Keynes vs Hayek

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[youtube]http://www.youtube.com/watch?v=d0nERTFo-Sk[/youtube]

Are markets driven by the animal spirits, or are interest rates the real concern? You watch them rap and then you decide!

haha I love educational rap videos. I remember a few years ago there was one about the Large Hadron Collider.

Duh, Hayek is right. Keynesianism is the whole reason we're in this mess to begin with.

That was an amusing video though. There's also this one that I came across quite a while ago. You've probably seen it, AG, but here it is anyway:
[youtube]http://www.youtube.com/watch?v=ipJTqCbETog[/youtube]

I lean more Keynesian than Austrian school.

Now, the Austrians blame the excesses of low interest rates and easy money for the later bust, but this isn't really a good refutation of Keynesianism. After all, properly applied Keynesianism would require budget surpluses, higher interest rates, and tighter credit during the boom part of the cycle in order to smooth the overall business cycle.

In reality, we have no good reason to favor one theory over the other. Empirical evidence used to support either theory is unsatisfactory, as there are too many confounding factors. The period when economic policy most closely conformed to Austrian ideas was a period of huge growth, but that may have simply been because of industrialization. Other places, other times we can see Keynesianism achieving excellent results, but again, other factors are likely at play. The Austrians try to take an apriorist approach to avoid this failure of empiricism, but how do we know their axioms correspond to external reality?

For you, I think the real question is standard Keynesian or Post-Keynesian.

Well, does Keynesianism have a lot of normal economy recommendations? I was under the impression that Keynesianism, while not just talking about depressions, was more policy oriented towards depression. I suppose they might prefer these moves during booms in order to prevent too much inflation, but I didn't see much more over that.


Right, but then again how do you study something without theories? I mean, I do think that Austrians are going the right direction with a focus on microeconomic factors. Aggregates don't seem very meaningful to me. So, I do think that the real issue is how to trace a recession out of the microeconomics of it. The real problem with this is that it really can be difficult to see the differences between Hyman Minsky's Post-Keynesian business cycle theory and the Austrian Business Cycle theory, as the only real difference is whether the boom is only psychological or whether money promotes the problem. Such a debate will have to go back to a lot of other factors.

I think the real issue might be the success of prescriptions. If one doesn't think that Keynesian stimulus is effective, then that will undercut Keynesian theories.

View from a purely engineering point of view, the Keynsean policy is an oscillation damping procedure. It is similar to shifting water ballast in a ship that is being violently rocked by wave to prevent capsizing. The only problem is that the politicians never apply the brakes during a boom. Never, ever. They think that the Good Times can roll on forever. In the U.S. we are seeing this abuse of Keynes being playing out. Between the late Bush administration and that of Lord Obama the U.S. is being financially capsized. Our credit is very steadily approaching CCC bond rating around the world. Not good.

ruveyn

what does Selma Hayek have to do with economics?...

You shouldn't be so coy pakled. o.O They're likely talking about... -quick search- this guy.

Friedrich von Hayek.

ruveyn

And that's why we watch rap videos. So we can find these things out.

At least in my econ book, about as much emphasis was given to Keynesianism needing to run surpluses during booms as to it promoting deficit spending during recession. But in practice, politicians seem to be supply-siders or monetarists during boom cycles, and Keynesians during recessions, so we never get a consistent implementation.


What good are theories without empirical verification?


That's because you tend to focus very heavily on small details at the expense of big picture ideas.

iiv;nttd

Really? I suppose I've heard that doing this will reduce variability, but not that this is central to the proper implementation of the theory. I am not sure that politicians are anything but politicians during the boom cycles. Maybe supply-siders, but little more.

The only thing similar to this that I've heard is Milton Friedman arguing that due to political issues, Keynesian stimulus will run late and thus over-stimulate the economy causing problems. Also that one should be wary of cost-push inflation. That's about it though. I am not saying that this is wrong, as your textbook is likely right in some sense, but nobody has really mentioned this much less emphasized this.


A load of good. For one, we can't really verify theories as well as we can falsify them. Secondly, even falsification isn't the real goal either so much as allow for fruitful explanation of the world.


I wasn't aware that I personally had too much of that tendency.

In any case though, the problem is that the big picture has proven to be incoherent: http://en.wikipedia.org/wiki/Lucas_critique .

Additionally, to go deeper on a problem, one must dissect a matter more and to dissect macroeconomics, one must look into microeconomic matters. Not only that, but if one looks at booms, they tend to be bubbles in particular industries, so the real issue seems as if it is going to relate more to what happens in the actual economic structure. I mean, appealing to something like "animal spirits" seems too vague to really be scientific. I mean, if one is actually appealing to economically rational characteristics, or human psychology, then I can make sense of the matter better, but that is going to have to relate a lot to microeconomic issues. That being said, I do think that Minsky's Financial Instability Hypothesis (a post-Keynesian theory) does seem to make some sense, as it argues that businesses over time borrow more and more as time goes on due to the fact that they must compete with other businesses that are leveraging themselves so much. The issue is that leverage increases the riskiness of all businesses, and eventually what happens is that a shock ends up toppling the entire system, as it gets piled higher and higher on risk. This is sort of like a game of jenga, at first our economy is stable, but eventually the slightest touch can upset the matter as the matter becomes more fundamentally risky. That being said, such a story really does have to appeal to the microeconomic matters in order to be credible, as the story has to really reflect the reality happening in businesses on the microlevel.

Keynesianism is hardly viable if all you do is deficit spend during the recessions—you really can't just keep running deficits forever, eventually you have to make it up with surpluses.


That problem can be circumvented by making the government budget more independent of political matters. A graduated income tax will result in lower tax revenues during a recession (people are either out of a job or earning less money, thus paying less income tax) and various social welfare programs, or perhaps some variant of Friedman's negative income tax, will also increase government spending during a recession as more people are eligible for (and taking advantage of) more government benefits, all without direct input from policymakers and in real time as the recession occurs. Such a policy would also allow for automatically running surpluses when employment is high, wages are rising, and fewer people are using the social safety net.

There, you have a simple, complete implementation of Keynesianism that is unhindered by the idiocy of politicians. Aside from the question of actually putting such a policy in place, anti-Keynesians would now have to resort to actually refuting Keynesianism on a theoretical basis, and that's harder to do than just saying "it's impractical."



A theory that does not correspond to reality is useless. If we have no empirical means of testing a theory, it can't be taken seriously. This is the same problem facing string theory: it's a nice idea, the mathematics works out fine, but we have no experimental validation.


You have in the past denied that forests, cities, and society exist. You've also denied the existence of trees, people, and everything above the level of atoms.