Link that lecture if there is one. It sounds like a riot.
Johnathan,
As far as I know, Paul Krugman has never written an econometric paper in his life. Krugman is exclusively a theoretical economist. And some of his early contributions were to theoretically demonstrate how increasing returns to scale can be used to explain intraindustry trade. And his work did have policy implications that could potentially support "infant industry" style arguments, but Krugman himself never supported these. In fact, Krugman has been a vocal advocate for free-trade many times.
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.
http://nobelprize.org/nobel_prizes/economics/laureates/2008/krugman-lecture.html
Ambition is a dream with a V8 engine - Elvis Presley
Caley McKibbin: Link that lecture if there is one. It sounds like a riot.
http://www.amazon.com/Lectures-International-Trade-Jagdish-Bhagwati/dp/0262522470/ref=sr_1_2?ie=UTF8&s=books&qid=1223911550&sr=1-2
Jonathan M. F. Catalán: The amount of capital available to invest remains the same. Whether it's distributed towards consumption or production is what matters. The key word is Mises' quote is "available". More capital has been made available to investors; the capital in the economy remains the same (until more is created through production)..
The amount of capital available to invest remains the same. Whether it's distributed towards consumption or production is what matters. The key word is Mises' quote is "available". More capital has been made available to investors; the capital in the economy remains the same (until more is created through production)..
I don't believe you are interpreting Mises correctly. Maybe if I quote some who says exactly what I said more directly.
Since individuals have higher incomes, their savings increase, lowering the interest rate and allowing for increased (net) investment and a lengthening of the average period of production (i.e. capital-deepening)
http://mises.org/journals/scholar/young.pdf
The very definition of capital deepening is an *increase in capital intensity*.
http://en.wikipedia.org/wiki/Capital_deepening
Student: http://mises.org/journals/scholar/young.pdf The very definition of capital deepening is an *increase in capital intensity*. http://en.wikipedia.org/wiki/Capital_deepening
Where does it say that the amount of capital in an economy has increased? All of that just suggests what I said; the amount of capital available to investors has increased, not aggregate capital.
On Krugman, in one of his posts on macroeconomic theory he himself agrees that he has used econometrics to prove several of his theories correct. I am currently searching through the NYT and his blog to find that article/post.
Capital deepening MEANS an increase in the amount of capital in the economy.
Capital deepening is a term used in economics to describe an economy where capital per worker is increasing.
Student: Capital deepening MEANS an increase in the amount of capital in the economy.
You are misinterpreting the quote. Capital-deepening in the stages of production. Right. That's what I said to begin with; capital is being made available through savings. Of course that the amount of capital per capita will increase in the capital-goods sector if capital is being transferred from savings to the stages of production. My point still stands.
This is an interesting quote from Krugman ( http://krugman.blogs.nytimes.com/2009/09/11/mathematics-and-economics/ ):
Math in economics can be extremely useful. I should know! Most of my own work over the years has relied on sometimes finicky math — I spent quite a few years of my life doing tricks with constant-elasticity-of-substitution utility functions. And the mathematical grinding served an essential function — that of clarifying thought. In the economic geography stuff, for example, I started with some vague ideas; it wasn’t until I’d managed to write down full models that the ideas came clear. After the math I was able to express most of those ideas in plain English, but it really took the math to get there, and you still can’t quite get it all without the equations.
:) I don't believe the quote says that all. In fact it says that a lower interest rate will lead to a lengthening of the production period (i.e. capital deepening). And capital deepening is simply defined as an increase in capital intensity. There was no mention by anyone about this being only the case for capital goods sector.
And infact, that comment kinda makes me think we need to spell this out a bit. Lets just think about this for a second. Here is a graphical representaiton of the stages of production known as the Hayek Triangle.
If the interest rate falls, this means that people are willing to forego consumption now for consumption later. The lower interest rate drives down the competitive gross profit margin in each stage of production. That is, for each stage input prices are bid up in relationship to output prices. the cumulative effect of this relative-price adjustment increases with increased remoteness from the final stage. Accordingly, resources are shifted out of late stages and into early stages in response to the lower time preferences. As illustrated here...
Now, as entrepreneurs invest in early stages of production they will be purchasing a lot of capital goods for building factories and the like. This is why capital per worker in the production of consumer goods increases.
Now I think that's all I have in me. I hope that makes sense. If not, I have posted three different links that I believe support what I'm saying. But since I don't even think the production period is a useful concept, I don't think I can put much more energy into discussing it. Hope this helps! :) Have a good evening.
Jonathan M. F. Catalán: This is an interesting quote from Krugman ( http://krugman.blogs.nytimes.com/2009/09/11/mathematics-and-economics/ ): Math in economics can be extremely useful. I should know! Most of my own work over the years has relied on sometimes finicky math — I spent quite a few years of my life doing tricks with constant-elasticity-of-substitution utility functions. And the mathematical grinding served an essential function — that of clarifying thought. In the economic geography stuff, for example, I started with some vague ideas; it wasn’t until I’d managed to write down full models that the ideas came clear. After the math I was able to express most of those ideas in plain English, but it really took the math to get there, and you still can’t quite get it all without the equations.
Just so we're clear. You do know that econometrics is not simply mathematics applied to economic subjects. Correct?
http://en.wikipedia.org/wiki/Econometrics
Student: :) I don't believe the quote says that all. In fact it says that a lower interest rate will lead to a lengthening of the production period (i.e. capital deepening). And capital deepening is simply defined as an increase in capital intensity. There was no mention by anyone about this being only the case for capital goods sector.
I never said that was untrue. You are arguing along a tangent of what I originally posted, which specifically said that the amount of capital in an economy grows when interest rates are decreased (specifically, it suggests that the Austrian theory believes that lower interest rates directly lead to an increase in capital in an entire economy). None of what you are saying suggests that this is true. Capital intensity increases, but this is because the capital, which has been saved instead of consumed, can be borrowed and used to lengthen and widen the stages of production.
Accordingly, resources are shifted out of late stages and into early stages in response to the lower time preferences.
EXACTLY. (Bolding in the quote is mine.) Lower interest rates does not cause an increase in resources, until after each successive stage of production is completed. Roundaboutness leads to an increase in capital (through the production of capital-goods father away from higher stages of production), not vice versa.
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..."
Student: Johnathan, Just so we're clear. You do know that econometrics is not simply mathematics applied to economic subjects. Correct? http://en.wikipedia.org/wiki/Econometrics
I have taken plenty of econometrics classes, thank you very much. But, Krugman's quote says math, not econometrics.
I watched that whole lecture and I don't see what is so special about it. Boring as hell. Maybe it is impressive to some old ricket that believes perfect competition or something. My guess is that he was given the prize for obsessively attacking the perfect competition model, which is obsessively hated by socialists.
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.
"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."
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.
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.
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
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
Last link is dead.
Caley McKibbin: Last link is dead.
Thanks. Fixed.
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)
This is apparently a Man Talk Forum: No Women Allowed!
Telpeurion's Disliked Person of the Week: David Kramer
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.
Economics and Moral Cowardice
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.
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.
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?
Well, we don't know the answer to the question of how many pennies are on seabeds.
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.
Student: <snip>
<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?
I guess spammers can be useful for something. This was a decent bump.