Western civilization can be seen as the liberation of technical theory (science, in the broadest sense) from moral values. This battle continues to this day. It is so much easier and enjoyable to be a witch-doctor than a scientist (again, in the broad sense as devoted to rational thought).
- Machiavelli divorced poltical theory from the personal morality of the ruler — a ruler must do the right thing for his people, even at the cost of going to Hell (Shakespear sketches this out pleasantly in Measure for Measure).
- Modern medicine broke the connection (so evident in the Gospels) that sickness is not the consequence of sin (with a few possible exceptions).
- Keynes broke the connection between economic cycles and sin.
The current reminder of this dearly learned insight
“Keynes offers us the best way to think about the financial crisis“, Martin Wolf, Financial Times, 23 December 2008 — Exp note #3. Excerpt:
I see three broad lessons.
The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”.
The second lesson is that the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.
The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.
Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.
This same moralistic debate is with us, once again. Contemporary “liquidationists” insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold.
Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable. They are indeed the underpinnings of a productive economy and individual freedom. But they can also go seriously awry and so must be managed with care. The election of Mr Obama surely reflects a desire for just such pragmatism. Neither Ron Paul, the libertarian, nor Ralph Nader, on the left, got anywhere. So the task for this new administration is to lead the US and the world towards a pragmatic resolution of the global economic crisis we all now confront.
The urgent task is to return the world economy to health.
… As Oscar Wilde might have said, in economics, the truth is rarely pure and never simple. That is, for me, the biggest lesson of this crisis. It is also the one Keynes himself still teaches.
Recessions as magneto trouble
Recessions are technical troubles with our economic engine, not the workings of a morality play. As Keynes said in “The Great Slump of 1930“, economic cycles — even the Great Depression — has narrow technical causes:
The machine {is} jammed as the result of a muddle. But because we have magneto trouble, we need not assume that we shall soon be back in a rumbling waggon and that motoring is over.
Similarly, he argued that a downturn did not overthrow the moral basis of capitalism. From his great The General Theory of Employment, Interest and Money (1936):
I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. It is not the ownership of the instruments of production which it is important for the State to assume.
Are recessions the inevitable payback for good times?
Since Keynes perhaps the greatest single essay breaking the mental equation between sin and economics is nobel laurate Paul Krugman’s essay “The Hangover Theory” (Slate, 4 December 2008) — Excerpt:
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. But the incident set me thinking-not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or “liquidationism,” or just call it the “hangover theory.” It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.
The hangover theory is perversely seductive—not because it offers an easy way out, but because it doesn’t. It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience, secure in the belief that they are not heartless but merely practicing tough love.
Powerful as these seductions may be, they must be resisted—for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality — with policies that encourage people to spend more, not less. Nor is this merely an academic argument: The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression—with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore “sham” prosperity by expanding credit and the money supply. And these same views are doing their bit to inhibit recovery in the world’s depressed economies at this very moment.
The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity — of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes — investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.
… the key to the Keynesian revolution in economic thought — a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles—was John Maynard Keynes’ realization that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.
Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods — implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?
Most modern hangover theorists probably don’t even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. (Hence their opposition to any attempt to increase demand: This would leave “part of the work of depression undone,” since mass unemployment was part of the process of “adapting the structure of production.”) But in that case, why doesn’t the investment boom — which presumably requires a transfer of workers in the opposite direction — also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry — not just the investment sector—normally contracts.
… Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can’t stand the thought that positive action by governments (let alone—horrors!—printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism.
… The Great Depression happened largely because policy-makers imagined that austerity was the way to fight a recession; the not-so-great depression that has enveloped much of Asia {1997-98} has been worsened by the same instinct. Keynes had it right: Often, if not always, “it is ideas, not vested interests, that are dangerous for good or evil.”
Afterword
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- Good news about America, a collection of articles!
- about America – how can we reform it?
- the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
These posts discuss Diagnosis, causes, and the larger context of the crisis:
- The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
- Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
- Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
- Let us light a candle while we walk, lest we fear what lies ahead, 10 February 2008 – Putting the end of the post-WWII regime in a larger historical context.
- A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
- A picture of the post-WWII debt supercycle, 26 September 2008
- Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
- Causes of the financial crisis (no, its not the usual list), 29 October 2008
- Government policy errors and the Great Depession, 1 November 2008
I’m not sure that Krugman disproves the “hangover” theory, or even explains it correctly. Normally he’s a clear writer, but here he spins off the road somewhere.
As for Keynes’ point, the economy may not be a morality play (where evil is punished) but it is certainly not beyond the moral realm, as medecine or physics are. An economy is how a society chooses to support itself. In our economy we believe that entrepeneurs/investors are entitled to unlimited profits and we all benefit from their unregulated energies. Other societies believe that investment choice are guided, wholly or partly, by the broader society’s needs. The argument between the theories is usually couched in terms of efficiency — which produces more goods for more people; but it also has a moral dimension — what people deserve to be rewarded.
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Fabius Maximus replies: I do not believe that Krugman says or believes that economics is “beyond the moral realm.” First, he is a fairly doctrinaire liberal (hence this seems unlikely). Second, the role of morality as a foundation for capitalism was well-established at the start. For good reason Adam Smith wrote “The Theory of Moral Sentiments” before “The Wealth of Nations.”
A question: Doesn’t the idea that we can manipulate the economy to increase demand in order to sustain full employment make a value judgment that full employment is the goal that we should be seeking? Are we not trading one morality tale for another: trading the purifying fires of recession for the rapture of full employment? An intervention, it seems, assumes a value judgment.
And just to nibble around the edges of your main argument – a biological/evolutionary defense of morality tales:
If one accepts that we are products of natural selection (as all animals must be), then habits or traits which would help group cohesiveness (and belief systems, i.e. morality, which support those habits) would be selected and amplified in a species as social as humans. But because we were/are largely ignorant to the workings of nature and of our own minds, moral codes can help us rationalize beneficial behaviors that have no directly observed benefit (A particularly Humean view of things, if I’m not mistaken).
It seems to me that you’re glorifying human reason to the disparagement of a system of social organization that is much older than the scientific method and Keynesian theory. I know this is only tangentially related to the topic of the post, but yours seems like a mind that might be interested in these sorts of thoughts. I also think you simplify the field of medicine in point 2 above. Medicine is older than the Gospels, and much of the focus of Hippocrates and others was non-normative. Their approaches to medicine were very much based on internal imbalances of heat, cold, humors, etc. A rhetorical approach on your part, no doubt, but I didn’t want Hippocrates getting short shrift.
As you might be able to tell, I’m a biology student who moonlights in economic theory, but I hope my posts add some bit of value.
A citation to support the first bit: Nowak MA, K Sigmund (2005). Evolution of indirect reciprocity. Nature 437: 1291-1298 (source).
Dr. Martin Nowak (mathematical biology – Harvard) does fascinating work on the evolution of cooperation, among other things.
Seneca,
There’s more to the moral dimension than that. How much of a person’s life should be devoted to production? How much of the earth’s resources?
The Keynesian focus on perpetually increasing production at the fastest sustainable growth rate all but decides those questions for every individual. This is stated clearly in the “second lesson.”
Hence, there can only ever be a small minority following a prudent course of savings. If that group ever grows significantly, the deflation alarms start ringing and the government will quickly transfer wealth to groups that will spend it.
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Fabius Maximus replies: You confuse individuals with aggregates. “Everybody” cannot “save money”. Wolf says something similar with “The second lesson is that the economy cannot be analysed in the same way as an individual business.”
This is a core insight of inter-temporal accounting. Borrowers and lenders must net out at any point in time. The only thing we can do is invest, in the sense of accumulating capital plant (e.g, buildings, storehouses of metal) which we can pass onto the next generation.
One of Keynes arguments was that government stimulus could be created by secretly burying jars of money around the countryside. This would create a treasure-seeking industry that would soak up excess supplies of workers and capital and put the country back into boom mode. He argued that this was as good a mode of stimulus as any other.
I think it is pretty easy to see the downside of this scenario — the healthy sectors of the economy, which would otherwise use cheap workers and capital to grow themselves, instead are placed in competition with a synthetic, non-productive industry. In fact they are taxed to pay for it.
I liken the situation to a crack addict. When Mr. Addict comes down off his stimulus high, his main goal is to get back on the high, by taking more crack. Slowly he destroys his livelyhood and his health, but all the time he feels like he is just doing great because of the stimulus. Eventually he can’t find the money to buy more crack and finds himself a homeless guy with a deeply messed up brain — he’s too messed up to work.
Similarly, Keynesianism has served to deindustrialize the US and destroy our workforce to the point where we need immigrants both at the top (engineering, science) and bottom (contruction, agriculture). Keynesianism has also destroyed native birth rates by supporting the fantasy that an inverted demographic pyramid can support the elderly with government programs, housing values, and stock investments (only true when the pyramid has a broad base buying into housing and retirement investments and paying taxes).
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Fabius Maximus replies: Something about this comment makes me wonder if the author has actually read anything by Keynes, or knows anything about Keynesian economics other than what some right-wing critics have said about it.
Here are two posts about the need for and utility of a fiscal stimulus:
* Dr. Bush, stabilize the economy – stat!, 7 October 2008 — Why a fiscal stimulus is needed, and how it works.
* Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008 — Why the alternative, debt deflation, is potentially lethal for a high-debt economy like ours.
Of course
Nonsense. There is no earthly reason that every dollar earned must be promptly spent by the earner or lent to someone who will spend it.
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Fabius Maximus replies: The quantity of money is fixed at any given time. Putting cash or securities in your bed does not change the total quantity of either in the economy. There are some excellent on-line Economics textbooks available; I suggest doing some reading before disputing major experts on basic fundamentals of their field.
Sorry, but it’s certainly not obvious that total spending must equal total income. In times of economic trouble, many people can and do withdraw cash from the bank and stuff it under their mattress — especially in times of deflation, which doing so actually increases their effective wealth over time.
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Fabius Maximus replies: When a world-famous expert makes a basic statement about his field — one repeated in most basic textbooks in that field — you should assume your disagreement means that you do not corrrectly understand the issue.
Please re-read a basic economic textbook instead of writing rebuttals to Econ 101 here. It is off-topic and additional comments will be snipped.
I don’t mean to be obstreperous, but when Krugman claims “Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa)” this is quite obviously wrong. Every sale is not necessarily a purchase, nor is every purchase necessarily a sale. Take the example of the Mexican gardener who gets a NINJA loan (No Income, No Job, No Assets). He claims to have bought the house, but he hasn’t really, since he can’t afford it, and when the balloon payment kicks in, the “purchase” turns into bunkum since he files for bankruptcy and the bank, which recorded the total principal + interest as profit, winds up having to write that profit off. But the bank can’t sell the house even at depressed prices…so the house just sits there. It was sold, but never really bought.
Again, when Fabius Maximus claims “Borrowers and lenders must net out at any point in time” this seems quite clearly wrong. Take the example of the ill-advised investor who buys call options on the DJI at a strike price of Dow 36,000 back in 1999. (Somebody actually wrote a book titled Dow 36,000, so don’t laugh.) That debt would clearly grow over time. In fact, if it were something like a CDS with no expiration date, it would grow essentially without limit. This is what happened with Lehman Brothers, and the other investment banks. They took bets using derivatives that were leveraged at 3:1 or 5:1 and as the economic situation worsened, they wound up leveraged at 10:1, then 30:1 and then 50:1 and then 100:1 with no end in sight. Eventually they ran out of money to pony for the margin calls and they went broke, but the debts kept rising. Same thing happened to Long Term Capital Management back in 1997. They wound up notionally indebted to the tune of over a trillion dollars before they went bust-o.
With derivative financial instruments, it seems clear that a debt can increase effectively without bound. So the debt winds up vastly outsizing the initial loan. That’s what makes derivative financial instruments so dangerous. Or am I missing something here?
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Fabius Maximus replies: To repeat: Please re-read a basic economic textbook instead of writing rebuttals to Econ 101 here. It is off-topic and additional comments will be snipped.
“Again, when Fabius Maximus claims “Borrowers and lenders must net out at any point in time” this seems quite clearly wrong. Take the example of the ill-advised investor who buys call options…”
Derivatives (e.g., options, futures) are zero-sum instruments. One side has a gain, the other side an equal loss.
Off topic, but, holy crap! Have you seen this? Europe-Asia Shipping Rates Hit Zero For the First Time Since Records Began. I don’t know much about international trade, but this scares the living spit out of me.
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Fabius Maximus replies: That’s the right reaction. The Baltic Dry Freight Indexes have fallen (from memory) about 95% from their May 2008 high. This is a tangible indicator of the collapse in global trade — and the rapid slowing of the global economy.
I tend to disagree that economics is not a morality play. It goes right to what an individual values. Why? Because success at economics (for a society or an individual actor) depends on taking a set of assets and moving them from a less valuable use to a more valuable use. It’s all about making value judgements.
Secondly, there is the required framework of trust. If you can’t trust your boss, you get Enron. (How did that work out for the rest of us?). If you can’t trust the gubbermint, you wind up like Mrs. Kelo. I hope that strip-mall her residence was inconveniently preempting offers a wonderful cultural tableau for the residents of New London.
Finally, there is fundamental duty for economic system to be based on moral precepts for the sake of the culture and society within which it operates. As Cardinal Ratzinger once wrote before he became Pope Benedict…
“An economic policy that is ordered not only to the good of the group – indeed, not only to the common good of a determinate state – but to the common good of the family of man demands a maximum of ethical discipline and thus a maximum of religious strength.”
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Fabius Maximus replies: As I said in comment #1, I believe you are overly broadly interpreting this.
“economics is not a morality play.”
That is a misquote. He said “one should not treat the economy as a morality tale.” The key word is treat, because the discussion is about treatment of downturns. You appear to intrepret this as saying “morality is irrelevant to economics”, which is a different class of statement.
This is the primary point of my post, as seen in the opening paragraphs.
OK, I’ll pick that guantlet up as well…
“Machiavelli divorced poltical theory from the personal morality of the ruler — a ruler must do the right thing for his people, even at the cost of going to Hell (Shakespear sketches this out pleasantly in Measure for Measure).”
And Patrick J. Buchanon believes the US (and perhaps Eastern Europe) would have had an easier time of it in the Cold War Era, if FDR had sat out WWII longer and let Hitler and Stalin wail on one another for another few years. Machiavelli would have stood up and cheered. This would have involved throwing France, England and Poland to the junk yard dogs as a negative externality. Personally, I think we’d be worse off today had we gone with that temporary Machiavelian expedience.
“Modern medicine broke the connection (so evident in the Gospels) that sickness is not the consequence of sin (with a few possible exceptions). ”
–I know better than to argue with the graduate school indefinite clause at the end of this one. We’ll move to Keynes and point #3.
“Keynes broke the connection between economic cycles and sin.”
I tend to think a major reason that people move large portions into subprime assets has to do with deliberate mendacity at private rating agencies, such as Standard & Poor’s and amongst government agencies such as Fannie Mae and Freddie Mac. Also, Sarbanes Oxley was exceedingly moralistic and normative in jurisprudential outlook AND was passed to vouchsafe the economy against a potential crash. A potential crash that would have been caused precisely by moral failure when it was time for corporate CEOs to fairly evaluate the value of their firm; when it was that SEC time of the year.
So, no, the extent to which Keynes suceeded in authoring effective advice was not a result of applied amorality. Or to phrase it more accurately, applied amorality is a reason to question Keynes’ intellect rather than revere it.
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Fabius Maximus replies: I do not understand most of this.
“Machiavelli would have stood up and cheered.”
What does this have to do with FDR’s personal salvation, which was Machiavelli’s point (personal salvation vs. wealth of the people)? Even crazy Buchanon does not claim that fighting the NAZI’s was sinful.
The 2nd half is equally difficult to understand. What does the rise in US HH debt, a long and complex story, have to do with treatment of the economic cycle? Imprudence and criminal behavior appear as constants in economic history, part of the 1920-1940 story just as much as our current boom-bush cycle.
If you are so unfortunate as to have a heart attack, would you like the Emergency Room staff to lecture you about the evils of smoking and poor diet — or get out the paddles?
I think this is a deeply important topic. I agree that the discipline of economics can/should be divorced from morality, but feel that economics, therefore, is a field whose input should be viewed within a far larger than only technical context, which of course includes ‘morality’.
Viz. health: we have substituted the notion of ‘sin’ with ‘stress’. There is little substantive difference when all is said and done. Substantive studies on stress might reveal much more of a connection than we ‘post-religious’ folks care to admit nowadays.
As to ‘the quantity of money being fixed’ or that everything ultimately ‘nets out’, perhaps this is true in theory but in practice what matters is where it ends up, i.e. it is significant that the wealthiest 1% in the US receive 19-21% of the GDP (pre ’29 crash levels); also something in the region of 4 trillion dollars from those wealthy (plus corporations) is sequestered OUTSIDE the official US economy in offshore tax havens. This means they are now outside the ‘netting out’ universe to some (not insignificant) degree. In other words, the nice contained realm in which national economic theory resides does not necessarily exist, and/or that even if it all does ‘net out’ as FM maintains, why such incredible inequity? Surely this is an example of how morality does enter into ‘economics’ at least in terms of fashioning national (and now international) financial systems?
Interesting articles on this sort of thing: “The Trillion Dollar Income Shift, PART 1″, Jack Rasmus, posted at Kyklos Productions, 11 March 2007.
I cannot vouch for the source – having been continuously cautioned by our fiery host here! – but the data within is worth considering imho whether or not FM approves!
“If you are so unfortunate as to have a heart attack, would you like the Emergency Room staff to lecture you about the evils of smoking and poor diet — or get out the paddles?”
That brings up an excellent question. If I smoked and my diet consisted of nothing but Twinkies and scotch for twenty years, what do you think the emergency room staff should do? There is the opportunity cost for all of the resources involved with bringing a careless and profligate person back from Death’s Door.
I look at this as a question of what is better for society at large. Let’s say the Obama plan pulls us out of this completely, the way we all should logically hope it will.
Would Americans save more money? No. Why should they. Keynesian stimulus is always one or two bad quarters of economic data away. Personal bankruptcies are a social engineering problem to solve; not an indictment of any individual or corporation’s ethical or logical judgement.
Would Americans produce more goods and fewer services? No. Why produce anthing? You get rewarded more for needing a bailout than you do for being a socially virtuous or vitally productive corporation.
Would Americans conserve more and invest in the necessary R&D to get off of fossil fuel dependency and out of the petroleum-based economy as a whole? No again. That’s the gubbermint’s job.
So Dr. Keynes could hit us with the paddles, and the lifeblood of conspicuous welath could course through the veines of our venal, rotting society.
In conclusion. Yes, I’m the devil on this one. The guy who blieves that I, myself, and everyone else who took it up the butt in this recession had it coming like the snitch in penitentiary cell block. Much of this crisis came from poor decision-making and crappy moral thinking.
As cruel and unfashionable as it is to say this, we can expect this to continue to be a cycle until we convince ourselves that this sort of garbage leads to consequences. Unpleasant ones that some Keynesian stimulus can magically bail us out of like a High Level Cleric in an Advanced Dungeons and Dragons Game.
It doesn’t? If I put a previously uncirculated dollar in the our fractional-reserve banking system, portions of that dollar will be lent, deposited, and re-lent until M1 and M2 have increased beyond just $1.
Consequently, if I take that dollar back out of the banking system for an extended period of time, they would have to unwind the loans that were based on it, causing M1 and M2 to drop by the appropriate multiple of $1.
The quantity of hard currency in the economy may not change, but the effective money supply would.
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Fabius Maximus replies: You are using money in a differerent sense. That’s why I used quotes around “save money” in reply to your original comment. As I said above, lending creates an offsetting debt and asset (the loan is an asset to the credit). It does not change total savings (in the sense used in this discussion).
“Modern medicine broke the connection ****(so evident in the Gospels)**** that sickness is not the consequence of sin (with a few possible exceptions).”
Well, actually, the Gospel breaks that connection itself:
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Fabius Maximus replies: There are many examples in the Gospels making of sin=illness. But, as usual when quoting Scripture, there is always at least one quotation making the exact opposite point!
Regarding ECON 101… (probably more like econ 300-something. Econ 101 was more like “this is a graph. this is the x-axis. this is the y-axis…”). Anyway, a lot of the concepts/equations that get mentioned are what’s called ‘ceteris-paribus’, or ‘all-things-being-equal’ analysis. If everything else is the same, which can be assumed to be true for a short time, and you make a change to one thing, you can calculate the proportional impact to another thing. This is just a way for economists to say in words what scientists would say is a ‘partial derivative’. You can use this to learn a lot about *local* changes. Often doesn’t apply to large changes. often doesn’t apply when you’re near the boundaries of your system. Like, say, snowboarding, which I recently tried to learn. Small shift in your weight will make you turn tighter. Shift the other way and you turn less. Nice. Predictable. Big shift in your weight as you change direction… uh… edge digs in, and splat! wipeout. Theory needs to get a little more complex. Could’ve predicted that if I weren’t busy testing my simple theory.
I trust someone on Krugman’s level to know what he’s talking about, except it seems like there isn’t concensus on what the right thing is- hence competing schools of thought. Sortof like climate change, FM.
What I’m saying is that a few years of thinking about this stuff isn’t enough. For someone in the position we’re in (i.e., not a professor studying macro econ and policy), trying to judge whether we should pump more $$ into banks, practical experience and common sense is a much better guide than trying to work out the theory with our limited knowledge.
Personally, from a common-sense point of view, deliberately not trying any analysis for which I know I and probably 99% of everyone else here is unqualified, I’m against taxing future generations for a bailout that may just prolong the inevitable and propel us faster down the mountain when we have no collective idea what we’re doing. Take the fall and learn properly. Let the banks reap what they have sown. This will have the beneficial side effect of teaching Main Street not to entrust Wall Street with their prosperity.
Here’s a question. How much of what is written, great and small, by economists and similar academic professionals, merely amounts to justification for some form of central planning — great and small?
We are all familiar, or should be, with the efficacy of central planning are we not?
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Fabius Maximus replies: this is a powerful question. An underlying assumption in much modern economic theory is that the government has the data (accurate, timely), knowledge (effective theory), and wisdom to manipulate the economy. All three assumptions are questionable.
Furthermore, the only way for economists as a guild to weild influence is through government, which might induce a bias in their thinking.
Define it, please.
Since essentially every professional economist failed to foresee this crisis, and led us into it using the prescriptions specified in “Econ 101,” this suggests that Econ 101 is garbage and obviously wrong and should be thrown out.
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Fabius Maximus replies: Since medicine has failed to cure a single viral inflection — including those cancers caused by viruses — it should be thrown out! Since democracy has failed to prevent wars and depressions it should be thown out!
That’s logic!
Electrophoresis, when you go to Heaven, you will find the perfection to which you aspire.
A comment to follow on comment 16:
Economists have become a consultant class. As a class their need for “influence” is only to convince a part of the populace to buy their services. As a “guild” wide disparity in their predictions only serves to increase demand for their collective services as more opinions are needed to settle on a mean of their widely divergent opinions. Being on the fringe of economic opinion and occasionally correct can be as or more valuable than being in the mainstream and mostly correct as it is disaster or nirvana many rely on such shaman to predict.(A correllary to this theory is that those who wish to engage in fringe behavior seek shaman who endorse fringe behavior.
Allen Greenspan with his endorsement of risky Federal policy toward housing, interest rates and credit and his resulting long tenure at the Fed is an example)
They need those who buy their services to feel good about their predictions or they won’t be hired again. Hence they adapt their opinions to their listener’s expectations. (A moral judgement) The real question is which economists are making good moral judgements about how they disseminate information and opinions?
Why the cartoon portrayal of the Austrian Theory of Economics as a mere exercise in overworked Victorian morality?
AT has a Nobel Prize Winner to its credit (Hayek, 1974), so hopefully I am allowed to speak about it, even if that is not mentioned in Econ 101. AT has a very large basis of theory and study, surviving even though AT is completely ignored by many academic establishments and policy-makers. AT is the only theory that has an explanation for the current crisis, is a theory that cuts through the fog of current misunderstanding (it is NOT a liquidity crisis and never was, it is a solvency and capital crisis) and, though we may not like what it entails, AT also provides a solution to resolving this mess. Monetarists and Keynesians alike have misjudged this crisis from the beginning – why not look for something that actually works better (not perfect, works better)?
Just as the Keynesian analogy of the economy as a machine is horribly simplistic (it is much more akin to a massive ecosystem with all sorts of feedback loops), this analogy of AT as morality argument and not a valid economic school of thought is overly simplistic.
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Fabius Maximus replies: Krugman is an eminent economist (Professor, Nobel Lauriat), and hence is entitled to his opinion.
Also, you bizarrely misstate the nature of Keynesian economics: “Just as the Keynesian analogy of the economy as a machine.” Feedback relationships are at the core of his concept of equilibrium.
small points re FM’s comment:
“Since medicine has failed to cure a single viral inflection — including cancers — it should be thrown out! ”
Cancer is not a virus, but suspect that’s just grammatical confusion there.
The sentence should read ‘Since Western medicine…’ They have been curing viruses in China (and elsewhere) for centuries, if not millenia. Not every virus every time, not to the point of being free from occasional vicious plagues, but many different, including new, viral infections have been overcome consistently.
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Fabius Maximus replies: Some cancers are caused by a virus.
Every purchase is only necessarily a sale, and savings is investment only when actual money is used. When any single party in the game is allowed to create IOUs at will and force other parties to accept them as if they were money, then that link is necessarily broken. Appeal to authority all you want Fabius, but Krugman is demonstrating a logical failure here and no amount of sheepskin on his wall changes that.
So, if the economy is a sine wave of booms and busts, and you want to make the busts less horrible, it necessitates the reduction of the amplitude of the wave, meaning lower highs, and higher lows. We have been attempting to push the amplitude as high as possible on the most recent wave, and now, in order to jump-start the economy, are trying to stop it at zero. Instead, we should simply increase the frequency.
nice storie greetz jack