[Politics] Economic Schools Debates

[Username17]

How often is inflation caused by just monetary expansion, with no other confounding factors? Inflation seems to have a lot stronger correlation with political instability than the reverse, since substantial expansions of the monetary supply (e.g. Japan) hardly do anything. Hell, I think I might do a mini-graph showing that surpluses or deficit reduction caused by revenue increases has a lot stronger correlation with recessions.

For examples of that you need to go to Eastern Europe. Word got out the Serbian nationalists were printing extra money to pay for pet projects. Inflation went fucking nuts. By 1993, they were printing 500 billion dinar notes and then the country collapsed into civil war. You get something similar in Hungary.

While the US Federal Reserve appears to be able to fiat two trillion dollars into existence and have inflation stay below historical norms, money printing for ideological reasons seems to have a much lower tolerance among the people. That is: is respectable people in suits make a speech about "blah blah demand curve blah blah liquidity blah blah" and then announce that they are putting an extra trillion dollars into circulation, no one cares and inflation doesn't move. Well sure, Austrian types announce the sky is falling, but enough people accept that things are working responsibly that the inflation dial barely twitches, if at all. But if some political party announces that they are printing a bunch of money because they want party hats for dogs, the economy collapses.

That is to say: whenever you print money, you have to come off as respectable and serious or people will freak out. If there is even a hint that the people at the mint are printing money to enrich themselves, political instability is not far behind.

1.) What does Paul Krugman have against MMT or its offshoots? I can understand him not bringing it up because the American political elite would label him as (even more) shrill and delusional if he did. But it seems like he's actually against it. And not in a reasoned way, but in a 'tut tut unserious person' way that he accuses the political elite of doing towards traditional ideas.

Ancient History already went to the link. To me it sounds like he gets alarmed at some of the blanket statements made by MMT people and then rejects things without considering the rest of it in context. Consider this portion:

The point is that there are limits to the amount of real resources that you can extract through seigniorage. When people expect inflation, they become reluctant to hold cash, which drive prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc.. Do the math, and it becomes clear that any attempt to extract too much from seigniorage — more than a few percent of GDP, probably — leads to an infinite upward spiral in inflation. In effect, the currency is destroyed. This would not happen, even with the same deficit, if the government can still sell bonds.

MMT agrees with that unreservedly. It's not an objection to MMT, that's MMT's theory of currency of inflation pretty much in a nutshell.

My impression is basically that Krugman has come to almost exactly the same conclusions as the MMT crowd, but because he came to them from a different direction he labels his terms differently and the two groups are talking past each other. MMT thinks of the "deficit" as the amount of currency being injected into the economy, such that a "deficit" that is too high would saturate demand for currency and create inflation. Krugman is thinking about the deficit as actual money that the government owes and printing money as a separate action used to cover that obligation by injecting currency into the economy. But it's really the same.

Krugman just chokes and sputters when MMT people state that the government can't go bankrupt. Which of course, they can't. Both MMT people and Krugman accept the need for money printing for the economy to grow. Both Krugman and MMT accept that too much money printing can increase inflation and be self defeating. Both Krugman and MMT acknowledge the primary difference between Greece and Japan or Italy and the UK. But the hats are slightly different, and that makes them shake their fists at each other.

Honestly, it wouldn't really surprise me if Krugman actually did fully understand and embrace MMT and even did MMT analysis at home, but felt that for political reasons he had to place his discussions in non-MMT terminology. Because when he wrote out his "objections" to MMT, it was actually just the limits that MMT already says exist on policy, not really any new objections from outside the theory.

-Username17

[Username17]

A good discussion of Krugman on MMT is here.

-Username17

[Koumei]

So, many people, including/especially Frank, have had delightful things to say about the Austrian School. Where should I look in order to do some reading on them myself?

And related, you make it sound like they are repeatedly wrong - they make an economic model that "should totally work", it doesn't work, and then they say it's not because the model was wrong, it was because, in this model, people didn't turn out to have perfect knowledge and not make stupid decisions - or whatever.

Am I right in assuming they know it's a load of shit and that they are personally getting rich off this (at the expense of whoever listens to them)? Or is it just a bunch of crazy people with bad ideas? And presumably, whether by design or by broken clock syndrome, they've also had some actual good ideas?

(Disclaimer: I ask this stuff because I largely know fuck-all about economics and would find it interesting to educate myself on it.)

[Ancient History]

If you're going to start with the Austrian school, then go here - it's best to see what they say about themselves first, and there's a reading list of core texts if you desire to look into it further.

[Username17]

There's also a pretty good smackdown on Austrian Economics here.

Long story short: they reject empiricism, and are thus empirically wrong.

Edit:
From Ancient History's link:

Say discovered the productivity theory of resource pricing, the role of capital in the division of labor, and "Say's Law": there can never be sustained "overproduction" or "underconsumption" on the free market if prices are allowed to adjust.

It should be pointed out that Say's Law is not actually true and that General Gluts do in fact occur. The Austrians cling to a maxim from the early 19th century that was disproved the very moment a recession occurred, and continues to this day to be disproved every time a recession strikes anywhere.

-Username17

[Taishan]

Personally, I've always enjoyed the rap battles. http://www.youtube.com/watch?v=d0nERTFo-Sk

[Ancient History]

It should be pointed out that Say's Law is not actually true and that General Gluts do in fact occur. The Austrians cling to a maxim from the early 19th century that was disproved the very moment a recession occurred, and continues to this day to be disproved every time a recession strikes anywhere.

And when that happens, Austrians usually try to find some excuse - mainly that prices are not allowed to adjust because of government interference or some bollocks. Played very strictly, Austrian economics is a government-hands-off system where banks and businesses are allowed to fail as the market attempts to find its own level - no matter the consequences.

[Lago PARANOIA]

Am I right in assuming they know it's a load of shit and that they are personally getting rich off this (at the expense of whoever listens to them)? Or is it just a bunch of crazy people with bad ideas? And presumably, whether by design or by broken clock syndrome, they've also had some actual good ideas?

It'd be easy to just dismiss them as shills for the overclass, because whether they're sincere or not the effect is the same. I mean, that's basic 'our owning slaves and economic entrenchment enriches you, the poor white Southern farmer' conservative deceit right there.. But as Europe and the American Tea Party have shown us, people actually believe in that shit.

Whether it's a case of astounding ignorance in our elite or just another case of propagandists eventually believing their own propaganda is an exercise left to the reader.

[sabs]

I find it amusing, that a group of people who believe that Money is the Root of all Evil, think that Free Market Capitalism is the savior of all.

Tim Robbins said something interesting the other day. "The menial, low pay, low skill jobs are never coming back" This is the economic truth of America. We will /never/ be able to compete against places like China. Or Africa when someone gets the bright idea that he can pay a Sudanese factory worker $1 a week, instead of a day.

All of these economic models don't take into account several important factors:

Globalization
Technology
Advances in Robotics, Computers, Manufacturing techniques.

The neo-con science bad, education bad, guberment bad (except to keep women and minorities down) movement is /hurting/ America. In a 100 years, when people ask why the hell the United States didn't manage to last 100 years as a world power? They will point to the Republican Party.

[Ancient History]

It's a fine line between pickout out the True Believers from the pack, but there are a couple different things at work here - and the most important is, this is something they can sell. Your average person doesn't understand the velocity of money and their eyes go wide-eyed and fearful when it comes to setting interest rates - because that's big-time grown-up stuff, that's where you're no longer a leaf floating on the river of the world, subject to the whims of the economy. People like austerity because they can understand it from personal experience; politicians et al. like it because you can sell it without going into any in-depth math. If empirical evidence is wrong - if you can just ignore it - well, that's a siren call. People do not, in general, handle piles of numbers well. They don't trust statistics and modelling, unless it was cooked up by some individual of supreme genius and promises tremendous profits.

Because that's the same trick of psychology that has people fiddling with those little puzzles made out of iron nails, trying to bend and twist things that obviously aren't supposed to move that way. They look for a trick because they don't believe the real problem can be solved.

[Lago PARANOIA]

All of these economic models don't take into account several important factors:

What these 'OMG we have to get rid of the minimum wage or they'll outsource our jaerbs' overclass shills keep omitting however is that the flow of money is circular in an economy. That is, while Apple can pay oe dollar a day wages and get a lot of savings, they're still fucking themselves over because the worker can't afford shit with that dollar. Worse still, they can't exactly buy a lot of other shit with that dollar, which drives down the profits (and wages) of people in other industries.

The German autoworker earns almost as twice as much as the American autoworker and German autoplants are well over twice as productive. Of course once this circular flow of money is established, you, then there's an incentive for an individual company to defect to increase their profits/competitiveness. It's a classic tragedy of the commons situation.

[mean_liar]

If you can make widgets on the cheap, that widget has a target market which isn't necessarily the widget-makers.

That circular flow encompasses the entire world, and the world has a per-capita GDP equivalent to Macedonia (about a fifth of the US per-capita GDP).

If you're attempting to sell your widget to the world rather than a population, you better be selling rice steamers and utensils, not iPads. Those things only exist because of wealth imbalances.

[Koumei]

...wow, and I thought there was some hyperbole involved regarding their "Well sure, you loosened regulations and then the economy nose-dived instead of rocketing like we predicted, but that's because there are still regulations at all!" thing and the water-plant comparison. But they're really this mad.

[sabs]

Hey, the republicans view their Loss to Obama in 2012, as "our candidate wasn't batshitcrazy conservative ENOUGH"
They seriously think that, finding some crazy rightwing extremist is what will bring them to the promise land of the Oval Office.

[mean_liar]

...wow, and I thought there was some hyperbole involved regarding their "Well sure, you loosened regulations and then the economy nose-dived instead of rocketing like we predicted, but that's because there are still regulations at all!" thing and the water-plant comparison. But they're really this mad.

It's probably the most shocking/crazy/disappointing/scary thing about the Austrian school and neoconservatives.

[Username17]

The plants and water analogy should be gross hyperbole about how the people in question are using unsatisfactory hand waving to explain away evidence the left introduces to bolster their own point. But it's not. The Austrians really do come right out and say that there is actually no possible real world evidence that would make them change their mind. The Ron Pauls of the world call it "praxeology" - literally claiming to know things regardless of (and even in spite of) evidence.

Now to take the water/plant analogy to the next level, imagine if you would that the plant is GDP and that water is government spending:



And they write This. Can you see any relationship between the Austrian explanation and the observed pattern of actual spending and recession in Europe? Of course not.

Meanwhile, while the more "respectable" wing of Right Wing Thought (the Chicago School) does still claim to be amenable to reason and evidence... they've basically become an obscurantic cult. And yes, just like the water/plant analogy, I'm unfortunately dead serious. Lucas famously said that even the mention of Keynes caused "serious" people to whisper and giggle. That no one taught that stuff anymore. He said that in the fucking 80s. Those guys have spent the last thirty years deliberately refusing to read any competing theories to their own.

And now? Now they are off in crazy town. Having spent the last three decades in a hermetically sealed echo chamber of their own devising, they dig up fallacies from the 1930s and spout them off as new wisdom because they don't know that these ideas aren't new!

John Cochrane, a finance professor at the Booth School of Business at the University of Chicago, said that while Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago. “It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.” To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the stimulative effect, Cochrane said. It also will do nothing to unlock frozen credit, he said…

Aside from the fact that it is demonstrably true that government spending is associated with increased growth, the bitter truth here is that people have in fact been researching how and when and to what degree government spending can spur the economy. The Chicago school rejected the idea half a century ago, but other people didn't and if the Chicago boys ever read anything outside their echo chamber, they'd know that.

-Username17

[Lago PARANOIA]

Aside from the fact that it is demonstrably true that government spending is associated with increased growth, the bitter truth here is that people have in fact been researching how and when and to what degree government spending can spur the economy. The Chicago school rejected the idea half a century ago, but other people didn't and if the Chicago boys ever read anything outside their echo chamber, they'd know that.

-Username17

Unlike the Austrian school, I can straight-up tell you that the Chicago school people are frauds and know that they're frauds. Rmoney has straight up said that cutting spending would be bad in this economy and that we need to increase it -- and of course there's Paul Ryan's budget, which increases overall spending (in defense). In public they'll go on and on about austerity and the government being broke and all that jazz, but when no one's looking they have no problem allocating money to their pet projects.

And of course there's the whole Pinochet and the Chicago Boys debacle. Conservative economists like Friedman know that they fucked up -- even looking pass the gross human rights abuses -- but they don't give a shit because Chile privatized a bunch of stuff and owes the IMF a lot of money.

[Username17]

Unlike the Austrian school, I can straight-up tell you that the Chicago school people are frauds and know that they're frauds.

When it comes to their political advocacy, I think that's pretty clear. John Taylor went out and claimed that he disagreed with "The Taylor Rule" because it was suggesting a course of action that Bernanke and Obama were taking. The Taylor Rule is named after it's inventor... John Taylor. John Cochrane recently came out against both stimulus and austerity thus making the laughable claim that all countries in the world had exactly the right levels of spending and taxation. And hell, how many times have they invoked Milton Friedman (inventor of quantitative easing) in an effort to stop quantitative easing?

But it's not like they don't come up with interesting ideas from time or time or that they don't do math - they do if anything too much math in an effort to "prove" their systems. The Taylor Rule is a real thing, rational expectations didn't work but it was an interesting idea. Real Business Cycle Theory is a fucking joke, but they put it together as a serious scientific hypothesis. And they were right about inflation expectations.

The big deal here is that they were right about inflation expectations in like the 1960s. And none of their theories panned out until like the 90s. Taylor Rule is 1993. They haven't had any successful predictions since then. Clearly, the supreme failure of the vast majority of their theories should be cause for a massive rethinking, but it wasn't. Instead, they buried all the old books and stopped listening to heretical schools.

The Great Recession basically kicked them in the ass. Their models didn't predict anything like this, and they really don't have a policy answer to how to deal with it. Every day their models show things "should" be happening in ways that are totally different to what is actually happening. And their response is to basically say random shit. Cochrane has no fucking model that handles this scenario, so he plays for team Republican and burns through his credibility saying whatever is on the top of his head to try to justify whatever crankass policies the Republican party happens to want to implement at the moment.

-Username17

[Koumei]

...yeah, I then went on to read the explanation of the Chicago School. While it looks like the Austrian school is just a bunch of crazy people who seriously believe some crazy stuff and who nobody listens to*, the Chicago School actually does seem to be designed specifically to promote right-wing ideas and to make money at the cost of setting the economy on fire, and to make big corporations rich at the expense of "everyone else".

Actual conversation:
Me: wow, I thought Frank was just using hyperbole to describe the Austrian school of economics, but no, they're really that crazy.
Girlfriend: wait, Austria has an economy to have a school for?

While Purple (the Dane) might offend you with his view of the world, my girlfriend (the Swede) has a much more realistic view of Europe, that being "Scandinavia is awesome. The rest... are a joke" (including "Wait, Greece has electricity?")

*With occasional exceptions where someone from there goes on to be a big part of a special "Help keep Republicans in power and cause more income inequality" corporation.

[Username17]

The Danes appear to have an unrealistic appraisal of themselves. And in a negative direction. They see things like Danes having to go to Germany for treatment for rare diseases and conclude that Germans must have better healthcare (they don't, Germany is just bigger and has more destination hospitals). They simply assume that countries around them have it as good or better than they do in every aspect. And they really don't.

It's bizarre reverse chauvinism. Denmark is a country where the biggest problems are school bullying and alcoholism. And they seem to think that other European nation states are similarly problem-free.

On the flip side, Danish people have the hardest time getting it into their heads that countries outside Europe are in fact different places. It's very odd. They seem to think the rest of Europe is made out of bigger, richer Denmark, and that the rest of the world is made out of Somalia and Iraq.

-Username17

[cthulhu]

What's the water/plant analogy? I seriously just went through the thread trying to find it.

[Ancient History]

Think of government spending like watering a potted plant. According to the Austrians, the plant should reach its greatest growth when it isn't being watered at all.

[Maxus]

The plant analogy is inexact.

It'd really be more like a plant in your yard.

If situated right, it really will grow on its own in a normal environment. It's when the dry spells hit that you need to get the waterhose out.

[Username17]

The full water plant analogy is this:

First you have a bunch of plants (economies) under observation. Then you give different amounts of water (government spending) to the different plants, and notice that the plants that get more water grow faster and bigger and that plants that get less water grow slower and smaller. The Austrians then assert that the reason plants aren't achieving their maximum potential is that they are getting watered at all.

The Austrians believe in the (thoroughly refuted) "Say's Law": that supply creates its own demand. Because of this, they claim that in a free market economy, general down turns cannot happen. This puts them in quite a bind considering that the most of the world is in one right now and historically they happen all the time. So they developed another system called ABC: Austrian Business Cycle. This claims that government interference with the economy is the source of economic downturns.

So they are in the weird position of claiming that despite the historical fact that counter-cyclic government intervention can mitigate or prevent serious downturns, that the potential of that same government intervention is the thing that causes the downturns in the first place. Hence the water/plant analogy. And of course: the United States had literally dozens of recessions before it got a central bank, making the entire ABC thing fucking laughable.

-Username17

[Fuchs]

What do you think of this?

It's apparently part of a discussion between Krugman and Keen about Minsky.