Tuesday 9 February 2010

“Let Me School You in My Austrian Perspective”

Remember this? 

Watch it again.

With no hyperbole at all, Cato says it “may be humanity’s greatest contribution to the fields of music, theater, and political economy all at once.”  And with no hyperbole whatsoever, I can say that it makes rap watchable, and good economics memorable.  And since being released into the wild just over three weeks ago, it’s pulled down over half-a-million views worldwide in just three weeks—that’s half-a-million views of some good economics, and growing.

If you want to know why it’s so good, then Jeffrey Tucker is your man. Let him school you in our Austrian perspective:

    _quote As with the classical music show on public radio that takes apart a symphony to explain "why it is great," I want to explain why this video is great. To begin with, the character depiction is fantastic. . .
    “Keynes is popular and beloved by all, promoting a high lifestyle, parties, and living it up — the future be damned. Hayek's personality here is more intellectual, sober, and even a bit puritanical, with a focus on reality and the long-term good.
    “The theme of the party animal vs. the sober economist continues throughout the story. The terms of the argument are laid out very clearly. Hayek says business cycles are caused by "low interest rates" born of intervention, whereas Keynes wants to blame "animal spirits" loose in a market crying out for management.
    “Keynes then gets his turn at explaining depression. It is caused by sticky wages and can only be cured by boosting aggregate demand through government spending and the printing press. He favors public works, war, and broken windows, warns against the liquidity trap, favors deficits, brags that he has changed the economics profession, and concludes, "Say it loud, say it proud, we're all Keynesians now!" All the while, the viewer is witness to wild antics of drunken partying.
Hayek-Keynes     “It is left to Hayek to restore reality to the discussion. He dismisses Keynes on the grounds that there is too much aggregation in his equations, which ignore human action and motivation. Hayek compares post-recession stimulus to drinking the "hair of the dog" to cure a hangover. He points out that there can be no prosperity without saving and investment, and he proceeds to school Keynes in the Austrian perspective.
    “He begins by changing the focus from the bust to the boom, which he regards as having planted the seeds of disaster. The boom starts with an expansion of credit. The new money is confused with real, loanable funds and is invested in new projects like housing construction.
    “But sufficient resources to complete these projects are lacking. They are malinvestments. The "grasping for resources reveals there's too few" and the boom turns to bust. As for the liquidity trap, that is only evidence of a broken banking system. The lesson: "You must save to invest, don't use the printing press."
    “This entire explanation takes place against the backdrop of Keynes trying to sleep off a hangover and then hurrying to the bathroom to throw up — the after-effects of partying the night before.
    “What Hayek is discussing in the video is his own theory of the structure of production. But note here that there is a structure of production working in the world of ideas too. The first pieces of the Austrian business-cycle theory were being put together 100 years ago, while Mises was working on his first book, which appeared in 1912.
    “Here we have the first treatise that puts together interest and production theory with the theory of money. Mises's main point is that central banking will end up causing more cycles, not fewer. Hayek followed up in the 1920s and 1930s with a series of studies on the topic. Later came Mises's own improvements in his 1949 book Human Action. Roger Garrison's studies in the 1990s provide some of the language that appears in the video. Still later, there is Jesus Huerta de Soto's book on economic cycles, which explains the role of fractional-reserve banking — a book that builds on insights from Rothbard from the 1960s.
    “What we see in this video, then, is the culmination of many threads of thought that began a century ago. That's a long and complex production structure for ideas, but it is precisely what is necessary to build a theory of this complexity that can be reduced to a rap video anyone can view and learn from.”

Great stuff. Send a copy to Bill English.

And for those who are after a more technical description of the debate and its consequences, get hold of John Cochrane & Fred Glahe’s The Hayek-Keynes Debate-Lessons for Current Business Cycle. You’ll see that nearly eighty years after their debate began, on every important point but one Hayek has been proved right, and Keynes wrong.

(Great stuff too. Send a copy to Alan Bollard.)

And that one point?

That the “animal spirits” of politicians, which Keynes understood, would always head for a high-spending agenda, no matter how big a hangover it causes in the long terms. 

That’s the same hangover we’re suffering right now—and however much they try to wriggle out of it, they’re too blame.

Hayek told them so nearly eighty years ago.  They just haven’t been listening.

hayek-keynes

7 comments:

Falafulu Fisi said...

I have a copy of the following paper, if one is interested to read. Just indicate here that you want a copy, so I can send it to PC so you can get it from him.

It is a discussion from a physics point of view about both Keynes & Hayek's theoretical framework.

Title :
=======
Economic uncertainty and econophysics

Abstract :
==========
The objective of this paper is to provide a methodological link between econophysics and economics. I will study a key notion of both fields: uncertainty and the ways of thinking about it developed by the two disciplines. After having presented the main economic theories of uncertainty (provided by Knight, Keynes and Hayek), I show how this notion is paradoxically excluded from the economic field. In economics, uncertainty is totally reduced by an a priori Gaussian framework—in contrast to econophysics, which does not use a priori models because it works directly on data. Uncertainty is then not shaped by a specific model, and is partially and temporally reduced as models improve. This way of thinking about uncertainty has echoes in the economic literature. By presenting econophysics as a Knightian method, and a complementary approach to a Hayekian framework, this paper shows that econophysics can be methodologically justified from an economic point of view.

From Journal of : Physica A: Statistical Mechanics and its Applications
Volume 388, Issue 20, 15 October 2009, Pages 4415-4423


Finally, if you request a copy, then I send you one, please don't post it on the internet for free-download for the whole world, since the author has asked me not to re-distribute the paper on the internet (when I requested my free copy) since the copyright holder is ScienceDirect ( the publisher) and not him.

It should be easy read, since there is no equation derivation in there at all. Everything is descriptive (ie, words and no formulas).

Peter Cresswell said...

FF, the key debate between Keynes and Hayek, highlighted here, is their business cycle theory--not their views on certainty.

Furthermore, the application of an econometric model to aggregated data (which is what this looks like), was argued against strongly by both von Mises and Hayek. . .

Greig McGill said...

Yes please FF. Looks like an intriguing read.

Greig McGill said...

PC, doesn't mean it's not something interesting and worthy of a read, surely?

Peter Cresswell said...

@Greig: Not at all. Knock yourself out. :-)

Falafulu Fisi said...

PC said...
...is their business cycle theory--not their views on certainty...

No, it is relevant. Business cycle theory has a/n (external) cause.

Quote Hayek's view (from the paper):
==================================
However, by arguing that a particular law systematically emerged (the self-order emergence) from uncertainty, Hayek recognized
a certain "externality" to this uncertainty [27]. This implicit externality of uncertainty is directly in line with the Austrian
tradition, since the emergence of a self-order is the only (economic) law that governs radical uncertainty.


The emergence that Hayek's meant, is the self-organisation and self-emergence that are found in Complex Adaptive System (economic system is one) or CAS for short, which is the domain that has thoroughly studied by statistical mechanic physicists (many body problem of interacting agents).

Peter Cresswell said...

Well, it's not a big issue, but Hayek's work on certainty and 'spontaneous order" -- order which is "the result of human action not human design" -- post-dated his work on business cycles (for which he received his Nobel Prize, several decades later), and was largely unrelated.

I, for one, wish he'd kept up the business cycle work. I blame Karl Popper for his diversion. ;^)