It is interesting the way people react to various economic proposals on what should be done about the current economic malaise. The two most divergent proposals are those of the Keynesians and the Austrians, with most other proposals being somewhere on a spectrum between the two.
It is interesting because of the disaster that Keynesian economists predict were Austrian proposals to be implemented. If an analogy were to be made between economics and medicine, with the economy being a sick patient, it highlights the absurdity of some of the Keynesian predictions of doom.
Imagine a patient is brought to a hospital with a broken leg. The patient is in pain and unable to walk. Doctor Keynes wishes to give large doses of pain killers, while Doctor Hayek wishes to set the bone before applying a cast. Hearing what Dr. Hayek plans, Dr. Keynes interjects with "There will be a lot of pain while you set the bone. I am interested in treating the patient's pain, your proposals only cause more pain."
Or if a patient is brought in with operable cancer, Dr. Hayek would suggest surgery and a few weeks of recovery. Dr. Keynes would point out that there will be harm caused by the scalpel going in, harm caused to the skin and muscle covering the tumor, and great difficulty for the patient in recovering from the tumor.
These comparisons are absurd, because if the subject were medicine there would be no argument about setting a bone or operating to remove a tumor. But the comparison is also valid.
The Austrian method of ending a recession or a depression is to allow malinvestments to liquidate and to remove barriers to growth. The Keynesian method of ending a recession is to stimulate aggregate demand through fiscal policy, as well as by any other interventionist method since no Keynesian in practice is confined to fiscal policy. Therefore failing industries would be subsidized until theoretically they are no longer failing, and prices that need to fall would be propped up through loose fiscal and monetary policy to prevent the specter of deflation.
Every Keynesian proposal treats a symptom. But what of the actual cause of the ailment? It is the well known "animal spirits", which are not a rational explanation of the cause. Austrian economics, on the other hand, tries to do a diagnosis.
Yes, transition to sound currency and balanced budgets would cause economic turmoil during the transition, and yes some people - especially those who depend on unbalanced budgets and fiat currency - would be hurt. In the long term the short term pain would lead to long term health, like setting a bone.
Showing posts with label Austrian theory. Show all posts
Showing posts with label Austrian theory. Show all posts
Thursday, February 27, 2014
Sunday, January 06, 2013
Krugman's Phony Disaster
Paul Krugman penned an unusually dishonest editorial recently, When Prophecy Fails, in which he chastises the "economic doomsday prophets" for there being no catastrophe coinciding with the fiscal cliff negotiations.
It is an absurd piece because even Paul Krugman must know that those he considers to be "doomsday prophets" are primarily of the Austrian School of economics, and the reason followers of that school see economic hardship increasing has little to do with kabuki negotiations taking place in Washington that won't have any effect on solving the fiscal problems of the United States.
While economists cannot predict politicians and their decisions, there was little reason for anyone to predict that there would be anything other than some variant on the dominant Keynesian model resulting from the negotiations. As it turns out, there were some superficial proposed cuts in spending and a small tax increase on the top income earners, but nothing that would indicate a desire to balance the budget.
When the fiscal cliff negotiations failed to significantly accelerate the collapse of the economy, something no Austrian had reason to predict, Krugman seized the opportunity to say "see, these negotiations failed to significantly accelerate the collapse of the economy."
Some would say that Paul Krugman should know better, but his purpose in writing that was not to convey economic information from the author to the reader. His purpose, as is the case with most of his columns, is political, to lend support to the establishment economic model by virtue of his name and prestige through a straw man attack on an alternate economic model.
Prophecy did not fail. There was no prophecy to fail, except in the political and not economic imagination of Paul Krugman himself. Only those economists who subscribe to the mainstream view, and not the "doomsday prophets", were at all concerned about the fiscal cliff model.
It is an absurd piece because even Paul Krugman must know that those he considers to be "doomsday prophets" are primarily of the Austrian School of economics, and the reason followers of that school see economic hardship increasing has little to do with kabuki negotiations taking place in Washington that won't have any effect on solving the fiscal problems of the United States.
While economists cannot predict politicians and their decisions, there was little reason for anyone to predict that there would be anything other than some variant on the dominant Keynesian model resulting from the negotiations. As it turns out, there were some superficial proposed cuts in spending and a small tax increase on the top income earners, but nothing that would indicate a desire to balance the budget.
When the fiscal cliff negotiations failed to significantly accelerate the collapse of the economy, something no Austrian had reason to predict, Krugman seized the opportunity to say "see, these negotiations failed to significantly accelerate the collapse of the economy."
Some would say that Paul Krugman should know better, but his purpose in writing that was not to convey economic information from the author to the reader. His purpose, as is the case with most of his columns, is political, to lend support to the establishment economic model by virtue of his name and prestige through a straw man attack on an alternate economic model.
Prophecy did not fail. There was no prophecy to fail, except in the political and not economic imagination of Paul Krugman himself. Only those economists who subscribe to the mainstream view, and not the "doomsday prophets", were at all concerned about the fiscal cliff model.
Saturday, April 07, 2012
The Omniscience Fallacy
Austrian economics views people as rational actors when making decisions in the market, which is one of the many reasons government intervention is frowned upon. If a person wants to make one decision, and the government forces a different decision, then by definition that person is doing something they would normally consider irrational if not for the threat of government force.
Ayn Rand calls man the "rational animal" saying that reason is the tool of survival for man. She decried the use of government to intervene on the basis that since reason is the tool of survival, forcing a person to act differently is to force the person to act against their own survival.
Both of them would have that a person acting within the confines of their knowledge and desires will attempt to make the decisions that are best for themselves.
This runs into an interesting claim sometimes made by Progressives and Keynesians, that there is no way to consider a person to be a rational decision maker based on not having enough facts with which to make a decision. Supposing a person wants to buy a computer, and he compares several brands at several stores before coming to a conclusion based on cost, capability, and his needs. Well, the progressive will claim, if there is another model out there that still even more closely fits his needs then he didn't make the most rational decision.
By their unfairly high standard, it is impossible for anyone to make a rational decision. This clearly calls for the decision maker to know everything in order to make a decision. It is an attempt to deny that decisions are made rationally in the first place.
Accusing the progressive of demanding omniscience will only result in denials of that charge and a clarification that the person only need to know all the relevant information. But the problem is, that is omniscience. Suppose that same computer goes on sale the next day? Buying it that day will result in what is, from the progressive point of view, an irrational decision.
The irony here is that while creating a strawman in order to "prove" that an individual lacks sufficient facts, the progressive is undermining their own belief system. It is progressivism that believes that central planners can indeed have enough information to make plans, not only for themselves, but for others as well and for the economy as a whole.
The "rational" definition used by both Austrians and Objectivists clearly states that people are rational within the confines of their knowledge. Claims to the contrary are fallacies.
Ayn Rand calls man the "rational animal" saying that reason is the tool of survival for man. She decried the use of government to intervene on the basis that since reason is the tool of survival, forcing a person to act differently is to force the person to act against their own survival.
Both of them would have that a person acting within the confines of their knowledge and desires will attempt to make the decisions that are best for themselves.
This runs into an interesting claim sometimes made by Progressives and Keynesians, that there is no way to consider a person to be a rational decision maker based on not having enough facts with which to make a decision. Supposing a person wants to buy a computer, and he compares several brands at several stores before coming to a conclusion based on cost, capability, and his needs. Well, the progressive will claim, if there is another model out there that still even more closely fits his needs then he didn't make the most rational decision.
By their unfairly high standard, it is impossible for anyone to make a rational decision. This clearly calls for the decision maker to know everything in order to make a decision. It is an attempt to deny that decisions are made rationally in the first place.
Accusing the progressive of demanding omniscience will only result in denials of that charge and a clarification that the person only need to know all the relevant information. But the problem is, that is omniscience. Suppose that same computer goes on sale the next day? Buying it that day will result in what is, from the progressive point of view, an irrational decision.
The irony here is that while creating a strawman in order to "prove" that an individual lacks sufficient facts, the progressive is undermining their own belief system. It is progressivism that believes that central planners can indeed have enough information to make plans, not only for themselves, but for others as well and for the economy as a whole.
The "rational" definition used by both Austrians and Objectivists clearly states that people are rational within the confines of their knowledge. Claims to the contrary are fallacies.
Wednesday, June 23, 2010
Against Milton Friedman
Upon seeing "Fear the Boom and Bust”, the Keynes versus Hayek rap video, the following email was sent to the producers of that video:
The following response was forthcoming:
For reasons unknown, Milton Friedman is considered to be a libertarian thinker, especially in matters economic. He is often used as an example of libertarian thinking by those who are not libertarians but wish to reference libertarians to support a point.
The problem is, Milton Friedman was a Monetarist. As pointed out, Monetarism is not the same thing as Capitalism. When compared to Keynesianism then of course it appears to be more libertarian, but that is an awfully low bar to measure against.
There are many critiques libertarians can make against Friedman, such as his relationship to Pinochet or how he instituted income tax withholding, but the most fundamental one is that he, like Irving Fisher, advocated central banking.
If Keynesians are to be considered as saying that two and two make eight, and Austrians are to be considered as saying that two and two make four, then Monetarists try to position themselves as moderates by saying that two and two make six. They may be closer than Keynesians, but they are still quite wrong. Central banking, the defining position of Monetarists, is causing yet another catastrophic collapse, and people actually are calling it libertarian? Calling it so is a gift to the statists that they couldn't even hope for.
On Thu, Apr 22, 2010 at 11:39 AM, Ayn R. Key wrote:
Having Keynes versus Hayek was great. Loved the imagery of alcohol and hangover, and the reference to Tim and Ben.
Next, Hayek (or Rothbard or Mises) versus Friedman (or Fisher, where Friedman got all his ideas from) please.
I'm tired of people thinking that Chicago School Monetarists are some sort of libertarians.
The following response was forthcoming:
On Thu, Apr22, 2010 at 9:16 AM, John Papola wrote:
Thanks for the note! Explaining the differences of the two schools of thought is useful and we'll be getting to it in our extended content via interviews. It's a little too nuanced for a rap song.
Have you read Roger Garrison's "Time and Money”? There is much more in common between the Austrian theory of the business cycle and Milton's monetarism than meets the eye. If we can't call Milton a libertarian, we're doomed. I'm not big on libertarian factionalism. Compared with our opponents on the Keynes/Marx statist side, the differences between Hayek and Friedman are inconsequential in my opinion. Friedman was also very successful in moving public opinion and the profession away from Keynes. For that we should all be grateful.
Friedman, Hayek, Mises and Rothbard are all awesome in different ways.
For reasons unknown, Milton Friedman is considered to be a libertarian thinker, especially in matters economic. He is often used as an example of libertarian thinking by those who are not libertarians but wish to reference libertarians to support a point.
The problem is, Milton Friedman was a Monetarist. As pointed out, Monetarism is not the same thing as Capitalism. When compared to Keynesianism then of course it appears to be more libertarian, but that is an awfully low bar to measure against.
There are many critiques libertarians can make against Friedman, such as his relationship to Pinochet or how he instituted income tax withholding, but the most fundamental one is that he, like Irving Fisher, advocated central banking.
If Keynesians are to be considered as saying that two and two make eight, and Austrians are to be considered as saying that two and two make four, then Monetarists try to position themselves as moderates by saying that two and two make six. They may be closer than Keynesians, but they are still quite wrong. Central banking, the defining position of Monetarists, is causing yet another catastrophic collapse, and people actually are calling it libertarian? Calling it so is a gift to the statists that they couldn't even hope for.
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