Economics Questions

Re: Real world emprical test of Keynes vs Hayek?

ViennaSausage — Thu, 15 Jul 2010 19:30:04 GMT

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.

Re: Real world emprical test of Keynes vs Hayek?

hugolp — Thu, 15 Jul 2010 18:45:39 GMT

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.

Re: Real world emprical test of Keynes vs Hayek?

wolfman — Thu, 15 Jul 2010 18:40:46 GMT

They key here is not whether we have inflation vs. deflation. But how each is being measured by Keynesian vs. Hayek.

Re: Real world emprical test of Keynes vs Hayek?

ViennaSausage — Thu, 15 Jul 2010 17:00:08 GMT

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?

Re: Real world emprical test of Keynes vs Hayek?

hugolp — Thu, 15 Jul 2010 10:06:36 GMT

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.

Re: Real world emprical test of Keynes vs Hayek?

ViennaSausage — Thu, 15 Jul 2010 08:15:10 GMT

"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.)

Re: Real world emprical test of Keynes vs Hayek?

Jon Irenicus — Thu, 15 Jul 2010 05:30:41 GMT

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?

Re: Real world emprical test of Keynes vs Hayek?

Smiling Dave — Wed, 14 Jul 2010 21:10:10 GMT

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.

Re: Real world emprical test of Keynes vs Hayek?

Caley McKibbin — Wed, 14 Jul 2010 21:03:46 GMT

What are you doing with Keynesian friends?

Re: Real world emprical test of Keynes vs Hayek?

Joe — Wed, 14 Jul 2010 18:41:32 GMT

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.

ABCT has things to say about prices, but not the general price level. It says that prices will rise in the higher order goods. All this new credit is trying to pull resources away from their more productive uses.* Companied with level, followed by increasing consumer prices as the newly created money begins to flow through the economy.

*As opposed to under a savings induced growth period in which resources in the lower ordered stages are 'released' to the higher order stages, due to the change in time preference.

Re: Real world emprical test of Keynes vs Hayek?

Esuric — Wed, 14 Jul 2010 17:56:09 GMT

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).

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%.

Re: Real world emprical test of Keynes vs Hayek?

silverharp — Wed, 14 Jul 2010 17:18:34 GMT

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

Ludwig von Mises describes the endgame brought on by reckless expansion of credit: "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

http://globaleconomicanalysis.blogspot.com/2006/02/inflation-what-heck-is-it.html

Re: Real world emprical test of Keynes vs Hayek?

ViennaSausage — Wed, 14 Jul 2010 16:52:25 GMT

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.

Re: Real world emprical test of Keynes vs Hayek?

ViennaSausage — Wed, 14 Jul 2010 16:12:13 GMT

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?

Re: Real world emprical test of Keynes vs Hayek?

nirgrahamUK — Wed, 14 Jul 2010 14:48:05 GMT

what if the government imagines up some money to buy bonds with?