Economics Questions

Re: Krugman on Austrian economics and comments

John James — Thu, 20 Sep 2012 04:04:19 GMT

I guess spammers can be useful for something. This was a decent bump.

Re: Krugman on Austrian economics and comments

Jonathan M. F. Catalán — Sat, 12 Dec 2009 20:47:24 GMT

Student:

<snip>

I see what you mean now. I hadn't taken into account capital accumulation. Why do you believe that the idea that countries with lower interest rates do not have more capital than countries with higher interest rates? Let's assume a free-market in both countries (that is, there is no "dead capital" in existance). By the way, I bought Contra Keynes and Cambridge mostly to read Piero Sraffa's critique of Hayek's Prices and Production.

If you believe that capital theory is not important in macroeconomics, then what is?

Re: Krugman on Austrian economics and comments

scineram — Sat, 12 Dec 2009 15:51:27 GMT

Student:
But, capital theory does not play a huge role in modern macroeconomics, so the problem has basically been ignored.

There was an interesting discussion of what makes ABCT distinctively Austrian recently. See espacially Pietro's comments. In the end they settled on capital theory.

Re: Krugman on Austrian economics and comments

Caley McKibbin — Sat, 12 Dec 2009 09:07:14 GMT

Well, we don't know the answer to the question of how many pennies are on seabeds.

Re: Krugman on Austrian economics and comments

Sam Armstrong — Sat, 12 Dec 2009 08:27:46 GMT

Krugman makes a lot of assertions in that article that he states Austrians have no answers for. Anyone care to find some articles that refute what he says they have no answers for?

Re: Krugman on Austrian economics and comments

Prateek Sanjay — Fri, 11 Dec 2009 17:48:13 GMT

In this article

http://www.slate.com/id/9593

Krugman says he does not take Austrian ideas of business cycles seriously enough to comment on them.

I guess the fact that he goes as far as he does is a sign that he has already taken more effort than he is willing.

Mr. Catalan, I don't Dr. Krugman has much to worry about his reputation. It is high enough as it is, and he is in the safety of government approval. About the most concession he has probably ever made is towards the giant Milton Friedman, but other than that, I don't think he sees the others big enough to comment on.

I think a more enthusiastic man who'd be willing to defend Keynesian critiques from opponents would be Stiglitz, who has a pretty strong opposition to "market fundamentalism". A debate between him and an Austrian would be interesting.

Re: Krugman on Austrian economics and comments

Student — Fri, 11 Dec 2009 14:55:05 GMT

Jonathan M. F. Catalán:

You have yet to disprove what I have been saying. I think you are actually ignoring what I'm saying, or you forgot the context behind the argument. None of what you have said suggests that the amount of capital in an economy has grown as a direct result of a low interest rates. The original quote:

"Earlier ... Samuelson fell into the similar error of asserting that economies with a lower steady-state interest rate had more capital..."

Haha I lied again. I said I wasn't going to continue, but I think I see one major problem. You don't see why lower interest rates might imply an economy with more capital. So lets forget about "roundaboutness" for a second and consider that question.

I think we both agree that Austrains would argued that if the interest rate falls, investment will increase. Why? Because the marginal benefit of an investment is its rate of return and the marginal cost of an investment is the interest rate (defined as the amount the entrepreneur must pay for the borrowed funds used to under take the investment). When you reduce the interest rate, you are essentially reducing the marginal cost of investment so other things being equal he will invest more. Agreed?

So if you have two seperate countries, but one has a lower interest rate than the other, then the country with the lower interest rate will be investing more (assuming they are identical in every other way). Agreed?

But what is investment? Well, from the entrepreneurs perspective, it is the purchase of goods that are not used for consumption but for future production. Stuff like factories, computers, etc. In other words, they purchase *capital*. Agreed?

So, by saying one country invests more than another, we are saying that it is accumulating capital more quickly. Agreed?

If we can agree on all these points, I am not sure how you could argue that we would not expect the country with greater investment to have a greater capital stock, holding everything else equal.

For example, say you have two countries (1 and 2) that have been identical in every way until this year. That means thier existing capital stocks are exactly the same. But this year, the folks in country 1 decided to consume less and save more. The interest rate falls right? That means the folk in country 1 will now be investing more than the folks in country 2. Essentially, they will be adding more to their capital stock than the folks in country 2. And as a result, at the end of this year, the folks in country 1 will have more capital than the folks in country 2.

And this is not just a consequence of Austrian economics. In fact, this is how economics is still taught in the mainstream. Check out Barro's Macroeconomics Textbook. Barro describes investment in exactly this way.

So if the Austrians are wrong on this point, so is almost everyone else. And technically, I believe everyone is probably wrong on this point. In the context of Samuelson's comments, he later retracted those remarks because of the implications of "reswitching". For a description of what "reswitching" is and how it might threaten the Austrian conception of capital accumulation and roundaboutness, I suggest you read this article.

"Reflection on Reswitching and Roundaboutness" by Roger Garrison

http://www.auburn.edu/~garriro/garrison.pdf

In this article, Garrison directly discusses the Samuelson example being quoted and tries to explain why we don't need to worry about reswitching (I would give you CliffNotes but I am at work). You will also see that everything Garrison says is completely consistent with my story about how Austrian theory should imply that lower interest rates imply greater "roundaboutness" and greater capital accumulation.

PS* I should note the argument that reswitching probably invalidates the simple story of capital accumulation presented here is not a big secret. And for a while in the 1960s it was a point of great debate.

http://en.wikipedia.org/wiki/Cambridge_capital_controversy

But, capital theory does not play a huge role in modern macroeconomics, so the problem has basically been ignored.

Re: Krugman on Austrian economics and comments

Daniel James Sanchez — Fri, 11 Dec 2009 07:30:19 GMT

Economics and Moral Cowardice

Re: Krugman on Austrian economics and comments

Le Master — Fri, 11 Dec 2009 06:14:40 GMT

Your comment is probably too late, Lilburne. It'd be glorious if they accept it, though.

By the way, check out the first Comment of the Moment on the side bar of the blog (the one by Servius). Not a bad comment to be featured on the blog.

Re: Krugman on Austrian economics and comments

Telpeurion — Fri, 11 Dec 2009 06:10:35 GMT

Student:
So why are Austrians different? Personally, I think it boils down to language. Many Austrians (at least those of the LvMI varierty) are unwilling to speak the language of modern economics--mathematics. And whats more they are unwilling to read articles written in that language. So they are content to keep the truth to themselves. *shrug* So much worse for the world, I suppose. But it is hardly the mainstreams fault for not begging the Austrians to come outside and play. If the Austrians don't want to contribute to the mainstream discussion, many more people are willing to do so.

I think it is because the Lew Rockwells of the world think actively engaging the government in mainstream publications and institutions would be nothing short of selling their souls. Note the constant criticism of CATO for their seminars featuring government officials (Oh no!). I respect the fact that many around here view compromise with the 'enemy' as only turning to the advantage of your opponents. The historical experiences of the German Liberal Party and Bismarck are marked as an example. The Ludwig von Mises Institute seems focused on educating the masses, and to that extent they have been largely successful, but I think the alienation of any non-purists is just going a bit too far. If CATO and LvMI would work together rather than have their stupid squabbles I think the liberty movement would really get going.

As an aside, I am curious as to what Lew Rockwell does for a living. I know that he was a political staff member for Paul but that was years ago, what does he do now? I am pleased with the efforts of the institute and gladly donate, but I am curious as to whether or not my money is going to paying its staff members to write blogs. (This whole post probably sounds hostile to Mr. Rockwell, that is not my intention)

Re: Krugman on Austrian economics and comments

Daniel James Sanchez — Fri, 11 Dec 2009 05:59:50 GMT

Caley McKibbin:

Last link is dead.

Thanks. Fixed.

Re: Krugman on Austrian economics and comments

Caley McKibbin — Fri, 11 Dec 2009 05:56:23 GMT

Last link is dead.

Re: Krugman on Austrian economics and comments

Daniel James Sanchez — Fri, 11 Dec 2009 05:50:28 GMT

Jonathan M. F. Catalán:
Well, although this is probably a good thing (Austrian movement seems to be gaining strength), in a comment I challenged him to provide a critique of the Austrian theory

Good comment, Jonathan. I'm glad it got through!

I weighed in, too, although my comment is still pending moderation...

Thank you Dan for linking to my archive.
To "A fan in NY" and "M", You should know the "crazies" in the Austrian tradition helped revolutionize economics with subjective marginal utility value theory (Menger), and did so for the BETTER (unlike Keynes), played a huge role in developing time preference and capital theory (Bohm-Bawerk and Fetter), connected monetary theory with subjective value theory (Mises), predicted the Great Depression (Mises), took the lead in the calculation debate over socialism (Mises and Hayek), and predicted the present crisis (Peter Schiff was only the most televised Austrian to do so). Meanwhile the "respectable and sane" Keynes and Krugman believe burying bottles of cash in coal mines would have a net salutary effect on the economy (for an overview this and other gems to be found in Krugman's Keynesianism read http://mises.org/daily/3583). And yes, Paul Krugman really did voice support for a housing bubble as I demonstrate in this article: http://mises.org/daily/3539

Re: Krugman on Austrian economics and comments

Vitor — Fri, 11 Dec 2009 04:37:36 GMT

Student:

If you are interested, check out page 13-15 of the article I linked for what I believe is convincing critique of the Austrian theory of roundaboutness.

Personally, it seems to me that the Austrian contributions that have not already been incorporated into the mainstream have been considered by prominent scholars and found wanting. Maybe that judgement is wrong, but modern Austrians do not do much to correct the situation. They insist that the mainstream approach their theories on their terms. But, for better or worse, that is not the way to get your work noticed.

Peter Boettke has the right idea--publish in well respected journals, present at major conferences, teach at the most respected institutions that will hire you. And if there is anything to whats going on in Austrian economics today, it will work its way to the top.

PS* Another example of Austrian influence, in their "Time to Build" paper, Prescott and Kyland explicitly use Austrian-influenced notions of the production structure to explain economic fluctuations. This paper would go on to serve as a primary foundation in Real Business Cycle Theory and would help win these authors the Nobel Prize.

http://www.jstor.org/stable/1913386?seq=1

I really think if you just google around, you will find plenty of Austrian influence in both mainstream micro and macro.

PPS* Oh one more story I remember reading. I could have sworn I saw somewhere Robert Lucas say that his island models were an attempt to resurrect insights from Hayek's business cycle theory. Can't find it on google, but I'm sure I saw it somewhere.

Of course most mainstream economists will find many austrian contributions "wanting", since the austrian theory is quite explicity about the limits of knowledge that an economist can have, what is very, very frustrating for those who want to "guide" the resources of society in a "wiser" manner than the market.

Re: Krugman on Austrian economics and comments

Esuric — Fri, 11 Dec 2009 04:35:27 GMT

Student:

Again, I take it you are not directly familiar with Krugman's work? At least check out his Nobel Prize Lecture before you criticize him for things he hasn't done.

What has he done? None of his work is original whatsoever. He's a political shill who's more interested in his own legacy then he is in economics; his policy advice is dangerous and potentially disastrous. Why would anyone take time out if their day to further familiarize themselves with Krugman? We learn about his stolen theories in international eco.

Student:
I think some quick google searching will convince you that Keynesians have historically actively engaged Austrian economics. You may not see the same level of engagement today because Austrians have effectively separated themselves from the mainstream. But it has not always been that way.

Austrian economics is simply marginal economics before the so-called Keynesian revolution, which later broke off into monetarism, only to create the synthesis--neo-Keynesianism. Keynes, Hayek, Mises, and others all used the Wicksellian framework when explaining business cycle fluctuations. Hayek showed that Keynes misunderstood the Wicksellin framework and the indirect transition mechanism as laid out in the Treatise, forcing Keynes to retreat on almost all of his positions (except for inventory adjustment mechanisms). Main stream neo-Keynesians don't include time, don't understand the entrepreneur, don't include the structure of production, try to work around uncertainty with probability theory, and believe capital to be a homogeneous blob. So I don't really know what you're talking about. The Solow model is not Austrian: Austrian capital theory is about more than providing enough savings to cover depreciation and population growth, it's about the elasticity of the structure of production, and the kind of capital goods produced.