Economics Questions

Re: Anatole Kaletsky on Austrian economics

Fried Egg — Tue, 21 Jul 2009 11:52:40 GMT

What I find really difficult in these kind of discussions is getting good historical data, particularly going back further than the 1950's and especially prior to the 1920's.

If anyone knows of any good statistical sources, I would appreciate knowing about them.

Re: Anatole Kaletsky on Austrian economics

RobH — Tue, 21 Jul 2009 09:15:28 GMT

guys what is a good introductory book about Austrian economics? Thanks

Re: Anatole Kaletsky on Austrian economics

AF — Tue, 21 Jul 2009 03:49:40 GMT

Lilburne:
(i) The economic costs of serious busts are too high in comparison with this alleged disciplining effect.

What 'economic costs' is he referring to? And from the 'disciplining effect' part, I get the impression he still thinks of Austrians as evil bad guys who want to make people suffer for no good reason as 'punishment' for the boom, completely ignoring any necessary reallocation of resources such as capital, labour etc.

Lilburne:
(ii) There is no empirical evidence that the disciplinig effect actually makes an eocnomy more effciient - on the contrary, economies in which demand management has continuously prevented severe recessions occurring have had the highest productivitry growth

Empiricism doesn't prove or disprove anything in economics, especially without a solid theoretical backing with which to understand empirical data, which is the very thing he is avoiding using with his appeals to empirical evidence.

Lilburne:
(iii) Even if punitive busts of the Austrian kind were economically desirable, it is hard to imagine the political circusmastance in which they would be allowed to happen, whether in a democracy or in a dictatorship.

What's his point? I don't think any Austrians are arguing that not doing anything will be a good move politically, but good politics =/= good economics.

Lilburne:
I also disagree with the Austrian idea that business cycles are created entirely - or mostly - by central bank "mistakes" and could therefore be avoided in a gold-based monetary system. Again, this goes against the empirical evidence, which shows that business cycles in monetary systems based on gold have been more frequent and more severe.

Again with the appeal to empiricism. Same responce applies.

Lilburne:
I think that even from the Austrian point of view that focuses narrowly on investment excesses and errors in price formation, there is much more plausibility in Wicksell's idea that business cycles are caused by inherent fluctuations in market interest rates above and below the natural rate.

Which sounds a lot like what Austrians are saying, only Austrians aren't picking some arbitrary level as 'natural' beyond what would naturally occur in a free market, and have a better explanation based around central banks and FRB as opposed to vague refferences to 'inherent uncertainty about the future, as well as by trend-following behaviour'.

Re: Anatole Kaletsky on Austrian economics

Daniel James Sanchez — Tue, 21 Jul 2009 00:10:58 GMT

Okay, NOW he posted. But he didn't deign to respond to me. However, he essentially ceded to my first two points, because in his response to his "colleague" (see below), he completely changes his story about what Austrians think economic busts do and the alleged Austrian theory of "natural business cycles" (I bolded the relevant bits). Of course he doesn't acknowledge the corrections, or admit that he was wrong. And of course he proceeds to replace his corrected falsehoods with a swath of new ones. Oh well, at least he probably won't be spreading those two particular lies about AE in the future.

Dear Will

Thank you for this very well-reasoned response.

I didn't mean to suggest that Austrian economists want to create deep depressions just for the sake of it, or out of a sadiistic desire to inflict pain. But eocnomists of the Austrian school do tend to suggest that severe recessions are necessary to eliminate and deter boomtime excesses of investment and financial speculation (as well as for the micro-economic reasons discussed by Schumpterer, with which I have a lot

more sympathy). In fact, you make this point yourself in your very clear summary of the Austrian theory below. I think this is wrong for the three reasons I detailed in my earlier email:

(i) The economic costs of serious busts are too high in comparison with this alleged disciplining effect.

(ii) There is no empirical evidence that the disciplinig effect actually makes an eocnomy more effciient - on the contrary, economies in which demand management has continuously prevented severe recessions occurring

have had the highest productivitry growth

(iii) Even if punitive busts of the Austrian kind were economically desirable, it is hard to imagine the political circusmastance in which they would be allowed to happen, whether in a democracy or in a dictatorship.

I also disagree with the Austrian idea that business cycles are created entirely - or mostly - by central bank "mistakes" and could therefore be avoided in a gold-based monetary system. Again, this goes against the empirical evidence, which shows that business cycles in monetary systems based on gold have been more frequent and more severe. I think that even from the Austrian point of view that focuses narrowly on investment

excesses and errors in price formation, there is much more plausibility in Wicksell's idea that business cycles are caused by inherent fluctuations in market interest rates above and below the natural rate. Wicksell , like Fisher, Keynes and Frank Knight,. recognised that such fluctuations are driven by inherent uncertainty about the future, as well as by trend-following behaviour, which are intrinsic features of any capitalist system. It is, in my view, both naive and dishonest to blame all such errors of judgement and the cyclical patterns they follow, on interfering governments and incompetent central banks.

Having said all this, I agree with many of your thoughts about the intrinsic inefficiency of government and especially about the difficulty of reversing "temporary" programmes once they get built into bureaucratic structures. But I think that the time politicians should focus on eliminating waste fraud and abuse in government is during the boom phase of the cycle not the bust. In this respect, Bill Clinton and Larry Summers had a much better record of cutting back the size of government than did George W.Bush.

Anatole

Re: Anatole Kaletsky on Austrian economics

Esuric — Mon, 20 Jul 2009 20:56:26 GMT

Keynesians want to lower interest rates when times are good so that they become great! But when times are bad, interest rates will rise, putting additional pressure on the economy, when they should be falling.

Re: Anatole Kaletsky on Austrian economics

nirgrahamUK — Mon, 20 Jul 2009 20:51:02 GMT

I thought I was being informal and 'cute' with my penetrating one-liner barbs of wisdom.

my bad. :-p

Re: Anatole Kaletsky on Austrian economics

RobH — Mon, 20 Jul 2009 20:41:27 GMT

it came across that you were mocking me, sorry if that was a misinterpretation on my part

Re: Anatole Kaletsky on Austrian economics

nirgrahamUK — Mon, 20 Jul 2009 18:55:34 GMT

did i say something false or pointless?

Re: Anatole Kaletsky on Austrian economics

RobH — Mon, 20 Jul 2009 18:49:34 GMT

are you contributing to the thread or just acting retarded?

Re: Anatole Kaletsky on Austrian economics

nirgrahamUK — Mon, 20 Jul 2009 18:39:17 GMT

total liquidation? are we talking about fractional reserve banking systems crashing. oh dear :-/

Re: Anatole Kaletsky on Austrian economics

RobH — Mon, 20 Jul 2009 18:36:10 GMT

a deflationary cycle from a conventional perspective in that people try and pay off debts which shrinks the effective money supply (M3) which puts pressure on asset values and collateral values which if severe enough might tempt a purging outcome where a total liquidation occurs and people lose a lot of money, i mean push the economy and wealth levels well below trend.

Re: Anatole Kaletsky on Austrian economics

nirgrahamUK — Mon, 20 Jul 2009 18:23:56 GMT

I dont want to guess what a deflactionary 'cycle' might mean...

the norm in a healthy capitalist economy would be price deflation .... not price inflation like in sick socialized economies.

Re: Anatole Kaletsky on Austrian economics

RobH — Mon, 20 Jul 2009 14:59:17 GMT

I dont know enough about either Austrian theories or the other schools to properly argue with them. All the other posters are economists working at Gavekal.

The central part of their argument versus the austrian argument is that the governments should inflate the money supply and offer a social safety net and smooth out govt spending via defecits whereas the austrians advocate govt cut backs mainly though tax cuts. The austrians also think a new cycle starts itself where as the conventional economists believe in a deflationary cycle taking hold. Perhaps someone more knowledgable could show how a deflationary cycle is not possible in the austrian school?

You know unless mainstream commentators who are listened to understand Austrian economics it will never be taken seriously and Gavekal is a widely subscribed to economic research group aside from Kaletsky's articles in the London Times newspaper.

Thanks

Rob

Re: Anatole Kaletsky on Austrian economics

MatthewWilliam — Mon, 20 Jul 2009 03:25:32 GMT

Lilburne, I don't think that was written by Anatole as a response to you. it was written by a guy called will Denyer (check the username) .

Koletsky writes for The Times of London.

Re: Anatole Kaletsky on Austrian economics

Daniel James Sanchez — Mon, 20 Jul 2009 02:12:29 GMT

Here's his response. I can't figure out if it's addressed to me. And it seems to contradict what he said earlier several times.

Thanks for adding your remarks. They were thought-provoking, provide multiple claims for me to explore, and also give me a better understanding of the assumptions from which you are working.

As for the Austrian school of thought, I think I need to point out that my understanding of Austrian economics is different than yours.

While I cannot speak for all of them, I do not think most Austrians WANT for deep depressions. In fact, a lot of Austrians spend a lot of their time and energy trying to warn against policies they believe cause and/or prolong depressions. You can debate which of their warnings/proposals are well-founded economically and which are not, as well as which are politically possible and which are not, but I do not think it is fair to say they want for deep depressions.

As I understand them, Austrians generally think that governments have taken on responsibilities, and grown in size, far in excess of the ideal (differences of opinion exist within the school as to what the ideal is exactly, but on this they generally agree). As a result of their bloated footprints on the economy, when governments mis-step, the impact can be significant and systemic. Austrians think that inefficiencies and excesses build up on a systemic basis during the boom years largely as a result of policy mistakes (whether monetary, fiscal, regulatory--or even due to the expectation of future policies, e.g., of various sorts of expected "bailouts" for the banks when the party ends--including an unnaturally steep yield curve that helps banks recapitalize). Given this, it is understandable that Austrians are generally skeptical of allowing the culprit (government, in their opinion) to take on even more responsibilities and grow even larger in size when crisis strikes. Among other reasons, I think they sympathize with Milton Friedman's warning that "few things are more permanent than temporary government spending plans".

I agree that most Austrians do not find government spending to be ineffective. After all, if they thought it had no effects, I cannot imagine they would put so much effort into warning against it. And I agree that Austrians do tend to propose a relatively, or completely, hands-off government response to severe economic downturns. But right or wrong economically, this is not because they want to people to suffer. It is because Austrians think that as unfortunate (and in their opinion, unnecessary) depressions are, government interventions generally tend to make matters worse. If anything, they say the government should remove the distortions that helped cause the recession/depression; not pile on more interventions. Further distortions may, at best, soften the initial blow of the correction, but they will also complicate market signals dictating necessary corrections, and as such prolong the return to sustainable growth. At worst, new interventions will only add to the existing problem, more distortions, corruption, unjust transfers of wealth, new excesses, etc... For example, price fixing (whether of goods, labor, interest rates, exchange rates, etc...), subsidies, bailouts, protectionism, etc... all prevent the economy from making the adjustments necessary for getting the economy back on a sustainable growth path (referring to "growth" here not as measured by GDP, but as the sustainable drive toward greater productivity and higher standards of living--which they admit is difficult or impossible to measure accurately). Moreover, Austrians think protections on the downside are remembered by market participants and lay the seeds for the next boom...and bust (the whole moral hazard argument).

Given my current understanding of economics (which I am of course still developing), I think governments should massively reduce their spending, taxes and interventions. Now, PERHAPS, in the depths of recession or depression, it is not the time to shake things up further by cutting government spending and government employment. And PERHAPS there is even a case for a temporary increase of government spending during drastic times (I mean to read Richard Koo's book soon, which argues why increased government spending is necessary, not during ordinary recessions, but during what he calls a "balance sheet recession"--I listened to a lecture he gave recently and was intrigued but not yet convinced--so I'll read his book). However, like Charles, I'm skeptical of handing over even more of the reigns to government, as I'm afraid they will not give them back. I do see how monetary policy could be of use in softening the blow of a depression, saving banks and reigniting credit growth and GDP statistics. Whether the government should be involved in money and banking (beyond enforcing contracts and protecting against fraud and violent coercion ) in the first place is something I continue to study. I currently lean toward NO (and am not afraid to voice that opinion), but I have heard some very good arguments in favor of monetary intervention as well (from you, Charles, Louis, and others).

Like I said in my first email, and Charles' reiterated, I know that our job is to study the world as it is, and help people position themselves financially in accordance with reality. But since this is the weekend, and since you decided to write quite a bit on your understanding of Austrian economics, I thought I'd share my own understanding. I try to focus most of my efforts during the weak on studying the realities of today, and then spend my free time formulating "pipe-dreams"--in part because I find it fun, but also because I think the process helps me understand realities of the day better as well. And who knows, while a lot of economic proposals may not be currently politically possible, as you've said, the impossible can become the probable without ever passing through the improbable.