In the late 20th century, Austrian economics was troubled by a controversy between Misesians and Hayekians.
On the one hand, Misesians like Joseph T. Salerno (1990, 1991, 1993, and 1994) and Murray Rothbard (1991, 1992, and 1994; see also Herbener 1991) charged Hayek and his followers (like Israel M. Kirzner) with deviating from the “pure” Misesian orthodoxy on the nature of coordination in market systems.
Two of major antagonists – Rothbard and Kirzner – were both students of Mises.
In short, the Misesians charged that there was serious chasm between Mises’s and Hayek’s understanding of markets. It is a surprisingly interesting debate, and elucidates some important points about modern Austrian economics.
First, the nasty nature of the debate drove an exasperated Israel M. Kirzner to this astonishing statement:
“Salerno (quite unsuccessfully, it must surely appear) seeks to refute Leland Yeager’s definitive paper (Yeager, 1994) demonstrating that Mises’s thesis does, after all, require that we attribute to Mises at least implicit recognition of Hayek’s “knowledge problem,” Salerno sums up as follows: ‘Thus market oriented PC [i.e., perfect competition] theorists, such as Hayek and Yeager, and neoclassical socialist GE [i.e., general equilibrium] theorists are brothers under the skin’” (Kirzner 2000: 157). ….So on the face of it, this must have been a serious dispute!
“The biting sarcasm employed in this assertion is but a relatively mild example of the rhetorical excesses appallingly to be found in the ‘two paradigm’ literature against such writers as Hayek, Lachmann, and others charged with having diverged from the asserted ‘Misesian paradigm.’ I take this opportunity strongly to protest the use of verbal terrorism in Austrian economics. Even if (which is far from being the case) the asserted criticisms of Hayek, Lachmann, and others were valid, there would be absolutely no justification for the manner in which these great economists have been treated in the literature under discussion. The near-demonization of Hayek and Lachmann for alleged deviations from an asserted Misesian orthodoxy is a most distressing phenomenon. If Austrian economists (and the Review of Austrian Economics) are to be able to work constructively in the rough and tumble of the intellectual market place, anything approaching rhetorical brawling must once and for all be rejected.” (Kirzner 2000: 162–163, n. 2).
What was the dispute about? Let us review it below.
I. Misesian Socialist Economic Calculation versus the Hayekian Knowledge Problem
First, the dispute concerns the differences between Mises’s original “socialist calculation problem” and Hayek’s “knowledge problem.” Kirzner argues that Salerno and Rothbard came to the “unwarranted conclusion … that the Misesian calculation problem has nothing whatever to do with Hayek’s knowledge problem” (Kirzner 2000: 157).
In contrast, Salerno argues that Hayek’s “knowledge problem” is different from Mises’s original “socialist economic calculation problem,” and even Kirzner concedes that Mises did not formulate the “calculation problem” in terms of knowledge (Kirzner 2000: 158).
And, indeed, according to Rothbard, Hayek misunderstood Mises’s socialist calculation problem:
“It is now universally acknowledged that Ludwig von Mises, allegedly the loser in the famous socialist calculation debate that he launched in 1920, was really right: clearly, socialism cannot calculate, it cannot run a complex modern economic system. But it has only recently become clear, through the insights of Professor Salerno, precisely why Mises was right, and also how the Misesian message was systematically distorted, from the 1930s until recent years, by F.A. Hayek and his followers. For Hayek and the Hayekians, obsessed with the alleged ‘problem of knowledge,’ have systematically misinterpreted Mises as maintaining solely that the Socialist Planning Board, facing the uncertainty of a dynamic economy, lacks the knowledge enabling it to plan the production and allocate the resources of a socialist economy. In contrast, the market economy, through its price signals, conveys that needed knowledge from and to the various participants in the market economy.The difference between Mises’s and Hayek’s idea on the price system is summarised by Salerno:
Mises, while not disputing the importance of knowledge and its dissemination through the price system, was, however, arguing a totally different point. From 1920 on, he reasoned as follows: assume the best for the Social Planning Board. Assume that, by some magical process, it has been able to discover and know absolutely all the value-scales of consumers, all technological methods, and compile an inventory of all resources. Suppose, then, Mises says, we grant total knowledge of all these data to the Socialist Planning Board. It still will not be able to calculate, still will not be able to figure out costs and prices, particularly of land and capital goods, and therefore will not be able to allocate resources rationally. The real problem of the Planning Board, then, the major thing denied that Board by absence of a market, is not knowledge but economic calculation.
Thus, to Hayek, if the Planning Board could by some magic know, as people come to know through the market, consumer values, technologies, and resources, it could rationally plan and allocate resources fully as well as the market. As usual for Hayek and the Hayekians, the argument for the free market and against statism rests only on an argument from ignorance. But to Mises, the problem for the Planning Board is not knowledge but calculability. As Salerno puts it, the knowledge conveyed by present (or ‘immediate past’) prices rests on values, techniques, and resources of the immediate past. But what acting man is interested in, especially the entrepreneur in committing resources into production and future sale, is future prices and future costs. The entrepreneur, who commits present resources, does so because he appraises—anticipates and estimates future prices—and allocates resources accordingly. It is, then, the appraising entrepreneur, driven by his quest for profits and for avoidance of losses, who can calculate and appraise because a genuine price system exists in the means of production, in land and capital goods, that is, a system of exchanges of privately-owned capital resources. Only such a pricing system allows for calculation.
Salerno points out that for Mises, knowledge and appraisal on the market are complementary, and have very different natures and functions. Knowledge is an individual process, by which each individual entrepreneur learns as much as he can about the largely qualitative nature of the market he faces, the values, products, techniques, demands, configurations of the market, and so on. This process necessarily goes on only in the minds of each individual. On the other hand, the prices provided by the market, especially the prices of means of production, are a social process, available to all participants, by which the entrepreneur is able to appraise and estimate future costs and prices. In the market economy, qualitative knowledge can be transmuted, by the free price system, into rational economic calculation of quantitative prices and costs, thus enabling entrepreneurial action on the market.
As Salerno notes: ‘competition therefore acquires the characteristic of a quintessentially social process, not because its operation presupposes knowledge discovery [as with Hayek-Kirzner], which is inescapably an individual function, but because, in the absence of competitively determined money prices for the factors of production, possession of literally all the knowledge in the world would not enable an individual to allocate productive resources, economically within the social division of labor.’
In short, the entire Hayekian emphasis on ignorance and ‘knowledge’ is misplaced and misconceived.” (Rothbard 1992: 19–21).
“The price system is not—and praxeologically cannot be—a mechanism for economizing and communicating the knowledge relevant to production plans. [which is position of Hayek – LK] The realized prices of history are an accessory of appraisement, the mental operation in which the faculty of understanding is used to assess the quantitative structure of price relationships which corresponds to an anticipated constellation of the economic data. Nor are anticipated future prices tools of knowledge; they are instruments of economic calculation. And economic calculation itself is not the means of acquiring knowledge, but the very prerequisite of rational action within the setting of the social division of labor. It provides individuals, whatever their endowment of knowledge, the indispensable tool for attaining a mental grasp and comparison of the means and ends of social action.” (Salerno 1990: 44).So according to the Misesians both a market economy and a socialist planned economy are subject to the “knowledge problem.”
“There is a significant implication of our interpretation of Mises’s critique of socialism. Although the market economy has perfectly solved the problem of economic calculation—its very existence attests to the veracity of this conclusion—praxeologically, at least, it is on all fours with socialism with regard to the knowledge problem. For the imperfection of knowledge deriving from uncertainty of the future is a category of all human action, which cannot be overcome by recourse to the market price system, entrepreneurial alertness, the competitive discovery process, and so on.” (Salerno 1990: 48).
According to the Misesians, the primary reason why a socialist, planned economy cannot work is (allegedly) that it lacks money prices for factors of production.
II. Hayekian Prices as Signals that Solve the “Knowledge Problem”
Secondly, we have the role of prices as signals for communicating knowledge in Hayek’s thought.
Salerno argues that Kirzner’s entrepreneurial discovery process is derived from Hayek’s view of prices as communicating knowledge to ignorant market participants so that their ex ante plans for production and consumption are coordinated (Salerno 1993: 126), even though Kirzner himself recognises that exogenous change thwarts such a long-run equilibrating tendency and that the market is “never in or near a state of equilibrium” (Salerno 1993: 128).
But Hayek apparently held a different view. Even when Hayek abandoned his belief in the real existence of an equilibrium state and the belief in strict ex ante plan coordination, he still required a real world condition of close correspondence or proximity to such a state (Salerno 1993: 127–128).
Salerno contends that:
“as Hayek points out, in order for prices to fulfill their knowledge-disseminating and plan-coordinating functions, the economy must subsist in a state of what I will call ‘proximal equilibrium,’ wherein realized prices are always fairly accurate indicators of future prices.” (Salerno 1993: 128).Thus, in Hayek’s view, there is a real-world tendency for “market prices to conform to their equilibrium levels” (Salerno 1993: 128).
Rothbard points to the distinction between Mises’s concept of equilibrium and that of Hayek:
“The Misesian concept of equilibrium is as a remote goal, toward which economic processes are tending, but which they would only reach if divine intervention froze for many years all the relevant data of the economy: values, knowledge, technology, resources, expectations. But for Hayek ever since the 1920s (and for Kirzner following him), general equilibrium, while not actually extant, is right around the corner: in what Salerno calls ‘near equilibrium.’ It is only in near, or virtual, equilibrium, whether that of Hayek, Kirzner, or Schumpeter, that entrepreneurial creativity would be at all disruptive or disequilibrating; in a Misesian market economy, on the other hand, creativity would simply and smoothly change the remote equilibrium toward which the economy will be tending.” (Rothbard 1994: 560).In a world where the economy is in a state close to equilibrium and prices are normally near their long-run equilibrium values, expectations become “a trivial byproduct of the knowledge culled from past prices” (Salerno 2010: 232). That is to say, Hayekian theory has an utterly unrealistic view of the economy and of expectations. And this is according to Misesians, not non-Austrian critics of Hayek.
On the other side, Kirzner agreed that, for “Mises (as Salerno and Rothbard correctly point out) prices are not primarily signals economizing on the cost of communicating information” (Kirzner 2000: 159), but nevertheless Kirzner maintained the fundamental compatibility of Mises’s and Hayek’s viewpoints.
So what are the conclusions from all this? They are as follows:
(1) Austrians are deeply divided on the significance and even truth of Hayek’s “knowledge problem”;But the Misesians, even with their criticism, have no better theory.
(2) the Austrians cannot get their story straight on what it is that makes rational economic calculation in a planned economy impossible;
(3) there is some merit to the Misesian critique of Hayek, in that the Hayekian idea of an economy normally in “near equilibrium” or “proximal equilibrium” is wholly unrealistic and the role of prices in Hayek’s thought is erroneous.
Both Misesians and Hayekians live in a fantasy world, with respect to the price system. Both are dependent on the notion of universally flexible prices created by the dynamics of supply and demand curves, tending towards their market-clearing values. Both have failed to grasp the widespread reality and significance of fixprice markets and price administration. The real-world and widespread existence of fixprice markets “necessarily means that administered prices are not market-clearing prices and nor do they vary with each change in sales (or shift in the virtually non-existent market or enterprises ‘demand curve’)” (Lee 1994: 320, n. 18). Hence there is no reason why a market economy in general (outside of its flexprice markets) tends to equate supply with demand by means of flexible prices, and “in actual adjustment of supply and demand, prices play only a very subordinate role, if any [sc. role]” (Kaldor 1985: 25; my emphasis).
Hayek’s “knowledge problem” and his attempted solution are mostly a pseudo-problem and pseudo-answer, because Hayek was assuming a world in “proximal equilibrium,” without genuine uncertainty and without a proper role for diverging and subjective expectations.
To the extent that markets have coordination (as opposed to fictitious tendencies to long-run equilibrium states), they do so largely by “quantity signals,” that is, demand, sales volume, and signals from changes in inventories/stocks.
Moreover, profits are actively created and managed by means of cost of production plus profit markup pricing. The profit markup is often stable, which leads to some degree of stability of profits (Gu and Lee 2012: 461). Stable profits in turn allow stable margins for internal financing of investment (Melmiès 2012). The advantages of price setting to businesses include the reduction of the occurrence of price wars, goodwill relationships with customers, and stable selling costs (Gu and Lee 2012: 461). Empirical studies show that, outside given limits, businesses find that variations in their set prices produce no significant change in sales volume, and, above all, when prices are cut, this does not necessarily lead to changes in short term market sales (Gu and Lee 2012: 462). And experiments with prices adjusted downwards to a significant extent show that this causes a severe blow to profits, so severe indeed that enterprises quickly abandon all such experiments (Gu and Lee 2012: 461).
This is the reality of prices in a capitalist economy.
There is a further criticism of Hayek’s knowledge problem that can be made, according to Michael Emmett Brady.
Brady argues that Hayek’s concept of uncertainty and the role of knowledge are quite distinct from that of fundamental uncertainty as defined by Frank Knight and Keynes:
“Uncertainty for Hayek means that each individual decision maker only has a small piece of the puzzle. However, as a whole, the aggregated set of all decision makers have a complete set of all relevant knowledge. There are no pieces missing, lacking or unavailable from the puzzle. Market prices organize and synthesize the aggregate amount of knowledge so that market price signals, understood only by savvy, knowledgeable entrepreneurs, [eliminate] … any uncertainty.” (p. 14)BIBLIOGRAPHY
“Keynes, Knight and Schumpeter deny Hayek’s claim that the market generates price vectors which concentrate the knowledge so that savvy, knowledgeable entrepreneurs can act on this information and solve the problem of uncertainty. Uncertainty means vital important information is missing. Pieces from the puzzle are missing and will not turn up in the future” (p. 14).
“Hayek could not accept the standard concept of uncertainty as defined by Keynes, Knight and Schumpeter because it would then be impossible for market prices to concentrate knowledge that did not exist. In conclusion, nowhere in any of Hayek’s three articles on Knowledge in Economics in 1937, 1945 and 1947 does Hayek deal with the standard view that uncertainty means knowledge that is not there.” (p. 15).
Brady, Michael Emmett. “Comparing J.M. Keynes’s and F. von Hayek’s Differing Definitions of Uncertainty as it Relates to Knowledge,” January 30, 2011.
Gu, G. C. and F. S. Lee. 2012. “Prices and Pricing,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 456–463.
Kaldor, Nicholas. 1985. Economics Without Equilibrium. M.E. Sharpe, Armonk, N.Y.
Kirzner, Israel M. 2000. The Driving Force of the Market: Essays in Austrian Economics. Routledge, London and New York.
Hayek, F. A. von. 1945. “The Use of Knowledge in Society,” American Economic Review 35.4: 519–530.
Herbener, Jeffrey M. 1991. “Ludwig von Mises and the Austrian School of Economics,” Review of Austrian Economics 5.2: 33–50.
Lee, F. S. 1994. “From Post Keynesian to Historical Price Theory, Part 1: Facts, Theory and Empirically Grounded Pricing Model,” Review of Political Economy 6.3: 303–336.
Melmiès, J. 2012. “Price Rigidity,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics (2nd edn.). Edward Elgar, Cheltenham. 452–456.
Rothbard, Murray N. 1991. “The End of Socialism and the Calculation Debate Revisited,” Review of Austrian Economics 5.2: 51–76.
Rothbard, Murray N. 1992. “The Present State of Austrian Economics,” Working Paper from the Ludwig von Mises Institute, November.
Rothbard, Murray N. 1994. Review of Bruce Caldwell and Stephan Boehm (eds.), Austrian Economics: Tensions and New Directions, Southern Economic Journal 61.2: 559–560.
Salerno, Joseph T. 1990. “Ludwig von Mises as Social Rationalist,” Review of Austrian Economics 4: 26–54.
Salerno, Joseph T. 1991. “Commentary: The Concept of Coordination in Austrian Macroeconomics,” in Richard M. Ebeling (ed.), Austrian Economics, Perspectives on the Past and Prospects for the Future. Hillsdale College Press, Hillsdale, MI.
Salerno, Joseph T. 1993. “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6.2: 113–146.
Salerno, Joseph T. 1994. “Reply to Leland B. Yeager on ‘Mises and Hayek on Calculation and Knowledge,’” Review of Austrian Economics 7.2: 111–125.
Salerno, Joseph T. 2010. Money, Sound and Unsound. Ludwig von Mises Institute, Auburn, Ala.
I think you do a reasonably good job of describing a real area of debate within the Austrian world - I'm sure you would agree that such debate is healthy in economics and is key for economic thought to evolve.ReplyDelete
I think you go astray when you add your own editorial comment:
"Both Misesians and Hayekians live in a fantasy world, with respect to the price system. Both are dependent on the notion of universally flexible prices created by the dynamics of supply and demand curves"
This is clearly incorrect - one of the key aspect of Austrian theory is its business cycle theory. This theory is in essence one that assumes that prices are NOT "universally flexible" - or else they would immediately adjust to changes in the money supply and there would be no boom/bust.
I'm a little surprised you don't already know this as you have posted frequently on ABCT.
I do not deny that inflexible prices are an element in the Hayekian ABCT.Delete
But ABCT is about physically unsustainable production projects. There is a recession because capital is destroyed and labour needs to shift to new production.
According to the theory, even with flexible prices, capital heterogeneity -- the non-malleable nature of capital -- means that unemployment is inevitable due to idle capital projects and folding up of unsustainable production projects.
In the standard version of ABCT the only reason there is a physically unsustainable structure of production is because inflexible pricing lead businesses to invest in the wrong areas.Delete
With totally flexible prices (say all goods were sold by auction every day and all participants had perfect knowledge) then there would be no "unsustainable production projects" as a result of unexpected increases in the money supply.
Rob Rawlings, once the typical Hayekian Austrian business cycle is underway and about to collapse, Hayek was quite clear that non-homogenous capital is the reason why there must be unemployment.Delete
See H. Klausinger (ed.), 2013, The Collected Works of F. A. Hayek. Volume 7. Business Cycles. Part I. Routledge, p. 31:
This whole debate seems kinda pointless in the end, doesn't it? At best, the winner gets to refute Barone's little thought experiment. Not many cared a century ago, but it baffles my mind that somebody still cares about it now.ReplyDelete
Battling post-Keynsisnism is a thankless and probably pointless task - but someone's got to do it.Delete
I could imagine a lot of ways one could poke at the internal mechanics of Post-Keynesian models and theories, but the whole Socialist Calculation Debate? Come on, it is totally irrelevant to pretty much anybody.Delete
Imagine that, for example, Mises won and it is impossible for the central planner to plan production in the absence of prices. What part of Post-Keynesian theory collapses because of this very important result?
OK - here is what ABCT claims happens:ReplyDelete
1. The money supply expands and disrupts interest rates and prices
2. This causes the capital structure to become distorted and the boom to be unsustainable
3. When the bust comes (due to the unsustainable nature of the boom) the fact that capital is non-homogeneous means that there will be unemployment while things adjust - and this will be unavoidable even if prices are flexible at this point.
So steps 1 and 2 would not happen with flexible prices. Steps 3 does not need flexible prices but obviously you don't get to step 3 without step 1 an step 2.
The boom is dependent upon sticky prices - the bust is not. I don't see anything in your link that contradicts this view.
(1) We are now talking at cross purposes. You have conceded what I just said @March 22, 2013 at 10:39 AM.Delete
And, yes, if wages and prices were perfectly flexible, then it is generally admitted Mises and Hayek have difficulty explaining how their malinvestment happens.
I think Hicks made the same point (J. Hicks, “The Hayek Story”, in J., Hicks (ed), Critical Essays in Monetary Theory. Clarendon Press, Oxford, 1967, 203-215, at 207-207) and most recently in Arash Molavi Vasséi's “Ludwig von Mises's Business Cycle Theory: Static Tools for Dynamic Analysis,” in Harald Hagemann, Tamotsu Nishizawa, Yukihiro Ikeda (eds.). Austrian Economics in Transition: From Carl Menger to Friedrich Hayek. Palgrave Macmillan, Basingstoke, 2010, 196–217, at p. 213, much the same point is made:
In this light, Mises's business cycle theory depends on a price-lag, on nominal wages increasing while the prices of final outputs remain temporarily constant (the boom).
(2) But this does not invalidate what I am saying above.
Mises and Hayek are positing an unrealistic tendency towards flexible, market clearing prices, not perfect flexibility.
What you said @March 22, 2013 at 10:39 AM is true but (I think) somewhat misleading without additional clarification about the role of lags in the price adjustment process in earlier stages of ABCT.Delete
To cut to the chase: Clearly the fundamental point of disagreement is about whether any "tendency towards market clearing prices" exists or not. What I am trying to establish is that short-term price stickiness (totally consistent with what you call fixprice, and where quantity signals as well as price signals drive the market) are not at all a refutation of the existence of such tendencies and are in fact implicit in Austrian theory as can be demonstrated by looking at ABCT.
No, the Austrian theory is:Delete
demand changes > flexible prices > convergence to market clearing value (little or no change in employment).
demand changes > quantity changes (prices generally unchanged and employment and output changed).
The reality is confirmation of the Keynesian view of markets and confirmation that Keynesian policies work.
Aggregate demand changes induce more investment employment and output.
LK if you are interested of the
of the Stockholm School and
it´s development at the time in early mid thirties
from a Wicksellian that will say almost same roots as Austrian school but that take
very different direction.And if you not did it
allready maybee it would be of interest for you to
to check out Erik Lundberg´s 1937 Studies in the Theory of Economic Expansiones and
Erik Lindahl 1939: Studies in the Theory of Money and Capital
Lundberg's thesis is in many respects a comparative study of the economic approach, where older economic theory, based on Böhm-Bawerk and and
Wicksell,is broken against at the time, contemporary theory, presented by the Stockholm School economists and Keynes' General
Theory as well as A Treatise on Money
Erik Lindahl 1939: Studies in the Theory of Money and Capital is also based on a Wicksellian ground but is leading in even
a more Keynesian-inspired analysis
It should be mentioned that both Lundberg and Lindahl
later came to adapt a more pure Keynsian approach
Have a nice weekend! Cheers!
Do Austrians think :Delete
demand changes > flexible prices > convergence to market clearing value (little or no change in employment)?
They clearly think there is a tendency for this happen but recognize the existence of frictions that stop it happen instantly - as your post shows there is debate in the Austrian world as to the implications of this.
If the demand change is in aggregate demand rather than relative demand then most (but not all) Austrian recognize the importance of avoiding monetary disequilibrium as a consequence - if this fails to happen then these Austrians recognize that employment levels will be affected.
So your simple flow is incorrect in how most Austrians see the process as related to aggregate demand.
(BTW: You describe a situation of price stickiness and then declare that this is "confirmation of the Keynesian view of markets and confirmation that Keynesian policies work.". I'm sure you are aware that is very bad logic.)
You describe a situation of price stickiness and then declare that this is "confirmation of the Keynesian view of markets and confirmation that Keynesian policies work.". I'm sure you are aware that is very bad logic."Delete
That is not what I said:
demand changes > quantity changes (prices generally unchanged and employment and output changed).
The reality is confirmation of the Keynesian view of markets and confirmation that Keynesian policies work.
That is logical.
Even if one accepts thatDelete
"demand changes > quantity changes (prices generally unchanged and employment and output changed)"
Is a true statement - how is that confirmation that Keynesian policies work ?
It is a Keynesian proposition:Delete
(1) Aggregate demand drives employment and output.
Empirical investigation of the real world shows a vast number of markets are flexprice markets with price administration.
Demand changes do not normally change prices. Demand changes cause changes in production/output levels and employment.
Therefore an increase in general demand for products (sales volume, orders, etc.) will lead to greater employment and output. Proposition (1) above now has support with empirical evidence.
Real world examples of the process can be seen all the time. E.g., the US was hit by recession from November 1948 to October 1949. The US government stepped in after 1948 to provide macroeconomic stability.
Congress pushed through a tax cut in 1948 whose effect was felt in 1949 with shortfall in revenue funded by deficits -- classical Keynesian fiscal stimulus. Truman’s budget surplus of 4.6% of GDP in fiscal year 1948 fell to 0.2% in fiscal year 1949, as spending went from $29.8 billion in 1948 to $38.8 billion in 1949, as automatic stabilizers kicked in. In fiscal year 1950 (July 1, 1949 to June 30 1950), the budget went into an actual deficit of 1.1% of GDP.
With this fiscal expansion, Keynesian theory says that real output and employment should have increased after the GDP contraction and rise in unemployment in 1949.
Both real output and employment data confirm that is exactly what happened:
Real US Per Capita GDP 1948-1953
(in millions of 1990 international Geary-Khamis dollars)
Year | GDP | Growth rate
1948 | 9065 | 2.01%
1949 | 8944 | -1.33%
1950 | 9561 | 6.89%
1951 | 10116 | 5.80%
1952 | 10316 | 1.97%
1953 | 10613 | 2.87%
It is my contention that had Truman used monetary rather than fiscal policy to expand AD in 1949 the results would have been very similar. Indeed the cause of that recession was probably too tight prior monetary policy so the whole,thing could have been avoided with a correct understanding of the centrality of maintaining monetary equilibrium by policy makers at the time.ReplyDelete
Keynesianism often gives the illusion of working because a side-effect of its AD-stabilizing policies is to keep the economy close to equilibrium in the short term. However because it focuses on real variables like unemployment or output rather than nominal variables like NGDP , and because it disrupts the economy by diverting resources into government controlled projects financed by fiscal-spending it is unable to keep the economy in equilibrium beyond the short-run.ReplyDelete
This is precisely what we saw in the 1960s where Keynsian policies led directly to economic stagnation and inflation.
(1) LOL.. the stimulus in 1949 was not via public works or "government controlled projects financed by fiscal-spending". It was via a tax cut covered by deficits.Delete
Your analysis is absurd.
(2) There was no "economic stagnation" in the 1960s. It had some of best real GDP and real per capita GDP growth ever:
Year | GNP* | Growth Rate
* Billions of Chained 2005 Dollars
1960 | 2848.20 | 2.52%
1961 | 2916.10 | 2.38%
1962 | 3094.10 | 6.10%
1963 | 3230.10 | 4.39%
1964 | 3417.50 | 5.80%
1965 | 3636.40 | 6.40%
1966 | 3869.80 | 6.41%
1967 | 3967.70 | 2.52%
1968 | 4160.60 | 4.86%
1969 | 4288.00 | 3.06%
Real US Per Capita GDP 1870–2001
(in 1990 international Geary-Khamis dollars)
Year | GDP | Growth rate
1960 | 11328 | 0.87%
1961 | 11402 | 0.65%
1962 | 11905 | 4.41%
1963 | 12242 | 2.83%
1964 | 12773 | 4.33%
1965 | 13419 | 5.05%
1966 | 14134 | 5.32%
1967 | 14330 | 1.38%
1968 | 14863 | 3.71%
1969 | 15179 | 2.12%
You are thinking of 1970s stagflation above. That had different causes:
It Keynesianism leads directly to "stagnation and inflation" why didn't this happen in the early 1950s?
"(1) LOL.. the stimulus in 1949 was not via public works or "government controlled projects financed by fiscal-spending". It was via a tax cut covered by deficits.ReplyDelete
Your analysis is absurd."
I am claiming that monetary policy (creation of new money) would have the same effect on stimulating AD as fiscal policy (in this case tax cuts). Why is that absurd? Do you agree it would have the same affects or don't you ? If you agree you admit that Keynesian policy is unnecessary and all that is needed is correct monetary policy. If you disagree then your response is the thing that is absurd. Which is it ?
(2) There was no "economic stagnation" in the 1960s. It had some of best real GDP and real per capita GDP growth ever.
You are correct - I mean the 1970s stagflation, that I think can be shown to be directly related to the Keynesian policies of the 1960s (inflation actually started to pick up pace after 1967). Those high growth rates you are so proud of were achieved by trading growth for inflation - and this proved unsustainable.
I think this process began in the 1950's - it simply took 15-20 years for the full effects to manifest themselves - wouldn't a correct policy be able to maintain stability for longer than that ?
(1) I have no idea why you say "If you agree you admit that Keynesian policy is unnecessary and all that is needed is correct monetary policy." I have NEVER said, stated or implied any such thing.Delete
Monetary policy is a highly variable and blunt instrument. The relationship between interest rates and output is complex and not linear: the monetary transmission between interest rates and real economic variables is unreliable and complicated. It might work or might not. It depends on the state of expectations.
(2) There was no accelerating inflation from 1945 right down to about 1969 during the Keynesian golden age of capitalism.
Inflation was in fact low and showed no upward trend or tendency to rise higher with each stimulus.
At most, you can say that during booms there was sometimes a short-term accelerating inflation, but this was true even of booms in the 19th century.
US Inflation 1945-1982
Year | Inflation Rate
1947 14.33 Inflation after WWII
1974 10.98 1st stagflation crisis
1981 10.38 2nd stagflation crisis
And you have clearly not read the link I posted.
Causes of stagflation:
(1) From 1968–1971 there were the beginnings of inflationary pressures, in both wages and prices in many industrialised nations. Around 1968–1969, this was reflected in wage rises in Japan, France, Belgium and the Netherlands, and from 1969–1970 in Germany, Italy, Switzerland and the UK, which Kaldor attributes to demands by unions for wage rises (Kaldor 1976: 224). But this would not have become a serious problem had it not been for (2) (3) (4).
(2) During the most of the Golden Age of Capitalism (1945–1973), primary commodity buffer stocks had ensured price stability. But this policy was changed in the 1960s when the US modified its buffer stock polices:
“… the duration and stability of the post-war economic boom owed a great deal to the policies of the United States and other governments in absorbing and carrying stocks of grain and other basic commodities both for price stabilisation and for strategic purposes. Many people are also convinced that if the United States had shown greater readiness to carry stocks of grain (instead of trying by all means throughout the 1960s to eliminate its huge surpluses by giving away wheat under PL 480 provisions and by reducing output through acreage restriction) the sharp rise of food prices following upon the large grain purchases by the U.S.S.R. [in 1972–1973], which unhinged the stability of the world price level far more than anything else, could have been avoided.” (Kaldor 1976: 228).
The prelude to stagflation was marked by a significant explosion in commodity prices that occurred in the second half of 1972. Part of the problem was the failure of the harvest in the old Soviet Union in 1972–1973 and the unexpectedly large purchases on world markets by the Soviet state. As Kaldor noted, this could have been averted had the United States not dismantled its commodity buffer stock in the 1960s.
(3) The end of Bretton Woods (the post-WWII international monetary system) was momentous: inflation expectations and instability on financial and commodity markets resulted, as well as a rise in commodity speculation as a hedge against inflation. This contributed to the cost-push inflation that was being felt in many countries after 1971. As Kaldor noted, this could have been averted had the United States not dismantled its commodity buffer stock in the 1960s.
(4) The final factor that caused the severe inflation of the 1970s was the first oil shock from October 1973, when various Middle Eastern producers of oil instituted an embargo that lasted until March 1974 (Kaldor 1976: 226). In most countries, the double digit inflation of the 1970s was caused by the oil shocks.
Kaldor, N. 1976. “Inflation and Recession in the World Economy,” Economic Journal 86 (December): 703–714.
In the interest of fairness I should add that I think bad monetary policy in the 1970s as well as expansionary fiscal policy was needed to achieve stagflation.ReplyDelete
Anyway, this discussion has deviated far from the original question, which was your demand to know how the reality of quantity adjustment (rather than price adjustment) strongly supports and confirms Keynesian theory.ReplyDelete
I have shown exactly how it does, and you grudgingly concede this by suddenly switching to talking about how Keynesianism has the "illusion of working".
In other words, all the empirical data confirm it works, but you just can't accept it because of your preconceived Austrian ideas.
Well, it was you that went into a long defense of Keynesianism if you look above - I merely pointed out thatReplyDelete
"demand changes > quantity changes (prices generally unchanged and employment and output changed).
The reality is confirmation of the Keynesian view of markets and confirmation that Keynesian policies work."
Is not a correct logical progression - even if the second statement were true it does not follow logically from the first statement.
On quantity adjustments - I think Kaldor has some interesting ideas that actually align quite well with Bohm-Bawerk's thinking. So to that extent I have indeed learned something from this discussion.
Quote from Rothbard on Mises' calculation argument:ReplyDelete
"Assume that, by some magical process, it has been able to discover and know absolutely all the value-scales of consumers, all technological methods, and compile an inventory of all resources. Suppose, then, Mises says, we grant total knowledge of all these data to the Socialist Planning Board. It still will not be able to calculate, still will not be able to figure out costs and prices, particularly of land and capital goods, and therefore will not be able to allocate resources rationally."
I have a question. How does Mises know that the "Magical Market" allocates resources rationally without "knowledge" of a measure of what constitutes "rational allocation" and calculation of a markets proformance according to that standard?
Doesn't allocation require calculation by definition?
If he says his measure is the monetary price system then isn't that question begging? The question isn't about determining costs but why use a monetary pricing system to calculate cost?
Is Mises saying that humans can only calculate cost in terms of monetary cost?
This entire thing is idiocy beyond belief. Von Mises and Hayek are babbling. Neither are taking in any coherent concepts.
I have yet understand why it is "impossible" for people to simply allocate resources based on rate of production of inputs themselves versus the demand for the inputs in a given time frame like living bodies do via numerous processes?.
The biological bodies seem to have no problem allocating hundreds of trillions of units of chemical resources "rationally" according to certain standards of calculation and they doesn't relying on pricing.
I guess for Austrain economists living organisms either don't exist or if they do then they don't exhibit economical allocation of resources. Either way I question the usefulness of economical theories with which physical living processes have little in common.
"How does Mises know that the "Magical Market" allocates resources rationally without "knowledge" of a measure of what constitutes "rational allocation" and calculation of a markets proformance according to that standard?ReplyDelete
Doesn't allocation require calculation by definition? "
Yes, Mises thinks that agents on a decentralised markets will be able to solve the calculation problems, via the price system: Mises requires a flexible price system responsive to demand and supply and where prices move towards market clearing levels.
The "standard" he uses is full use of resources via market clearing.
Money prices allow prices to be given to factor inputs and consumer goods, so that profits and losses can be calculated.
In Mises' view, entrepreneurs move quickly into markets where profits are high and bring profits down towards zero.
Apart from the role of money prices as a mechanism to calculate profit and loss, most of the rest of his analysis is not a theory that describes real world markets. Businesses often simply set their mark-up rice and adjust supply to demand, leaving prices unchanged. Competition is nowhere near as effective as Mises thinks.
The economic "coordination" we have mostly comes from quantity adjustments, not from price adjustments.
Of course, often markets do not have effective coordination at all but widespread unemployment and unused resources.
"Is Mises saying that humans can only calculate cost in terms of monetary cost? "
Yes, he does say *objective* costs that can compared against each other can only be calculated in money terms.
But this idea is not unreasonable: we can measure real output in money terms by GDP, for example.