Dateline: Auburn, Alabama: The Economist tries here to summarize the battle that is going on in modern macroeconomics including Ron Paul, the Austrians, the Free Bankers, Paul Krugman, Keynes and one of my undergraduate professors Scott Sumner. It needs some extensive Austrian analysis and commentary.
Source link: http://archive.mises.org/20147/the-battle-over-macroeconomics/
The Battle over Macroeconomics
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They even have a comic of Bob Murphy!
http://media.economist.com/sites/default/files/imagecache/full-width/images/print-edition/20111231_BBD004_0.jpg
Hey, Bob’s a little heavy, but he’s not *that* fat!
Everytime VMI mentions Sumner the readers get chance to actually learn something. Austrians can’t answer the basic facts that sticky wages exist, Sumner can. He’s a lot more convincing.
Yeah, Bob Murphy totally hasn’t done this in several articles. PS, I’m being sarcastic.
Axe to grind much? BTW, they have done so. You may not like the answer. Too bad.
Not at all, I’m just happy that a great man’s name is being mentioned. Read Sumner’s blog “The Money Illusion” it is outstanding!
The Austrians on this site are generally very superficial in how they respond to sticky wages, I have seen it mentioned, they just don’t provide satisfactory answers. And of course, Austrian theories are by their nature non-falsifiable. Which puts the whole theory up there with religion and other faith based creeds.
In a free-market situation, wages would fall during the corrective bust periods. Also, there would not be severe corrective periods in a truly free market. Of course, in our current situation, some wages are sticky – this is part of the problem, part of what is preventing or slowing our correction from the state-induced boom, and subsequent bust, cycles.
“In a free-market situation, wages would fall during the corrective bust periods.”
But I think it would take two years.
That’s the problem, the Austrian theory can’t account for the fact that managers do not believe in pay cuts. They believe its better to fire employees than give anyone a pay cut.
Could that psychology be changed? Of course. Sumner believes in a truly free market, recessions would last about 2 years in response to a demand shock, as managers would respond to a demand shock.
Unfortunately, we have a government that contributes to unemployment, with minimum wage laws and unemployment compensation.
Like geometry!
Insofar as wages are sticky the cause is not hard to find- some form of government intervention. In a pure market economy , wages can also be sticky on the way up, offsetting the effect of (minimal) stickiness on the way down.
Sadly, some Austrians do talk about their theories as if they were Euclidean axioms. What a joke.
“The Austrians on this site are generally very superficial in how they respond to sticky wages, ”
Assertion.
“I have seen it mentioned, they just don’t provide satisfactory answers.”
Assertion.
” And of course, Austrian theories are by their nature non-falsifiable.”
Assertion.
” Which puts the whole theory up there with religion and other faith based creeds.”
Boring axe-grinding ad hominem.
Try again.
My intention is not to start an internet flame war with idealogues. I prefer a dialogue, not this kind of back and forth.
What is it about the Austrian theory that you find so appealing when there are so many better, well developed, mainstream economic theories? What do you think about Sumner’s ideas on NGDP targeting?
> What is it about the Austrian theory that you find so appealing when there are so many better, well developed, mainstream economic theories?
Because most common ‘mainstream’ theories ignore tend to ignore the fact that individual self-interest is the driving force in economics. Austrians are able to create a sound and reasonably complete view of the world that is also quite a bit more accurate in their predictions then more ‘mainstream’ theories.
They also realize the fact that when you have people who put themselves in charge of the economy they are only doing so out of their own self interest, and not in the interest of the whole. Also when people use force to remove or manipulate individual actor’s self interest then it creates significant adverse effects.
> What do you think about Sumner’s ideas on NGDP targeting?
Government policies designed to make pleasant looking graphs is not a useful way to run a economy. The most useful way to run the economy is let the economy run itself.
“What is it about the Austrian theory that you find so appealing when there are so many better, well developed, mainstream economic theories?”
Such as? In what sense are they “better”? Plenty of crap out there is “well developed”.
“What do you think about Sumner’s ideas on NGDP targeting?”
About the same I’d think of any other attempt for govt’s to “manage” the economy. At best, misguided, at worst malicious.
“How about the market is left to control the supply of money instead?”
Hey that’s fine. I support complete adherence to the nonagression principal.
But putting America on the gold standard like these Ron Paul types want isn’t letting the market control the money suppy, anymore than NGDP targeting is. They are both a form of central planning. So if we’re going to choose a lesser evil, wouldn’t it be the one that led to prosperity?
“They also realize the fact that when you have people who put themselves in charge of the economy they are only doing so out of their own self interest, and not in the interest of the whole. Also when people use force to remove or manipulate individual actor’s self interest then it creates significant adverse effects. ”
And I think that’s part of the problem. People are conflating one very good idea, the non-aggression principal, with all sorts of Austrian baggage that we don’t need. We don’t need to reinvent the wheel, we can be advocates of liberty while throwing out bad explanations of the business cycle.
“”" And I think that’s part of the problem. People are conflating one very good idea, the non-aggression principal, with all sorts of Austrian baggage that we don’t need. We don’t need to reinvent the wheel, we can be advocates of liberty while throwing out bad explanations of the business cycle.”"”
The problem is that the only other attempts to describe the ‘business cycle’ are little more then thinly veiled justifications for large corporations and government institutions to work together to ‘manage’ the economy for their own benefits.. and largely to the damage of everybody else. None of it makes any sense otherwise.
NGDP, for example, is just more of the same nonsense that I don’t like and I don’t think is healthy. It’s just more of the same. The only “advancement” it has over previous policies of continuously managed inflation is that they finally have admitted that sometimes inflation is a bad thing. They still believe that inflation is a good thing most of the time, that the GDP is a meaningful metric, and that central banks and governments are the ones that should be managing things… which is all wrong.
>Not at all, I’m just happy that a great man’s name is being mentioned. Read Sumner’s blog “The Money Illusion” it is outstanding!
I went to his site the other day out of curiosity. I found his blog posts very superficial to say the least. I read his blog post about why there were no short crisis and I felt ashamed. Then I read the comments and it looked like a ciclejerk. Look more like adults with the mind of a young kid unable to reason than people arguing about economics.
Its looks to me more of a marketing scheme than anything else. Maybe I picked a bad day to visit.
Hugo, you are right on one point: almost all internet sites lack a good comment section unless they are moderated.
But what do you think about the idea that NGDP targeting would have made the recession much shorter?
“If you blinked, you missed it: The words “but not limited to nominal GDP” contain the hottest new concept in the world of economics. NGDP stands for nominal gross domestic product and the idea is to have central banks such as the Bank of Canada and the U.S. federal reserve target nominal GDP growth in setting monetary policy. The Bank of Canada already targets inflation. The idea is that by targeting nominal GDP, central banks can help national economies achieve better growth and generate more jobs.”
What is targeting some arbitrary metric that has precious little connection to actual prosperity going to do to resolve the recession? Yeah, it would perhaps generate rosier figures for government quacks to parade about as having “solved” the crisis (when in fact they’ve done no such thing), but it sounds no different to any other Keynesian “demand”-driven policy.
“The idea is that inflation could be close to zero over the long term, and that the only way to get to zero would be to allow inflation to rise and fall according to productivity changes in the economy. Putting an inflation target at, say, 3%, unnecessarily introduces inflation into the economy. ”
How about the market is left to control the supply of money instead? I fail to see why some arbitrary, largely badly confusing metric like GDP should be used to set any target, especially when it is easily inflated by monetary inflation and gov’t spending. I’m assuming by inflation target they mean the CPI. The idea as presented in the article is no different to other stimulus nonsense and will not address the underlying structural issues the economy is facing, including the unwinding of unsound debt. No one believes governments anymore and the monetary system largely serves to keep their interest rates low.
http://opinion.financialpost.com/2011/10/31/terence-corcoran-%E2%80%94-ngdp-targeting-the-very-latest-econo-vogue/
“What is targeting some arbitrary metric that has precious little connection to actual prosperity going to do to resolve the recession? Yeah, it would perhaps generate rosier figures for government quacks to parade about as having “solved” the crisis (when in fact they’ve done no such thing), but it sounds no different to any other Keynesian “demand”-driven policy.”
Yes, it is a demand driven policy. What it solves is lowering the duration and extent of the unemployment without significant adverse effects. That means a higher standard of living.
“Because most common ‘mainstream’ theories ignore tend to ignore the fact that individual self-interest is the driving force in economics”
Whoah…where in the heck did you get that idea? Mainstream eco is absolutely based on this idea! Ever heard of homo economicus?
Sticky wages exist because of government regulations, such as minimum wage laws, and historical and cultural conditioning, and not for any particular economic reasons.
“Sticky wages exist because of government regulations, such as minimum wage laws, and historical and cultural conditioning, and not for any particular economic reasons.”
Maybe.
I tend to think there is something inherent in human psychology that its just really hard for managers to adjust to demand shocks. Even if managers learned to adjust to deflation, they would invetibly get frustrated by changes in the rate of deflation.
When you are fired, you adjust, when see people around you being fired, when you believe you will be fired, you adjust. Same when wages are on the rise.
“Even if managers learned to adjust to deflation, they would invetibly get frustrated by changes in the rate of deflation.”
Why doesn’t this apply to inflation?
Yes, that is our Bob Murphy nudging Paul Krugman for a fight. I hope Krugman finds out about this.
Strange… the author of this article writes, “While it provides insights into booms and their ending, it fails to explain why things must end quite so badly, or how to escape when they do. Low interest rates no doubt helped to inflate America’s housing bubble. But this malinvestment cannot explain why 21.8m Americans remain unemployed or underemployed five years after the housing boom peaked.”
Did the author forget that only 3 paragraphs prior, he wrote, “Once this realisation dawns, the entrepreneurs abandon their follies, firing their workers. If wages are flexible and workers mobile, this bust need not be too bad. But misguided attempts by the government or the Fed to prevent unemployment will delay the necessary reshuffling of labour from industries too tied up in the future to those catering to the needs of the present.”
I’m curious whether this is really just carelessness on the author’s part or that the author is trying too hard to discredit Austrian Theory in some way.
Maybe a little of both.
Sloppy editing and internal inconsistency are hallmarks of the The Economist. It could be that articles are thrown together from notes prepared by more than one researcher/writer. The editors may be hacks who are ignorant of economics, or else they may be working under extreme time pressures. Or, the editors and writers may be fearful of making their bosses or a lot of readers angry by taking a bold intellectual stand … so they wander from side to side in order to avoid attracting criticism.
They get away with it because people hold the journal in such awe because of its name and reputation and simply don’t read it critically. Or maybe they don’t get away with it – are its readership numbers in as steep decline as the rest of the mainstream media?
I have only met and spoken with one writer for the Economist and he was very impressive in his knowledge of economics. However, I think that most articles are stitched together by several writers and editors.
I honestly don’t know the answer to this, as I am not old enough and have only recently become interested – has Austrian Economics ever been so widely considered or popular before now?
I think it was in the 1940s and before, when the school enjoyed a very high level of prestige. The rants of various mathematically obsessed quacks notwithstanding.
could someone kindly address the allegation that natural interest rates(based on people’s savings/time preferences) can end up being harmful as apparently happened in the 1890s australian depression under a gold standard? i am pretty sure there is a simple explanation to it.but i saw these mischaracterization in the economist column comments .
Mark, I have learned so much from your articles and mp3′s. I can not thank you enough. I understand that you are an academic and so would like to see a reasoned refutation. However, I think that would be a waste of time. The cited article is tossing Austrian econ in with some money cranks and trying to dismiss us as fringe wacko’s. We need to proclaim and emphasize some points that the mainstream cannot make people forget when they try to baffle ‘em with BS. Namely, macro is not scientific. Marginal analysis gives rise to the supply-demand relation which is a universal, rigorous and scientific aggregate. Even they teach it. They have no reason for setting it aside and trying to re-invent the wheel with “macro.” Keynesian macro analysis was invented by politicians and bankers, not economists. Keynes just went along to support the ideas after they were already instituted in government central banks. And if the mainstream is so great, why has the economic stagnation of Europe and USA followed so closely the implementation of central bank intervention? They have to focus the debate on very narrow specifics that easily confuse lay people. If anyone takes a look at the big picture, it is all too clear that Keynes’ general theory is built on wishful thinking and unlimited police power. I hope they will listen to reason before it is too late. But you have to really dumb it down to where even a reader of the NY Times can understand it.
Happy New Year to everyone!
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