Not surprisingly, DeLong is not too impressed with (his own understanding of) the Austrian view. Unfortunately, DeLong’s list contains views that are not the “Austrian” take. FULL ARTICLE by Robert P. Murphy
Source link: http://archive.mises.org/12556/delong-on-the-austrians/
DeLong on the Austrians
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DeLong is a joke. Most of his assertions were dealt with by Hayek in the 1930s.
“According to DeLong, the Fed can’t possibly have had an expansionary policy during the housing-bubble years, because we didn’t see excessive CPI inflation as we did during the late 1970s.”
There is an old episode of Family Ties where Alex P. Keaton debunks this view taken on by his girl friend played by Cortney Cox. Alex essentially argues that price distortions are a secondary effect of money inflation. In other words, inflation shows its effects in the prices that are being bid up with the inflated money. I wish I could find a youtube clip of the Cox-Keaton dialogue.
It is entertaining how Mr. DeLong does his little shell game of three card monte between Fed expansion and the CPI.
Casey,
I remember that too. Alex explicitly says that higher prices are the effects of the real inflation in the money supply. I often think of that episode when I explain the nature of inflation to my students in Money and Banking.
I’ve always gotten the impression that Krugman was pretty smart, just partisan and on the wrong side of the issues. Delong on the other hand just doesn’t come off as very bright IMHO.
DeLong–bah! Martin Wolf’s comments are much more interesting. I’m especially concerned about where he thinks that Austrians are recommending mass bankruptcy, and that this is somehow worse than what government regulation can do. Government and the Fed got us into this mess, why does anyone think that government and the Fed can get us out again? The only cure to intervention is non-intervention.
Wolf may have some sympathy for Austrian economics, but he still suffers from Bureacratic Control Syndrome, where somebody must be IN CHARGE of the economy, controlling it, instead of letting the people in the economy be in charge of their own lives.
Yes, i agree; and as long as they think they can produce the outcome they want without consequences, they will be blind to reality.
DeLong isn’t very interesting, nor are his arguments.
Let’s not forget that the CPI changes over time as the government wishes to hide the rising costs. They use it to index certain payments and to trumpet how there’s no inflation at election time.
And of course, it is the government who creates the index. It’s like having banks decide what makes up the index that determine the interest rate of an ARM.
Personally, I find DeLong’s (or whoever is moderating the blog) behaviour quite disappointing. He deletes comments that challenge his academic conduct. At the same time, he leaves comments of those supporters of the Austrian theory that do not fully understand the theory and of those who act emotionally. This seems to be a tactical maneuver with which DeLong can not earn my respect.
Some of his recent blog entries prove DeLong should not be considered a serious economist. For the record, Krugman and DeLong should not be considered of the same ilk, even though they do lean on each other intellectually. Paul Krugman is much more intellectually consistent and of higher erudition than Bradford DeLong.
Agreed. I used to follow DeLong’s blog, but I couldn’t stand his obnoxiousness, and removed it from my feeds. Krugman may be dishonest, and I disagree with pretty much everything he says, but he’s not childish like Brad DeLong is.
“There is generally no period of high unemployment when resources are transferred out of consumption-producing sectors into investment goods-producing sectors.”
DeLong and Krugman can’t seem to understand that artificially low interest rates stimulate BOTH capital investment AND consumption. Artificially low interest rates increase the present value of long term capital investments, thereby stimulating investment. However, these artificially low rates also cause consumers to move down along their supply curve of savings. This means artificially low interest rates discourage savings. Less savings means more consumption. This is why there isn’t mass unemployment in the consumption stage during the boom.
Roger Garrison states: “Some resources are bid away from the intermediate and relatively late stages of production and into the early stages. At the same time, income earners, for whom that same lower interest rate discourages saving, spend more on consumption … In effect, the Hayekian triangle is being pulled at both ends (by cheap credit and strong consumer demand)” (Time and Money, pg. 72)
It seems to me that ABCT doesn’t fit the facts of the Great Recession. I grant that ABCT may truthfully describe many historic business cycles (or even most of them), but it doesn’t follow that every business cycle must follow the narrative of ABCT. Logical coherency alone does not a truth make. It seems to me that one prediction of ABCT is an increase in nominal expenditure during the boom and a decrease during the bust. While the latter has occurred, the former did not. Nominal expenditure increased only very slightly above its trend during the housing bubble, so increased spending on new homes must have been almost entirely offset by reduced spending on other goods.
Lee,
I’m not sure that’s a good interpretation. Austrians recognize that there is X amount of capital at any one point, and you cannot print capital into existence. The Austrian theory suggests that credit expansion will stimulate investment by distorting the price of capital-goods relative to consumer-goods, without there being the necessary real savings. So, “nominal expenditure” doesn’t necessary need to rise, given that the amount of real capital is limited.
Otherwise, it seems that the current recession fits Austrian theory like a glove.
ABCT suggests that artificial credit expansion will increase spending on capital and consumer goods simultaneously. When the nominal rate is pushed below the natural rate, there is an incentive to borrow and disincentive to save. The matter of whether spending on capital goods will increase more than spending on consumer goods depends on their relative elasticities. If spending on capital goods is more responsive to changes in the nominal interest rate than spending on consumer goods, then artificial “credit expansion will stimulate investment by distorting the price of capital-goods relative to consumer-goods.” However, if spending on consumder goods is more responsive to changes in the nominal interest rate than spending on capital goods, then artificial credit expansion will stimulate consumption “by distorting the price of consumer goods relative to consumer goods.” In the case that spending on capital and consumer goods is equally responsive to changes in the nominal interest rate, spending on both should increase proportionally. I stress the word “artificial,” because credit expansion that occurs concurrently with an increase in savings does not necessarily distort the structure of production.
In any case, each of possible consequences of an artificial credit expansion described above entails an increase in aggregate nominal expenditure. If aggregate nominal expenditure did not increase, then any additional spending on capital or consumer goods must have been offset by reduced spending on something else, i.e. saving. The boom described by ABCT predicts an unanticipated increase in aggregate nominal expenditure. However, aggregate nominal expenditure remained on its expected growth path (with only extremly minor deviations) during the housing bubble, so I do not beliee ABCT adequately describes the causes of the Great Recession.
That second quote is supposed to read: “by distorting the price of capital-goods relative to consumer-goods.”
You’ve made the mistake of using the world aggregate. There are no aggregates. ABCT is a perfect fit, but I can see how you’d be confused since you’re trying to cram it into a Keynseian mathematical approach. It’s just a basic understanding of scarcity. Low interest rates stimulate both spending and capital investment, true, but we have to consider what borrowing is. Borrowing is just promising future earnings toward a current purchase. It’s very simple. Holding down interest rates create incentives to promise a larger and larger portion of future earnings toward purchases today. There reaches a point where, no matter how low the interest rates may be, no matter how many printed dollars are thrown at the problem, that individual in the economy just promised the rest of his life’s earnings away and simply is incapable of buying anything more. This causes all of those capital investments being purchased on credit to die rather quickly and the whole system grinds to a halt.
Printed money is precisely the problem and ACBT explains it perfectly. Printing money disconnects the saving-lending dynamic, allowing both rapid consumer spending (which would normally drive up interest rates since fewer people are saving) to exist at the same time as borrowing (which normally also drives up interest rates). Since no consumer on the market is actually being paid back, there isn’t a reliable stable of savings from which to draw for future production.
Austrian economics is always incredibly simple to understand when you remove the money from the equation and look at what is really going on. Money is just the intermediary trade good. If I make ovens for bakers and promise to future delivery to them for bread today, that’s all a loan is. But with the illusion that money is actually valuable, instead of a method of avoiding excessively complex multi-lateral trades, that whole thing ultimately turns out to be me promising to devliver 10 ovens to bakers when I can clearly only produce 5.
Cut out the Keynseian math approach, one invented completely absent of any real scientific testing, and you’ll find that Austrian economics perfectly explain what just happened. People simply promised too much of their future incomes to continue the boom.
There are no aggregates.
Of course there are aggregates. The real point is that an aggregate simply doesn’t tell you very much by itself–it’s not necessarily meaningful data.
Lee,
The entire argument behind the austrian business cycle is that an end to an exponential increase increase in credit expansion reveals the fact that there are not enough resources to complete new investments, thus they are termed malinvestments. Nominal expenditure of capital does not have to increase if there are no resources from which this increases bases itself off. There is simply a bidding up prices of consumer-goods and capital-goods in demand (it should also be mentioned that there is no reason why capital-goods and consumer-goods need to be stimulated “proportionally”; Jesús Huerta de Soto talks about consumer credit in the second English edition of his book, and suggests that it was not a major part of the current recession).
Savings rates did not rise during the boom, which goes hand in hand with austrian business cycle theory. The entire point is that savings do not rise to surrender entrepreneurs the necessary resources (capital-goods) to complete their investments, and so resources are pulled in two directions.
Logic always beats experience. In fact, how can one know that experience gives us any knowledge about reality? We can only determine whether experience gives us knowledge about reality by first using logic. In short, you are involved in a performative contradiction.
Total consumption spending grew at a compounded annual growth rate (CAGR) of 5.72% between 2002 and 2007. Residential gross private domestic investment only grew at a CAGR of 4.3% during this same period. Therefore, your claim (“increased spending on new homes must have been almost entirely offset by reduced spending on other goods”) is not consistent with the data.
See the data here: http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2002&LastYear=2007&3Place=N&Update=Update&JavaBox=no#Mid
Anonymous,
The relevant datum is aggregate nominal expenditure. Consumption spending and residential gross private domestic investment are components of aggregate nominal expenditure, but they are not exhaustive.
It seems to me you’re making assertions. Jonathan already pointed out your error…
+1 Walter Block’s comment on DeLong’s blog.
Why won’t one of these guys debate an Austrian? I’m sure Schiff or Mr. Murphy here would be MORE than willing to accept it.
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