:02:23.852-08:002011-01-13T07:02:23.852-08:00I think that, in most cases, the unique difference...I think that, in most cases, the unique difference between a liquidationist and an anti-liquidationist are their political beliefs.<br /><br />Besides that, I see that (apart from the Austrians) nobody cares about such things as the "structure of production" and the "lengthening of production". This is what they mean when they say they want a "sound recovery".Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-30034933832446332782011-01-13T06:57:09.697-08:002011-01-13T06:57:09.697-08:00I feel guilty for making this cheap argument, sinc...I feel guilty for making this cheap argument, since even I myself don't believe it much, but could the unemployment in Australia have been caused by the wages being higher than the marginal product of unemployed workers? The Wiki article mentions powerful trade unions in Australia, and...well, I don't need to go further.<br /><br />It's been the opinion of one or two economists that America's Great Depression was partly aggravated by labour unions refusing to allow wages to fall below marginal product, thus forcing businesses to hire fewer people. It's not a very convincing argument, but I wonder what you think about it.Prateek Sanjaynoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-59768140798362046192011-01-13T05:19:26.345-08:002011-01-13T05:19:26.345-08:00Some information on Australia's 1890s depressi...Some information on Australia's 1890s depression:<br /><br />Australia had no central bank and a “free” banking system in the 19th century. <br />How did that system end? There was a massive property and stock market bubble in the 1880s which collapsed in 1890/91. The depression that followed went on for years and was probably worse than Australia’s Great Depression in the 1930s.<br /><br />Unfortunately, there was no “evil” central bank or regulated banks to blame for this. It was entirely a free market failure.<br /><br />The depression lasted from 1892-1894, but involuntary unemployment and stagnation continued until 1899. <br /><br />Real GDP fell by around 10% in 1892, and 7% in 1893. There was sustained deflation of more than 20% from 1891 to 1897 in retail prices. <br /><br />See:<br /><br />Charles R. Hickson and John D. Turner, 2002, “Free Banking Gone Awry: The Australian<br />Banking Crisis of 1893,” Financial History Review 9: 147–167.<br /><br />http://en.wikipedia.org/wiki/History_of_Australia_%281851%E2%80%931900%29#Booms.2C_depressions_and_trade_unionsLord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-57806143880565688022011-01-13T04:58:54.625-08:002011-01-13T04:58:54.625-08:00But is it a never ending spiral? Is there a ground...<i>But is it a never ending spiral? Is there a ground till which it can touch? </i><br /><br />Of course. History shows the worst depressions end in mass unemployment (20-30%) and a 25% to 30% collapse in GDP. Horrific.<br /><br /><i>Where Fisher says that it is cruel to allow almost endless bankruptcies to go on until things get better, can one also not consider that bankruptcies keep happening in times of boom and that they are necessary for further flowering of business?</i><br /><br />Bankruptcies in normal times are not a problem. Mass bankruptcies during a depression are mostly unnecessary, and a ridiculous destruction of otherwise productive capital. <br /><br /><br /><i>He says the natural end to a depression comes after nearly universal bankruptcy and unemployment - situation difficult to fathom since I have never heard of it happen in practice.</i><br /><br />Try looking at Australia’s depression in the 1890s. It is a very good example of what Fisher is talking about.<br />Fisher’s actual words, by the way:<br /><br /><i>“Unless some counteracting cause comes along to prevent the fall in the price level, such a depression as that of 1929-33 (namely when the more the debtors pay the more they owe) tends to continue, going deeper, in a vicious spiral, for many years. There is then no tendency of the boat to stop tipping until it has capsized. Ultimately, of course, but only after almost universal bankruptcy, the indebtedness must cease to grow greater and begin to grow less. Then comes recovery and a tendency for a new boom-depression sequence. This is the so-called “natural” way out of a depression, via needless and cruel bankruptcy, unemployment, and starvation.”</i><br /><br />The words “after almost universal bankruptcy” are of course a piece of rhetoric, perhaps a bit over the top. Can you not see that? <br />What he means is: after “a very large and devastating number of bankruptcies.”<br />He is completely correct, too.<br /><br /><i>Especially when bad loans were being made due to, as Fisher says, lure of big gains and reckless promotions? </i><br /><br />Non-performing loans and bad assets can be cleared without causing a depression (e.g., by asset management companies buying bad mortgages or assets, and also by writing off and restructuring debt). To stop poor lending practises in the first place you need effective financial regulation. We had such a system before the 1980s. Then the neoliberals and New Classicals dismantled it, and set up their own severely flawed system of regulation.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-6939614241980253342011-01-13T03:13:10.207-08:002011-01-13T03:13:10.207-08:00Ah, I see, it's a spiral. But is it a never en...Ah, I see, it's a spiral. But is it a never ending spiral? Is there a ground till which it can touch? <br /><br />I am reading Irving Fisher's study at http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf, and it explains how price deflation can cause debt deflation and debt deflation can cause price deflation, and how a business cycle is not just one cycle but various cycles and various factors acting together, independently or not. Very revealing.<br /><br />He says the natural end to a depression comes after nearly universal bankruptcy and unemployment - situation difficult to fathom since I have never heard of it happen in practice. It contradicts the conventional wisdom I acquired from reading Joseph Schumpeter's idea of creative destruction, who says that failure is a necessary part of business (UK just had several newspapers shut doors, even as nine others compete aggressively with even more circulation). Where Fisher says that it is cruel to allow almost endless bankruptcies to go on until things get better, can one also not consider that bankruptcies keep happening in times of boom and that they are necessary for further flowering of business?<br /><br />If endless failure, loss, and bankruptcy has allowed better investment and better quality products to end consumers in the history of business, why can't that apply to depressions?<br /><br />And when debt becomes more expensive due to deflation, does that not take care of moral hazard and adverse selection problems?<br /><br />Especially when bad loans were being made due to, as Fisher says, lure of big gains and reckless promotions?Prateek Sanjaynoreply@blogger.comtag:blogger.com,1999:blog-6245381193993153721.post-18844740397096981142011-01-13T01:56:27.364-08:002011-01-13T01:56:27.364-08:00Why exactly is debt deflation a problem, if you co...<i>Why exactly is debt deflation a problem, if you could elaborate on that?</i><br /><br />Of course, deflation itself is not always associated with recession or depression. <br /><br />But, under certain circumstances, debt deflation, after the collapse of a huge asset bubble in an economy saturated with excessive private debt, is the fundamental cause of depressions. In economies where aggregate demand has been pumped up by private debt, deleveraging and the fall in debt causes recession, and, without intervention, will lead to a vicious debt deflationary spiral – especially if the financial system is allowed to collapse.<br />It is a process like this:<br /><br />(1) High debt levels and asset bubble before deflation<br />(2) collapse of asset bubble<br />(3) A recession (for example, caused in part by the collapse of a bubble)<br />(4) Significant falls in aggregate demand and distress selling of assets (e.g., houses)<br />(5) Deleveraging <br />(6) Long-term, unexpected and severe deflation in goods produced in an economy<br />(7) Significant falls in profits, business failures, difficulty in servicing debt<br />(8) Higher unemployment, more business failures, cuts to wages and deflation<br />(9) Further collapses in demand <br />(10) Then back to (7), (8), (9) etc above. <br /><br />I recommend Irving Fisher’s classic study:<br /><br />Fisher, I. 1933. “The Debt-Deflation Theory of Great Depressions,” Econometrica 1.4: 337–357.<br /><br />Fisher’s insights have been developed by Post Keynesian economists, the most important of whom was Hyman Minsky:<br /><br />Minsky, H.P. 1982. <i>Can “It” Happen Again?</i>, M.E. Sharpe, Armonk, NY.<br /><br />Minsky, H.P. 1986. <i>Stabilizing an Unstable Economy</i>, Yale University Press, New Haven.Lord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.com