Olivier Blanchard’s recipe for avoiding future calamities of the kind recently witnessed is for monetary policy to be even looser and inflation rates even higher. FULL ARTICLE by Marius Gustavson
Source link: http://archive.mises.org/12212/blanchard-pushes-for-more-inflation/
Blanchard Pushes for More Inflation
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Inflation and Blarney. That’s all they’ve got in their arsenal.
Your article consistently implies that the Keynesian’s just don’t understand the issues.
But if one assumes that the Keynesian macroeconomic model has been created, supported and followed for specific reasons that more closely relates to “who benefits from this crime?”, it implies a completely different approach.
I would assert that these economists are not stupid people who just don’t get it. They are part of a cadre of players with mutual interests that are attempting to justify policy with bogus economic theory, not because they “really” believe it to be true, but because it produces the best and prevailing outcome for themselves and their colleagues. This is not because they are stupid or ignorant of the truth, but because those who benefit from the continuation of the economic status quo understand that current economic policies of intervention and control must comport with a seemingly rational economic theory. Keynesianism fits the bill, and any serious conflicts with reality can be handled simply by introducing “new and improved” versions. Competing ideas that strike at the heart of current policy will be attacked, ignored, and out-shouted by those who are interested in keeping the balance of power as it currently is.
If the macroeconomics debate is ever settled, as it appears to me to be, what then? One need not be right to prevail, and prevail they have. It is not purely an academic question.
I was thinking about this yesterday, while writing on John Keynes. While some may purposefully be dishonest, I don’t believe this to be true for all Keynesian economists. Most economists are trained in a certain fashion; if you notice, most Austrian economists were introduced to the school before receiving most of their training. If you read The General Theory you’ll see that John Maynard Keynes was heavily influenced by the mechanical quantity theory of money, which led him to completely dismiss Hayek’s argument. While Keynes believed inflation to be proportional and simultaneous along all sectors of the market, Hayek understood this to be untrue.
I have come to believe that the mechanical quantity theory of money, revived during the early 20th century, is one of the greatest reasons why the “mainstream” discarded Austrian capital theory. While, true, many Austrian authors published in German, and their works were not translated into English until decades later, there were American and British Austrian economists publishing even as early as Ludwig von Mises. One example is Benjamin Anderson’s The Value of Money, where he refutes the mechanical quantity theory of money.
The problem is one of training, and not one of innate stupidity or purposeful dishonesty.
But isn’t it true that certain economists find their way into appointments in the Fed, economic advisors to the President, and politicians who justify their decisions on the banking comitees by quoting some aspect of Keynesian theory. The question is not so much why did a particular economist reject or accept a particular theory or body of work, but why we find such an uneven prevailenc of one theory over another.
I recall on this site some witings by Keynes in german stating how his theory would be easier to implement in a totalitarian state (sorry I can’t recall the source). This is no accident, in my view. It serves a purpose.
I’m sure some follow Keynesian theory in order to appease their employers, but I was talking more in general.
I agree with you, Jonathan. I am currently in my second macroeconomics course at a Midwest university. I firmly believe that neither of the professors I’ve had hold any sort of devious plan to work their way up through the ranks and obtain a job where they can have a say in national economic policies.
Wildberry said: I recall on this site some witings by Keynes in german stating how his theory would be easier to implement in a totalitarian state (sorry I can’t recall the source). This is no accident, in my view. It serves a purpose.
I have not read nearly enough on the life of Keynes (though I’m licking my lips at all the free literature here on that subject), so I don’t hold an opinion on that, but I would find it entirely possible that he could have had less-than-benevolent intentions in developing his theories. However, I don’t think the academics who subscribe to his theories have much for evil plans. From my experience, it seems that they are fascinated by the inner workings of human relationships, and therefore love economic study, but unfortunately haven’t exposed themselves to Austrian ideas.
Thankfully I discovered Mises, Rothbard, Hayek and others before submitting myself to any “formal” economic instruction in school.
Wildberry wrote: If the macroeconomics debate is ever settled, as it appears to me to be, what then? One need not be right to prevail, and prevail they have. It is not purely an academic question.
The acceptance and denial of ideas and knowledge are processes that call human intuition and action home. We are not perfect beings, and sometimes bad ideas reign supreme. Though I would like to add that I don’t view the Mises Institute as an organization which publishes and/or promotes perfect information, nor do I think it tries. That is one of the loveliest aspects of this site and institution, in my eyes.
We, the lucky ones who have read Austrian theory and have had thousands of inner-head bulbs shine with nearly every passing page, should keep promoting the knowledge we’ve come to hold. Maybe soon the macroeconomics debate will shift in Ludwig’s direction.
Oh, and the article: Thanks for the wonderful piece, Mr. Gustavson. Succinct and loaded with useful information. It’s probably the 100th article I’ve read on the “financial crisis,” but I think I discovered something in every paragraph.
I took the trouble to find the link to the Keynes German reference, and it turns out it was his introduction to the German language edition of his book. The blog and reference are here.
http://blog.mises.org/7285/keynes-and-the-totalitarian-state/
I think you misunderstand my point. I am not saying that at age 10 Krugman figured to be a Keynesian and get a job bamboozling America. That would be silly. What I am saying is that academics which propound this particular theory find support in the mainstream: academic positions, supportive colleagues that will rally around the flagpole, Nobel prizes. The question I am asking is why has Keynesianism found its way into the mainstream of Banking and Government? It is not because it has formulated the superior argument. It is because it serves a purpose of common interests in the “mainstream” of economic and political power. As this coordination and support of common interests grows, it begins to look like a conspiracy, even though there is no secret handshake involved. Call it a special interest group, if that goes down better.
Academics can be misguided by their own intellects and still be sincere. I would suggest that the most effective propagandists are those who have a sincere and unshakable faith in their dogma. There has always been a symbiosis between academics and the state, so why would you suggest economics is somehow immune and pure of such things?
My point is that this is not simply an academic debate. Although the exchange of ideas, and the serious academic work going on by the participants on this site is vitally important, (and I have read everything here I can get my hands on), there are other dimensions besides the concept that the best ideas win out. Sometimes the best ideas don’t win out. That is not an accident. That is the problem.
Thank you for your thoughtful posts.
Wildberry,
You have hit on something. That economics is political. There are hack economists in every century. Look at the “Global Warming” situation. There are scientists that will sell themselves for the promise of a grant to further their research and more importantly give them a comfortable living and maybe even some prestige. Economists are no different. Keynesian economists love Keynes brand because it better fits the Democrats philosophy. You heard of “prime the pump.” The Democrats love to prime the pump and recently the Republicans have tried their hand at it. If you looking for purity buy some Ivory Soap. When it comes to the real world always follow the money. Keynes was a political hack nothing more. I wouldn’t even mention him in the same breath as Hyak, or Ludwig Von Mises.
Here is the complete text of the forward by Keynes himself:
http://mises.org/daily/3693
http://www.independent.org/pdf/tir/tir_13_02_1_raico.pdf
you may also be interested in “was keynes a liberal”, which also discusses the controversial forward in the german edition.
Why 2% over 4%, simple, prices double every 35 years at 2%, at 4% it takes only 18 years, everything else being equal.
Not to mention that those seeking long term investments have to rely on higher risk portfolios just to keep pace with inflation.
I’ve read reports of Blanchard’s paper several times now and I still don’t understand how he determines that targeting a higher inflation rate would result in a higher nominal interest rate. Perhaps I am missing something glaringly obvious but in my experience, when central banks raise interest rates, the idea is that it lowers inflation, rather than raises it. You don’t have persistent high inflation and high interest rates; the two move in opposite directions, at least according to prevailing central bank theories. What am I missing?
Nice article Marius.
I agree with the sentiments expressed by Wildberry:
“I would assert that these economists are not stupid people who just don’t get it. They are part of a cadre of players with mutual interests that are attempting to justify policy with bogus economic theory, not because they “really” believe it to be true, but because it produces the best and prevailing outcome for themselves and their colleagues. This is not because they are stupid or ignorant of the truth, but because those who benefit from the continuation of the economic status quo understand that current economic policies of intervention and control must comport with a seemingly rational economic theory. Keynesianism fits the bill, and any serious conflicts with reality can be handled simply by introducing “new and improved” versions. Competing ideas that strike at the heart of current policy will be attacked, ignored, and out-shouted by those who are interested in keeping the balance of power as it currently is.
If the macroeconomics debate is ever settled, as it appears to me to be, what then? One need not be right to prevail, and prevail they have. It is not purely an academic question.”
This is excellent.
It is not primarily for reasons of theoretical correctness that Keynesian economics predominates.
Keynesian economics rules because an economic construct is needed that assumes the state, and that has as its goal the maintenance of the state and the state order. Austrian economic is dismissed out of hand not because its reasoning is deficient, but because its policy recommendations imply and require a continued repealing of interventions. The total of all interventions is the state. Austrian economics recommends repealing the state. At the end of the road recommended by Austrians is the gradual evolution of the state into something essentially different; a social order less and less held together by central control, and more and more held together by individual voluntary associations.
Mainstream economists and social theorists know this. They do not share these ultimate ends. They are looking for an economic theory that assumes and that tries to achieve the same ultimate ends they hold: continuance of the statist social order.
If Austrian economists were to adopt the positive goal of maintaining and furthering a statist social order, Austrian economics and economists would immediately become accepted as part of the official statist program. They would no longer be ignored.
As Wildberry writes, it is not purely an academic question. The question has to do with the ultimate ends of social policy and the fact that statists naturally want to preserve statism.
As much as I like to argue, it is gratifying to hear support. Very articulate and powerful. Thank you.
You “rein” things in, not “reign” them in, for god’s sake. Can’t we at least write the English correctly?
Bill,
OK, you win points for making me look it up, but loose points for being wrong.
Anthony Clair wrote: “We are not perfect beings, and sometimes bad ideas reign supreme.”
“reign- 3. Dominance or widspread influence” American Heritage Dictionary.
Some people are perfect spellers, while others see the meaning behind the words.
Humbly yours,
Awesome article and awesome comments.
Thank you all.
Thanks!
Hi,
I have noticed that those who support central banking and fiat have a disturbing trust (I daresay, love?) for government. Distrust of one’s fellow man is indicative of “something lacking” within a statist. It is a form of psychological projection in which the statist and government both project a lack of conscience (defined as an internal feeling of discrimination between right and wrong) on to everyone else.
The central debate of economics, of central planning or individual freedom, is thus one of morality.
In debating free market mediums of exchange versus fiat it can be helpful to point out that the fiat money is truly reactionary (in terms of governments and royalty destroying the value thereof through debasement).
Great article, Marius. Comes with perfect timing – at this very moment, I am reading Blanchards Introduction to Macroeconomics. I noticed Jonathan Finegold Catalan’s comment above: “..most Austrian economists were introduced to the school before receiving most of their training.” So I guess I should be happy to have heard about Hayek and the gang before being brainwashed by standard university lectures on Keynesian models and the natural rate of unemployment..
Thanks, Anne Siri! I am glad to hear that your introduction to Austrian economics has been helpful.
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