More on Mandel, Austrianism, and Keynesianism

This isn’t Hayek’s view, see _Monetary Theory and the Trade Cycle_.

“many Austrians seem to believe that only government manipulation of interest rates can cause a misallocation. Keynesians believe that waves of euphoria and pessimism in the private sector also can cause misallocations.”

“I think that the Keynesian perspective is only valid up to a point.” Up to what point? Do you know that point? Can anyone know that point? And in what way is it valid? If there is a sound argument for any sort of Keynesian ditchdigging, I’d like to read it. Haven’t seen it yet, but hey, I’m young.

The key thing is the coordination of the time structure of non-permanent production resources, aligned across time not only among themselves but also in terms of consumption streams, savings streams, and interest rates.

Ask yourself — is the digging and filling of holes something that helps re-establish the coordination the time structure of production when you’ve dug too many holes building houses and dug too many holes building mortgage company office buildings?

Note well that Keynesians, New Classicals, New Keynesians and the rest can’t even think about this can’t even think about this stuff, much less talk about it — they are blocked from thought by their models which allow nothing but “K”. In other words, by stipulation there is are no time consuming heterogeneous productive processes, there is no time structure of production — there is no relative price coordination problem in the economy across time and through the production process.

Hayek provides a theory of capitalism which includes the use of productive resources of differing time periods across time — i.e. he provides a theory of capitalism which includes capital. Keynes and the New Classicals and the New Keynesians and the monetorists and the Real Cycle theorists provide a theory of capitalism without capital — just “K”, which isn’t remotely capital, it’s a letter in a phony math construct.

See Roger Garrison, _Time and Money_ on all this.

kebko – He said “much of,” not “all” productivity gains were illusionary.

Internet – good. Companies build on that platform with a burn rate instead of a business model – bad.

Look at a chart of the Nasdaq for the last 10 years and you get an idea of what was real and what was illusion.

I just wish I could have read the report via a delivery system that existed in a reasonable form in 1997. As it is, in computing the change in productivity for disseminating information, that makes my numerator undefined. Since I can read it for free, my denominator is $0. I’m having trouble fitting undefined/$0 into my models.

I am glad that Greg Ransom pointed out Roger Garrison, because his whole introduction to Time and Money is about how important expectations are. I believe he even mentions Kirzner(?) doing a lot of research on expectations. So I think over simplifying the Austrian reasons for misallocation is being done here. The interest rates impact expectations and thus causes misallocation of resources from the early stages to the later stages and vice versa, as Hayek points out. Correct me if I am wrong and misunderstood when I read Garrison.

The misallocation of resources has very little to do with current circumstances. You can look at the goings on in the physical economy and see plenty of longer term problems, but those problems didn’t cause the crisis.

We are having a massive financial information failure. If you were able to magically delete the tangled interlocking mess of failed securities in the system, and redistribute the underlying financial risk and resources in a fair and equitable manner to all those involved, almost all of this would disappear immediately. The physical allocation of resources in our economy may be far from perfect, but an amazing amount of value is successfully exchanged, and things work. It’s the financial system that is broken.

I don’t like the internet analogy because although the marginal investment during the internet boom earned terrible returns, the average investment earned good returns. The housing boom was very different because even during normal times the marginal return on housing investment sucks due to the tax and Fannie/Freddie subsidies. During the boom it looks like the average investment will earn negative returns. Too bad for us.

In the Keynesian story, a boom caused by misallocation is a good thing.

I would put this,
In the Austrian story, a bust is a reallocation of resources and a good thing. In the Keynesian story, a bust is a misallocation of resources and a bad thing. The Keynesian view is that reallocation occurs all the time during a boom, but (almost) not at all during a bust, so the faster we can return to a boom, the faster we can reallocate. It is not that a misallocation is good, only that it is inevitable (although a much better job could have been done preventing the last).

The current economy is going through a transition state. It is moving from one kind of economy to another. That is what happens during recessions. As changes accumulate in a stable economy, it becomes unstable, a shift occurs, and the economy leaps into a new stable order. The economist Joseph Schumpeter called this process “creative destruction,” and it is a key feature of free market economies.

During recessions, the “destruction” part becomes all too apparent. Still, it is necessary if the “creative” part is to occur at all. Recessions can be compared to an arborist cleaning up a bush. The deadwood has to be cleaned out to allow new growth to occur. When that deadwood is removed, the bush will look worse for a while, full of holes, drooping here and there – but after a while, new growth fills in everywhere, and the bush is stronger than before.

From this perspective, it seems odd to want to keep the growth-stunting deadwood around. Which is, after all, what the bailouts, started by Bush and being continued by Obama, are doing, and were intended to do. This kind of bailout of industries whose timely end has come is thus conservative in the truest sense of the word: it is intended to conserve the status quo. Unfortunately, such measures are made at the expense of what is now succeeding, slowing that success and, thus, delaying economic recovery. Worse, those who made bad decisions, who are failing, are being rewarded for their bad decisions and failures at the expense of those making good decisions and succeeding.

The consequence of all this is a delay of the next phase in our economy and, thus, of our economic recovery. At the same time, many elements of the new economy, such as health care and education, are in danger of stagnation precisely because of the dominance – and increasing dominance – of the government in those very areas. The drop in educational outcomes coincided wit the creation of the federal Dept. of Education, and has gotten worse the more we have funded it. This should make us at least question the value of federal involvement in serves and the economy. I am convinced that the arts, too, will become increasingly important, but the same people who rightly complain that our schools are driving out the arts are begging for the creation of a Secretary of the Arts. They do not realize it is the very people they want to put in charge who do not think the arts are a valuable part of education. Therein lies the problem. In a free market economy, you can make choices based on your values; the more the government becomes involved, the more you have to submit your values to the values of others. Such dominating ideology does not have a proper place in the marketplace, where people are freely exchanging value for value.

The real danger for our economy thus lies not so much in conservative efforts to prevent change, but in the fact that the federal government already controls so much of what will become the basis of the future economy: health care, education, and the arts. The places where true creativity, innovation, and growth will occur will be those places where there is little to no government presence. The best hospitals are private hospitals, not V.A. hospitals. Inexpensive health care is being provided to the poor in many places by clinics that refuse government-mandated insurance, Medicare, and Medicaid and deal only in cash. Our best schools are our private schools, not our public schools. The best, most innovative art and performances are found in private galleries and playhouses, not in those receiving government subsidies. Indeed, we are fortunate the arts receive so little federal support – it is why we have such a vibrant arts scene, in comparison to places like Europe, where the arts receive much greater subsidies. Subsidized art creates two dangers: art by committee, and the funding of those who play at being artists because it’s better than working for a living. True artists are in fact some of the world’s hardest workers. Subsidized artists are some of its laziest. The last thing we need to do to the burgeoning arts economy is to treat it as we do the farm economy, paying people to grow crops nobody wants, or to not grow anything at all.

The good news is that the “stimulus” package just passed by Congress has so little to do with the current economy that it will likely have little effect on it. The bad news is that it federalizes much of what was likely to have become the new economy. If history is any guide, that does not bode well for the economy over the long term.