A Keynesian friend of mine asserts:
"We are currently receiving a real-world, empirical test of whether Keynes or Hayek was correct. If Hayek were correct, we ought to currently be seeing inflation. In fact, as Keynes would have predicted, we have deflation, in spite of numerous actions by governments around the world that would be inflationary in the absence of a serious liquidity trap.
(I don't expect this will deter the Austrian devotees, since their beliefs have always been founded much more on the moralistic appeal of suggesting that people must suffer for the sins of the boom, than on any kind of evidence. They will continue to believe, in Panglossian style, that having the government refrain from doing anything about a recession or depression will actually create the best of all possible worlds, and that inflicting pain on the masses is virtuous.)"
I would argue that it is impossible for Keynes to predict deflation because of the sticky prices doctrines that Keyensians assert. But that is somewhat tangential. Other thoughts?
is this part of a conversation because it seems obvious he left out the interesting part of his 'interpretation' of keynes v Hayek.
to wit: why would Hayek predict inflation whilst keynes would predict deflation?
ABCT is not a moral theory.....lol
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Also, inflation and deflation need to be defined. To AE, inflation means an increase the general money supply, not an increase in prices. How does your friend define inflation out of curiosity?
We've had continuous conversations/debates on Keynes vs Hayek prior to this, so I take it both of us are operating under the assumption that we can at least articulate the others views (although I don't think he quite gets the Austrian perspective).
You ask a good question on whether Hayek would predcit inflaiton. From my understanding, ABCT does not explicitly posit inflation or deflation (in the price sense), but just a misallocation/malinvestment of capital due to monetery inflation.
I would further suggest that this cannot be a real world empirical test of Keynes vs Hayek because there have already been TARP funds and bailouts.
In our past arguments, he defines inflation/deflation as price inflation/deflation.
I am not sure if he even admits to the the connection between monetary inflation and price inflation.
Where is he seeing the deflation? Because I dont see it. Certainly there has not been a lot of inflation (yet) but deflation? Where? CPI has been arround 0% most of the time during the recession (sometimes a bit up, sometimes a bit down).
By the way, show him this graph. Is the productivity of the debt in the USA through time. Keynes says that government borrowing and spending is good and helps the economy. The austrian predict that by artificially manipulating the interest rates the capital structure of the economy gets distorted and becomes less productive. You can see how over time the debt has become less productive.
http://4.bp.blogspot.com/_pCDyiFUv9XU/S6UGAnsGArI/AAAAAAAAI8s/1wHV7ehjQdo/s1600-h/Diminishing+Productivity+of+DEBT+(2).jpg
We are not seeing price rises, because we are in a different stage that happens before the money starts moving.
Obviously, after the moderately large stimulus, one would expect that the increase in money supply filled into the coffers of private individuals and other parties would also follow a movement of that money.
That money isn't moving. There are businesses in the United States with several billions of dollars in cash balances which have not been used for any purpose. Some just sit on $30 billion of reserves.. That's perhaps because the current uncertain environment, with various reforms in labour markets (through reform in insurance), capital markets (through financial reform), international trade (through new tarriffs) and the general direction of policy is forcing them to hold back new investment or increased production. But that only has very little to do with it.
Consumers resist price rises less when they come in the form of lower quality goods. Wherever the money is flowing and pushing prices, consumers start saving more to meet those needs; savings which are further motivated by the pessimism brought by recession. This situation again holds back price level change. While business would make new investments in fresh assets, they have hitherto been recording profits on the historical cost concept and depreciation, with inventories valued on first-in-first-out basis. They have overstated their profits, and have ended up consuming capital - they now find that they have not reinvested enough to meet working capital requirements and asset replacement needs. They now need to save far more money to be able to make that investment.
The reluctance to invest more or increase spending means that they have to keep up the same level of production from outdated assets as close as possible to the same level of quality, even while the prices of raw materials rise. Thus, they have forced workers on overtime, employing people only on a temporary basis, and running on much lower margins. The productivity per worker is not rising far enough to allow for employing more people - as we see from rising unemployment figures.
However, that money will start moving. That businesses and households are sitting on their cash means that they have merely deferred their needs towards the future. The results of the recent monetart and credit expansion will be price inflation, which can not be coped with by masses of people producing less and earning less. That, as it may be, is a long-term thing. The actual effect of monetary expansion is not shown in price rise - it is rather revealed in increasing inefficiency, obsolescence, lower quality, and worsened standards of service and honesty from flesh-and-blood people.
The so-called liquidity trap is merely a means towards making investments in the future, by favouring long-term production over short-term consumption. Since the wrecking ball is now first put on production, because consumption is low, when consumption comes back up in the future, there will be less production to meet it.
By all means, your friend can continue citing empiricism, since he has not discussed what flesh-and-blood people actually do, and instead hides behind the unfalsifiability of statistics i.e. figures that only have hundreds of causes, and not those causes that people choose from foregone conclusions.
This is why we haven't seen massive price inflation yet despite a doubling of the monetary base in 2008/2009. Banks are afraid to lend, so they keep their liquidity as excess reserves in the Federal Reserve system where it is dormant. There exists a very efficient kind of stimulus for the Keynesian planner: impose a fee on said excess reserves. Banks will then start pulling out their money and lending again. This would lead to massive inflation and maybe another short-lived boom. I don't see how this proves Hayek wrong on any count.
The only places I see price deflation is in the housing market and gas prices. However, I too do not see a general price deflation.
Anyone who defines inflation by the CPI is not capturing the whole picture. It might be useful for negotiating with unions or deciding social welfare increases ;-) but that’s it. It takes someone like Krugman to paint his case in terms that suit him but it doesn’t make his analysis correct as he is framing the question incorrectly
Mish has been very good on this and he makes the valid point that if all the bad debt out there was mark to market , it would be very clear that we are in a deflationary spiral, also the “hot” liquidity that is pumping up various asset markets can disappear very quickly. I am not sure if this coincides with Austrian analysis as the finer points of Austrian money aggregates are lost on me.
When people say price inflation and price deflation everybody understands is the CPI.
This is falacious.
I could say that if the Fed were responsable then prices should be going down. The fact is that the government is going to do everything in its hand, and that includes changing rules, to keep the banking system alive, and that means avoiding deflation. The reality is that prices are hardly going down, as the should. Its because the Fed is buying everything that moves, and because the government is changing some rules. Fantastic, but prices are not going down.
You have to think that if the government wanted we would have price deflation (and it would be possitive for the economy in the mid long term, it would be the quickest way to get out of the recession) but its using all its power to avoid it (including changing rules) and prices are not going down. That is the reality. Saying that if the government would have not changed the rules we would be in price deflation is a bit pointless.
This is falacious. I could say that if the Fed were responsable then prices should be going down. The fact is that the government is going to do everything in its hand, and that includes changing rules, to keep the banking system alive, and that means avoiding deflation. The reality is that prices are hardly going down, as the should. Its because the Fed is buying everything that moves, and because the government is changing some rules. Fantastic, but prices are not going down. You have to think that if the government wanted we would have price deflation (and it would be possitive for the economy in the mid long term, it would be the quickest way to get out of the recession) but its using all its power to avoid it (including changing rules) and prices are not going down. That is the reality. Saying that if the government would have not changed the rules we would be in price deflation is a bit pointless.
I understand that they are trying to kick the can down the road but market history tells me they normally hit a wall, in the US case we are talking about a private economy of 30T+ and a Goverment /Fed balance sheet which is much smaller. Also If the market really beieved that the government was going to Hyperinflate, the bond market would crash before this post is finished, which would bring us back to a massive deleveraging, and a dash to cash as pension assets and bank balance sheets etc would collapse.
what if the government imagines up some money to buy bonds with?
So I gather thus far from the discussion, that price deflation is a good thing from the Austrian perspective. My only qualm is price deflation's compatability with ABCT, because doesn't ABCT suggest monetary inflation, thus implying price inflation because of that very increase in the money supply? Or is it more accurate to state that price fluctuations itself is an occurance of monetary inflation, but does not necessarily lead to price inflation?
In addition, it appears there was price deflation, as measured by a drop in CPI, from the annual average of 2008 and 2009, but if we look at the month to month trend, CPI is trending upward.
http://inflationdata.com/inflation/consumer_price_index/historicalcpi.aspx
Austrians typically don't use this sort of data nor method, but I feel I may have to make the case using such data.
A couple of "mish" articles on the subject, might be interesting for anyone who does not read his blog
http://globaleconomicanalysis.blogspot.com/2010/07/are-we-trending-towards-deflation-or-in.html
And an older piece that ends with one of the best all time warnings from history
http://globaleconomicanalysis.blogspot.com/2006/02/inflation-what-heck-is-it.html
Your friend is clueless; he doesn't understand either position. Keynes was empirically and definitively refuted in the 70s with staglfation. We had a negative savings rate in 07 (huge aggregate demand), and yet we're in a major recession. The interest rate has been at 0% for quite some time, and yet the economy is stagnating, and unemployment remains at 10%.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
ViennaSausage: You ask a good question on whether Hayek would predcit inflaiton. From my understanding, ABCT does not explicitly posit inflation or deflation (in the price sense), but just a misallocation/malinvestment of capital due to monetery inflation.
What are you doing with Keynesian friends?
In fact, as Keynes would have predicted, we have deflation,
No we don't. The CPI is a fraudulent way of measuring inflation, for many reasons. Here's one article about it.
The price of everything is going up. Ask him to name one thing that has gone down in price recently.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
So we have two parallel universes the only difference between them being one follows Hayekian and the other Austrian econ? Else, what "real world empirical test" is he alluding to?
Freedom of markets is positively correlated with the degree of evolution in any society...
"Your friend is clueless; he doesn't understand either position. Keynes was empirically and definitively refuted in the 70s with staglfation. We had a negative savings rate in 07 (huge aggregate demand), and yet we're in a major recession. The interest rate has been at 0% for quite some time, and yet the economy is stagnating, and unemployment remains at 10%."
Here is his response to stagflation:
Except that Keynsians have a ready explanation for stagflation that fits cleanly within the model -- in its most basic form, it can be described using the difference between the short-run and long-run Phillips Curves, a feedback loop between inflationary expectations and results. (The issue is laid out in the latter section of these slides.)
Here is his response to stagflation: Except that Keynsians have a ready explanation for stagflation that fits cleanly within the model -- in its most basic form, it can be described using the difference between the short-run and long-run Phillips Curves, a feedback loop between inflationary expectations and results. (The issue is laid out in the latter section of these slides.)
I just saw those slides. There is nothing there explaining stagflation. At least not directly, maybe some of those concepts led to the keynesian explanation of stagflation, but in any case, there is not an explanation of stagflation from a keynesian point of view. Your friend is bullshiting you.
Btw, ask him how the potential output is calculated, because that is how they calculate the output gap. He will tell you that they stimate it, and then you can go and tell him that what they are doing is not science, since they are puttin their models before the real data.
Thanks for the response.
" there is not an explanation of stagflation from a keynesian point of view."
Do you mean there is no Keynesian explanation of stagflation, period? Or do you mean there is there isn't any in these slides?
They key here is not whether we have inflation vs. deflation. But how each is being measured by Keynesian vs. Hayek.
Corporatism is using state means to enhance market share and profitability of a few favored firms, at the expense of the citizen.
Thanks for the response. " there is not an explanation of stagflation from a keynesian point of view." Do you mean there is no Keynesian explanation of stagflation, period? Or do you mean there is there isn't any in these slides?
I meant that there is no keynesian explanation of stagfaltion from a keynesian point of view on those slides.
I would hit him hard with the fact that they are putting their models over empirical data. That is no science.
I have another friend that appears to be on the fence, also involved in the Keynes vs Hayek discussion. He states:
"So given the economic crash (for lack of a more precise term) in 2008, and the subsequent, mostly Keynesian, actions to stimulate the economy, what would the Austrians have predicted to happen to the economy? Is it consistent with the state of the economy today?"
Granted Austrians are not readily one to predict the timing of events, but can infer future circumstances from deducation, I would say that Austrians would have predicted a prolonged recession/depression because of TARP, bailouts, and monetary inflation.