About four years ago, I described myself as an Austro-Keynesian. Recently, I have been asked about that concept.
One way to put it is that I accept and reject some major tenets of each camp.
From the Keynes camp, I accept the view that financial market psychology is variable (animal spirits and all that) and that market economies are unstable. I am comfortable with a Minsky-Kindleberger view. Thus, I reject what I see as the common Austrian view that the only source of instability in the economy is central bank money-printing.
From the Austrian camp, I accept the view that there is not much that government can do about downturns. I view a downturn as a sudden, widespread realization that certain patterns of specialization and trade are unsustainable. We just have to wait for entrepreneurs to sort things out. Thus, I reject the Keynesian view that deficit spending by the government provides a cure for unemployment. Another way of describing what I have in common with Austrians is that I do not subscribe to the aggregate demand/aggregate supply paradigm.
Because I do not subscribe to AS-AD, I am skeptical of the monetarist (or basic macro textbook) view that a downturn is almost entirely due to a misalignment between the supply of money and nominal wages. Similarly, I am skeptical of the "New Keynesian" view that a downturn is almost entirely due to a misalignment between the money supply and aggregate prices."My first reaction to Kling's comments are not unsimilar to the one I had when I sat on the San Francisco BART one day across from a transvestite who was reading, Gender Gap: The Biology of Male-Female Differences. That is that there are a few who may not get the differences, or who somehow mix up the differences that are glaring to most of us.
Kling in other words is something of an economic transvestite, mixing things up in ways that most of us would find difficult to do.
I first want to point out Kling's reference to animal spirits:
From the Keynes camp, I accept the view that financial market psychology is variable (animal spirits and all that) and that market economies are unstable.The problem with this "animal spirits" notion is that it seems to occur when a central bank is printing money and stops when a central banks stops printing money. Could it be then that there is no "animal spirit" activity other than when mad money printing teaches investors to throw caution and calculation to the wind and just buy any asset because it will go up in value, as the central bank prints more and more money?
In other words, Keynes (and Kling) have it ass backwards. There isn't any "animal spirit" stoking the markets. Central bank mad printing is stoking an "animal spirit" attitude.
Therefore, when Kling writes, following his animal spirits comment:
Thus, I reject what I see as the common Austrian view that the only source of instability in the economy is central bank money-printing.He is ignoring the fact of when these so-called animal spirit periods occur. Namely, during periods of central bank money-printing. But in something akin to transvestite fashion, he takes the Keynesian animal spirit tool that he has and rejects Keynesianism:
I reject the Keynesian view that deficit spending by the government provides a cure for unemployment.He then comes back and puts what he thinks is Austrian makeup on:
Another way of describing what I have in common with Austrians is that I do not subscribe to the aggregate demand/aggregate supply paradigm.In fact, I am not sure you can rule out an Austrian notion of a change in aggregate demand, if one means by this an increase in the desire to hold cash balances (which appears to occur regularly during severe downturns in the business cycle)---aggregate demand in terms of the dollars out there bidding for goods and services certainly declines at such a time. It's the Austrian notion of what to do during such a period that is different from the Keynesian view. Austrian's would argue that to clear markets prices should simply be allowed to fall to adjust to the new market conditions. Keyenesians, and other interventionists, would on the other hand call for money printing, government spending, and new regulations that would prevent the adjustment to a new lower price level.
Bottom line: The distinctions between Austrians and Keynesians is clear across the board. But for a few, like the differences in gender, this is apparently difficult to see or keep separate to any degree.
I think your site is great, read it everyday, while I subscribe to the Austrian theory wholeheartedly, I think you take central bank causation to the extreme. Because people are very unaware of central bank policy in general price inflation stays modest despite central banks printing like we were running out of trees.
ReplyDeleteI think price inflation has the so called animal spirits involved, while you call for it aggressively all the time.
While I agree than creating money creates inflation, the correlation of how much they print and rise in prices isn't very equivalent, I'm aware money flows to different areas but you'd think after so much monetary inflation we would have seen more substantial inflation across the board.
So ahhh, I guess that means we can add Austro-Keynesian to our list of oxymorons like:
ReplyDeleteMilitary intelligence
Balanced insanity
Business ethics
Civil servant
Common sense
Congressional accountability
Crisis management
Economic forecast
Federal budget
Free market
Government assistance
Good lawyer
Great depression
Health care system
Honest politician
Idiot savant
Stable economic policies
Unbiased opinion
Zero deficit
or how about: butt head? Works for me...
The biggest error I see with both keynesians and austrians who ascribe only central bank money printing as the cause of instability in markets (which is not all austrians by the way) is that they both appear to think that markets should be "stable". What is stability? In a complex system that is constantly equilibrating to a new equilibrium, how can there be stability? Didn't Mises pooh-pooh it in his Evenly Rotating Economy myth? There is always inherent change and instability in a complex dynamic process like the market. What central bank money printing does is to mask the rapid feedback information cycle that tends to adjust the market to new conditions so these equilibrations do not occur and a "cluster of errors" occur. I donot think many austrians ascribe to this view and Wenzel should make this clearer in his critiques of keynesian witchcraft.
ReplyDeleteHuge shifts in the economy (depressions/recessions) should still be unlikely in economies that are not, for example, based around a very homogenous sector like building cars in a world that develops teleportation or an entire national economy based on farming that then faces a nation-wide drought for 3 or 4 years.
DeleteDoes anyone actually follow Keynesian theory anyway? Keynes didn't call for monetary expansion as a cure for recession. Nor did he advocate deficits under normal conditions. For that matter, who follows monetarism? We've had two "monetarist" Fed Chairmen and neither of them expanded the money supply by 3-5% as Freidman had advocated. Volcker put the brakes on money creation big time, and Bernanke has created more money than any other Fed Chairman in history.
ReplyDeleteLet's face it. The most prominent economists are political hacks who simply cherry-pick policies from this or that theory in order to justify the policies being advocated by those to whom they are most politically connected.
Even Keynesian theory is friendlier to free markets than the policies we have actually been following.
Good points, Rob, and I'd add that I think where people misconstrue Keynes is that his policy prescriptions in "The General Theory" were for the very specific conditions of the Depression, taking the government interventions at the time (such as keeping wage rates stuck) as a given and then building a theory of: "well, if you really wanna get some employment happening in spite of your bad policies you should do X,Y,Z...".
DeletePeople forget, or don't realize, that Keynes really knew little about the history of economic thought and was more of a wily opportunistic huckster when it came to what he espoused, often flip-flopping on major issues without skipping a beat. Here's an enlightening interview with his compatriot Hayek on these matters: http://hayekcenter.org/?p=843
In any case, this is not to say I'm endorsing either Keynes or his prescriptions, but I think there is something to be said for the cliched kneejerk labeling people assign to what they perceive to be "Keynesian" economic notions. This was happening in Keynes' own time, and he himself famously remarked that he is Keynes, not a Keynesian!
If you follow Kling's writings for long you get to know that he doesn't know much about finance. As a result, he keeps in money in money market funds and some bonds. I've learned that few economists know much about finance. That's why they can be so smug and dismissive about it.
ReplyDeleteAnd Kling doesn't know much about Austrian econ, either. He likes some aspects of a cartoon version that he knows and simply doesn't know how little he knows about it.