The General Economics Thread

Do you have a source that compares the predictions of the major economists of various schools side-by-side? I know many predictions have been shared between multiple schools.

If I'm not mistaken, the "inflation and deficit" hawks have been recommending physical commodities, which have done great. Look at the price of gold over the past decade.

Gold went up largely because people were scared of economic collapse so they rushed to buy it. It's classic bubble mentality, especially given the rush of advertising for... gold. All you have to do to see it is look at who's profited from the increase in prices.

Oil has gone up because of issues largely unrelated to demand. Food prices have gone up in many cases due to drought and other weather conditions that are predictable if you look at climate change.

Specific data exists on Keynesian versus Austrian economic trends but I'll have to spend some time looking for it, as I rely mainly on Krugman's blog posts, which are numerous and not easy to search.

Incidentally, Krugman shares our disgust with the so-called "science" of economics. [1] [2]

Edit: Here are some blog posts that illustrate the evidence in favor of Keynesian theories: [3] [4]

edited 18th Dec '12 2:25:50 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

I'm glad to see that column. I didn't think Krugman was so self-aware. Good for him.

Except for 4/1/2011. That day lingers in my memory like...metaphor here...I should go.

Krugman has been lamenting the politicization of macroeconomics for years, ever since the response to the Great Recession proved that we have collectively learned exactly nothing since the 1930's.

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

@52 - Yes, as I said you can explain anything from the point of view of any economic school. The fact remains that the Austrians gave good investment advice. This goes back to the historical moment that Keynesians predicted that leaving the gold standard would cause the price of gold to fall relative to the dollar, Austrians predicted that it would rise. It didn't fall.

Other precious metals have done pretty well, too, although not as well as gold.

Don't get me wrong, though, I'm not an Austrian.

EDIT: I don't see anything about Austrian predictions in those posts.

edited 18th Dec '12 2:33:47 PM by Topazan

Frankly, I'm somewhat mystified that the price of gold is in any way relevant to modern economics since we stopped using it as a basis for currency.

If you want to look at the success or failure of economic policy, examine how austerity in European countries has had massive negative effects on their GDP and employment, whereas if you believed Austrian economics, they should be prospering. And exactly the reverse is true in countries with high taxes and social supports, who did not practice austerity — they are booming and, in fact, were largely immune to the recession.

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

It's probably more relevant in the Austrian model than the Keynesian model. You made the statement "if you believed the inflation and deficit hawks and invested on the basis of their predictions over the past six years or so, you'd have lost a ton of money." Personally, I've made one major investment based on a pessimistic view of our economy and it worked out ok for me (so far, of course).

I haven't studied Austrian theory, but is that really enough to rule it out? It's my understanding that they don't deny the short-term effects of a Keynesian style stimulus, but they say that it leads to malinvestment which will lead to a more painful recovery later on. I imagine that their short-term predictions wouldn't be that different.

edited 18th Dec '12 2:56:35 PM by Topazan

@ Fighteer: All I'd suggest is also to look beyond the US for examples — after all, the US was just about the only major combatant to come out of the World War II like it did — everywhere else was devastated and worn-out, and in Britain's case, out of money. In Britain, rationing got worse after World War II*

, not better, and domestic production was in short supply since it all was going for export.

I'm not sure how that can be explained under Keynesianism.

edited 18th Dec '12 3:07:30 PM by Greenmantle

Keep Rolling On

Simple. Pre-WW 2, we had a seriously lack of demand in the US, with both a labor and resource surplus. WW 2 increased demand massively, thus giving the people something to work on, and the resources somewhere to go. Also, mainland US was untouched by WW 2, so our infrastructure wasn't devastated like oh...every other nation.

European countries weren't facing what we had. They ended up with a nearly crippled infrastructure, and they didn't have a glut of raw materials and unskilled labor like we did.

Post-WW2 Europe was a supply crisis, not a demand crisis.

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

@Fighteer: New Keynesianism, as I've said, does in fact run on the rational actor theory; the idea of a "superrational actor" is either yours or Krugman's. Keynesianism suggests that the government should act to pick up the slack in recessions and to help resolve market failures (monopolies, transparency issues, public goods), it doesn't actually suggest "tax the rich." (Keynesianism actually advocates for lowering or raising taxes during a recession or a bubble as a control lever, which is not ideal; monetary policy and government expenditure are far better than tax policy for controlling the economy.)

edited 18th Dec '12 11:34:34 PM by Ramidel

We hear a lot about assuming rational actors in economics, and then we hear the response that real-life humans aren't rational.

But that assumption is there because it's supposed to establish a theoretical ideal case. The question is how deviating from that assumption would change the outcome.

Look, when I refer to Keynesian economics, I am talking about the school of thought currently embodied by Krugman's work. The distinction among labels like "Keynesian", "neo-Keynesian", "Chicago school", "saltwater", etc., is arcane to the point of being actively infuriating.

I thought I'd made my points clear, but since we insist on arguing semantics, here are the core principles of the theory:

• Humans, in general, are not rational actors, but their aggregate behavior can be predicted.
• It is the role of government to smooth the curves in the business cycle in an attempt to provide steady growth and mitigate the damaging effects of booms and busts.
• Government should spend and/or save as a counterbalance to private spending and saving. When the private sector is spending profligately (boom), government should tighten fiscal and monetary policy to keep things under control. When the private sector is saving (bust), government should step in to boost aggregate demand.
• Debt is a tool of fiscal policy, to be taken on as needed and paid down as possible. A nation with sovereign control over its currency cannot default on its debts.
• The primary purpose of borrowing is to divert money from investment to consumption.
• It is the role of government to provide a minimum standard of living for all of its citizens. Citizens who do not have food, housing, medical care, and other necessities are nonproductive and have a very hard time becoming productive.
• There is no "perfect" rate for taxation and spending; it must be adjusted according to economic conditions. However, in general, one wants to tax progressively because of multiplier effects — a given amount of money is more valuable to people at the lower end of the income scale and more likely to be spent rather than saved.
• Correspondingly, one wants to spend money on programs with the highest multiplier effects, whilst maintaining the core functions of government, thus maximizing efficiency.
• The "natural" top marginal tax rate is that which continues to provide a fiscal multiplier whilst not disincentivizing work.

I think those are the basics.

edited 19th Dec '12 5:47:37 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

But does he support the same theories espoused by John Maynard Keynes? If he doesn't, then it isn't Keynesianism, surely it must be — something it is already called, I might add, "Krugmanism"?

edited 19th Dec '12 5:50:52 AM by Greenmantle

Keep Rolling On

He calls himself a Keynesian and cites Keynes. He considers his work to be an expansion of Keynes' theories, which are still applicable 80 years later. Is this what the thread is going to become about, nitpicking labels?

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

* Shrug *

You saw right through me, there. I'll take that hit.

The trouble is, Keynesianism has an image problem. It's associated with the Post-war consensus*

and the problems of The '70s, whereas monetarism doesn't have that problem. Plus, a lot of Politicians grew up during The '80s and haven't the advantages of Keynesianism in their lifetimes, just the downsides of it. In fact, monetarism has become the mean, the normal. Keynesianism's got to fight against that, against practically the whole Western Political Establishment along with the IMF.

edited 19th Dec '12 6:11:50 AM by Greenmantle

Keep Rolling On

I vowed, and so did you: Beyond this wall- we would make it through.

....I really want to Sig that.

Anyway, my view of Krumanian Keynes is that although it's not perfect. (There's so many variables, it's impossible to make a perfect model.), but it's the best model we have, that provides the greatest good for all.

@Ten Tails Beast: Oddly, it is possible for an advanced society to support a certain amount of its population in idleness without harmful side-effects. Our goal should be to minimize this, of course, because in the end it is a drain on productivity, but because of multiplier effects it's not as big a deal as one might think.

There is an argument to be made that it is better to live on government support than to take a job that pays less than you need to live. In a sense, income support drives wage growth, because it sets a minimum standard for worker pay.

edited 19th Dec '12 6:50:26 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

Well, I also feel that people have a fundamental needs to work. My parents, for example, were kinda lost after they retired, and my mother ended up taking a part time job. Then again, I can't really speak for everyone. I just feel like many people feel like they need the sense of stability and routine that work provides.

Absolutely. That's part of human psychology - the need to feel useful and productive. Take that away and people fall apart, which is one of the other problems with long-term unemployment and/or endemic poverty.

This is part of the rationale behind income support: let people know that they have a fall-back position that doesn't involve starving and getting kicked out of their homes, and they'll have the security to reach for the work that they really want and that pays well enough for them to make a living, rather than being forced to take a shitty job just to feed the kids. This in turn forces companies to pay decent wages if they want employees.

Edit: @Greenmantle: When you say that "Keynes took a hit", I assume that you're referring to the effects of abandoning Keynesian principles in the 70's? Because that's what happened. Blaming Keynes for that is a bit like blaming Bill Clinton for the Iraq war. The so-called "failure" of Keynesianism was anything but; it was a symptom of failing to apply it properly — or, indeed, at all.

Now, this could be said to be an argument that governments are incapable of responsibly managing the economy, but look where we are now! This depression was directly caused by laissez-faire capitalist policies and continues largely because of them; those limited applications of Keynes' theory that we made in 2008-2009 are the only reason we aren't in worse shape right now.

Asserting that people should not attempt the best solution to a problem because they are too stupid to get it right; therefore we should go with the worst solution because it's easier is kind of insane.

edited 19th Dec '12 8:40:29 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

Keynesianism isn't the only theory using government intervention, though.

Feel free to provide details so we can discuss them. If you'd rather we not use terms like "Keynesian", maybe we can go with "interventionist" versus "non-interventionist"?

edited 19th Dec '12 9:58:41 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

The stagflation of the 70s could not happen in Keynesian models at the time. This is not to say the Keynesianism caused the stagflation, but it failed to explain it. Whether or not it had good policy recommendations, as a theory it was wrong.

My point is that Keynesian is not exactly equivalent to interventionist, so we should be clear which topic we are talking about.

edited 19th Dec '12 10:29:00 AM by Trivialis