Monday, April 29, 2013

Robert Murphy Takes Issue with my Reading of Empirical Data on the US Stimulus

For the interested reader, you can find his posts here:
“Just the Facts, Ma’am: “Testing” Keynesian Theory,” 29 April, 2013.

“Believing Is Seeing, Part II,” 29 April.
The unrealistic assumption that he appears to be making in his criticisms of me is this: that real output and private investment must have started expanding immediately after the stimulus began.

But it is obvious that government spending takes time to induce changes in private investment.

Why should there be an immediate and instant movement? I know of no Keynesian economist who has ever thought that there should be instant effects on private investment from stimulus.

With reference to the graph of US private-sector investment Murphy posts, I do not find it surprising that private investment continued to contract in 2008 and early in 2009. The shocks to business confidence were very severe indeed in 2008: probably worse than in any other recession after 1945.

But private sector investment did turn around in mid-2009: after 6 months or so of stimulus spending, which stabilised demand for products. There is a clear trend of rising private sector investment with rising government spending for years after mid-2009.

If private sector investment had continued to contract for years after the stimulus, then Murphy would have empirical evidence to support his anti-Keynesian, Austrian case. But that is not what the data show.


  1. What a complete misunderstanding of Post keynesian theory. Seriously, I wonder if these guys take the time to actually learn what they seek to refute. I mean if Murphy actually taken the time to read on PK's views on expectations and human action (which does not really take a lot of time to grasp), this sort of misunderstanding would not have been made.

  2. Murphy is about five years behind on the debate. Or is that seventy-five years? I'm not sure.

    Not that I agree with the pessimism surrounding the "lag" debate, but I guess if you have an audience that will swallow anything as long as you take an ideological line you can get a bit lazy.

    1. Long lags of fiscal policy!

      As opposed to monetary policy where the effects are instant and unequivocal.

      Of course it takes a while for private investment to pick up. There's a whole load of slack that will accommodate the quantity expansion to start with.

      And confidence in the reality of the recovery takes time to build particularly after a large shock.

      Honestly this is all very easy to understand once you realise how real businesses work.

  3. LK,
    Which, in your opinion have been your most serious Austrian economics opponents and which have been the most buffoonish? I would vote Murphy for the most serious, and Bob Roddis or Major Freedom for the most buffoonish. You?

  4. Do you mean "opponents" or "proponents?

    1. Jan: Lord Keynes here is a updated graph that show the United States
      Pre--stimulus//Post stimulus effects on different sectors of the economy.

  5. Opponents of you,

    Proponents of Austrian economics

    1. Of all the Austrian economists, Lachmann was the most interesting and serious, though he died quite a while ago.

      Isaac Marmolejo's Radical Subjectivist blog continues that "Lachmann" approach to Austrian economics:

      Murphy is interesting because he rejects the Wicksellian natural rate and accepts a monetary theory of the interest rate:

    2. "Murphy is interesting because he rejects the Wicksellian natural rate and accepts a monetary theory of the interest rate"

      Should be noted that Murphy's insights on this point is a Lachmannian insight or a radical subjectivist insight. From the intro of his dissertation:

      "In the third essay I widen my focus. I claim that a fundamental problem with Böhm-Bawerk’s theory was his aggregation of goods according to their date of availability. This component of his work led to the modern “real” approach to interest theory, which explains the premium on money loans as the outward expression of the underlying intertemporal exchange of real commodities. Drawing on the insights of the so-called “radical subjectivists,” I offer a completely different explanation of interest rates, viewing them as purely monetary phenomena reflecting the uncertainty of the future."

      Why Murphy couldn't use radical subjectivist insights for everything else, I dont know. He would have made a great Austrian economist in my opinion but I think his studies on libertarianism blinded him from doing just that

    3. I see that I had failed to see the "radical subjectivist" connection on these points.

      Thanks for this comment.

  6. @Neil Wilson

    But Murphy is an Austrian, Neil. And one key characteristic of the Austrian dogma is that you cannot understand how real businesses work. To do so would destroy the for of metaphysics and religion that you have been created around your mind. To step into a real corporation and pour over their balance sheets would be, for an Austrian, like urinating on a cross would be for a Christian. Profanity, pure and simple.

  7. @Nathan

    There are no serious Austrians on the internet. And there are very few left alive. Ludwig Lachmann was bright. Hayek, despite his tendency toward propaganda and metaphysics, was at least partially serious. Israel Kirzner, despite being a bit of a mystic, at least knows what the debate is all about. Apart from that... well, come on. Austrian economics has turned into what Marxian economics largely became in the 1960s: a political ideology first and an economic theory second.

    1. Radical subjectivism has a slow growing revival in my opinion. I get emails constantly about radical subjectivist literature, theory, etc. And there are serious Austrian bloggers that are close to the radical subjectivist perspective. The problem is that all these bloggers are still relatively young. Look at:

  8. Lord Keynes, Congratulations on continuing to do battle with Austrians. Personally I think watching paint dry is more intellectually stimulating than entering into discussions with Austrians. But I applaud you.

  9. LK,

    I read this comment by you over there:

    "You fail to see how those propositions support the statement that aggregate demand drives output and employment in fixprice markets".

    Why is it necessary to refer to fixprice markets? Even if prices are flexible, aggregate demand still drives output and employment.

    1. Why the emphasis on fixprice markets?:

      (1) because they are widespread and a very important element in real world capitalism.

      It needs to be driven home that the Austrian/New Classical models of the world as a place where universal flexprice markets exist is a ridiculous fantasy.

      (2) and because in the case of fixprice markets it is much more clear cut that aggregate demand drives output and employment.

      Under flexprice markets, businesses supposedly adjust prices downward to clear the market when demand changes, instead of directly firing workers and adjusting output.