As anyone who has been reading this blog for a while knows, I am not a fan of running high deficits or printing money, both of which we are doing in spades. I have posted on this subject repeatedly cautioning of the danger to our currency and the high risks of inflation. That said, there are more than a few smart people who think the real danger lies in deflation, not inflation. Generally I have found those arguments weak on numbers and rather anemic in their reasoning. However, this morning I stumbled on a contra-inflation article that is well written and reasoned and which I would encourage those interested in getting the alternative point of view to read.
The article is in PDF Format so I can't post any excerpts. But you can read it here.
Hat tip to John Jansen author if the excellent blog Across the Curve.
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9 comments:
Well, the fact that deflation might be a cause for concern is pretty standard macro-economic thinking. The only reason I can think of that this would be a surprise was if you were taking seriously the "Austrian" economics theories your blog links to. I spent my younger years immersed in that up to my eyeballs (I knew some of the modern proponents reasonably well). By the time I went back to grad school, I had realized it wasn't actually a real category of economics. These days my main takeaway is that it is about as reliable as Marxist-Leninist economics: they inhabit the same category of purely ideological theories. I don't always agree with him, but Paul Krugman was spot on when he said "A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the "Austrian theory" of the business cycle—a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well."
If you want a more "free market" demurral of the so-called Austrian school, try googling for Kaplan's paper on why he is not an Austrian. Better yet sign up for a graduate course in standard macro.
I would urge the anonymous above, and Krugman, Kaplan and anybody else who worships at the altar of macro-economics, to save us from deflation by voluntarily paying more for goods and services.
In the meantime, I will heed Rothbard and take shelter from the recessionary storm in falling consumer prices.
I knew Murray. Wonderful personality, at least in person. God rest his soul.
Programmatic and full of kooky/bad ideas nonetheless.
Not a substantive criticism.
Uh, not trying to make one either. On the other hand, if your idea of good economics is a pre-deterministic preference for anarcho-capitalism, then I doubt any comments would be useful. Couple awful methodolgical problems with conspiracy theories, historical revisionism, and a blind spot for right wing cranks in general and you have a system that, uh, doesn't really deserve much time in critique in my opinion.
In any case, an anonymous blog comment isn't worth much either. Go with God and forgive me if I have offended anyone. God grant rest to his servant Murray.
Modern economics creates a false dichotomy between macro and micro. It is intellectual legedermain to hide an inconvenient truth: inflation benefits upstream recipients of new dollars at the expense of downstream recipients. So macro-economists dress up public and private deficits, rising prices, and trade imbalances with positive macro numbers and arcane mathematics to assure everyone that all is well. People further down the food chain know differently: wages stagnate, jobs are lost, and savings are destroyed.
The Austrians called the current and preceding boom-bust cycles right, and they are the only ones. Falling prices are nothing less than the liquidation of prior errors. Overleveraged spendthrifts who paid too much lose their shirts, and savers snap up assets at prices that accurately reflect supply and demand. Again I encourage everyone who feels rising prices are a good thing to voluntarily pay more for goods and services.
Oh, come on. The idea that the Austrians a) were the only ones to predict the current recession or b) are the only economist to point out that monetary expansion has winners and losers are both demonstrably false, by reference to google. If we take the Mises-represented-by-Rothbard view of the business cycle theory to be what you are calling the Austrian theory, I'd simply refer you to the Kaplan paper for some elementary reasons the theory seems to be more or less wrong.
Putting that aside, your readers should understand that the methodological underpinnings of the approach you are advocating is to build up deductively from apodictic axioms - primitives that are assumed to be true. Empirical models are explicitly excluded. It's a bit like medieval disputations swirling around how many angels can dance on the head of a pin by the time you get to macro claims. Yeah, you may convince yourself that you are incontrovertibly correct, but an outsider with a different frame of reference may still have some questions if the data doesn't align or the assumptions don't ring true. I strongly urge anyone with the time and inclination to pick up a copy of Human Action or Man, Economy and State: read them from the beginning, carefully: if you are really convinced that macro phenomena can be logically deduced from a Crusoe scenario at least make sure you buy into all the explicit and implicit assumptions along the way. As an aside, Murray took the same approach with political theory (see, for example, the Ethics of Liberty) arriving at really and truely absurdist conclusions: the morality of markets in human babies and any-term abortions, for example. I certainly can't argue against a ruthless kind of consistency in his work.
Yeah, the standard models have problems - though arguably they rely too heavily on microeconomic assumptions rather than not at all. Yeah, econometrics can be equally blind. But they are understood to be in many respects radically imperfect models anyway. And that hardly argues for the Austrian approach.
By the way, I'd be delighted to see that Austrians predicted massive securities fraud in the mortgage market based on business cycle theory prior to the fact. I congratulate anyone who had the insight to understand what was happening in the mortgage issuance market. And I do appreciate their recurring critique of modern financial theory. Most of the time, though, the Austrian advocates are arguing for privatizing security regulation, which I would hope anyone can see is a delusional policy recommendation at this point.
I'm not saying they don't make any statements that are useful or true, that is a different claim. I am saying the methodologies are wrong, the models are flawed (as most economic models are) and the policy prescriptions are pre-determined and often ridiculous.
I'm not sure how we wound up going down this path on an Orthodox blog. My bad.
Most of the time, though, the Austrian advocates are arguing for privatizing security regulation, which I would hope anyone can see is a delusional policy recommendation at this point.
Of course. Because public regulation has worked so well.
I am compelled to agree that there is a certain strain among both Austrians and their libertarian close cousins that borders perilously close on anarchism. I am a moderate in my Austrian sympathies as also my libertarian views which puts me at odds with the purists.
The idea of privatizing everything on a for profit basis is of course silly. Those who want to return the United States to a more or less unrestrained laissez-faire system would do well to read a social history of the United States (and most other western countries) for the period generally known as the guilded age.
If you were wealthy it was a great time to live. Otherwise it's enough to make one sympathetic to labor unions and a few other things I don't normally care for.
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