As I mentioned a couple of weeks ago now, in the course of "Money Week," one of Keynes' signature ideas is the liquidity trap: business slows to a crawl when everyone becomes a hoarder. No one wants to lend, or keep their money in the care of institutions that lend, and the interest rates cannot get low enough to correct this situation in supply/demand terms. Do we believe in this idea, dear reader? The standard free-marketer's response to talk of a liquidity trap is that it is nonsense. It is based on the idea that there can be a sharp increase in demand for money that is NOT an increase in the demand for goods. Everybody becomes a hoarder. But why? Because everybody becomes attached to the medium of exchange, at the expense of the actual exchange? That sounds like a personal pathology, unlikely to be common enough to have macroeconomic effects. Most people realize that money is a medium of exchange. It is valuable BECAUSE it buys goods and services. It is not v...
Posts
If you had to name ONE defining characteristic of the revolution in economics scholarship known as Keynesianism: what would it be? Probably this: Keynes offered a distinctive explanation of sharp economic downturns within capitalist systems -- call them crises, depressions, recessions, or whathaveyous. Keynes explained them in a way that suggested a toolbox of remedies. His book, The General Theory, was published in 1936, so you would expect it to have something to say about that subject. What is distinctive about his theory is that although it involves the price of borrowing money (i.e. interest rates) it does NOT directly entail monetary policy. His tool box does not include things like "mint silver." Indeed, this may be considered odd because his is the first significant book in the history of economics to appear AFTER the overthrow of the long dominant role of gold either as money or as a backer of money. Yet he put that issue on the shelf. Instead, Keynes p...
Economist William Baumol, a professor emeritus at Princeton University, passed away on May 4. I imagine he couldn't bear the thought of witnessing one more silly pseudo holiday where Yankees pretend we care about Mexican history in order to drink tequila. In that case, his timing was perfect. Baumol is one of the two gentlemen immortalized in the name of the Baumol-Tobin model of the transactions demand for money. (The other, of course, is James Tobin who passed away 15 years ago.) Baumol's paper outlining this theory preceded Tobin's by four years, but the model seems to have languished in obscurity until Tobin's revival. Baumol did much else, too, but I'd like to write about transactions demand today. Indeed, I'm going to criticize its role in subsequent developments. This may seem a violation of the old rule "speak no ill of the dead." So I should preface it by saying the following: I'm certain Baumol made many other contributions more ...
In June of this year, Paul Krugman wrote a sort of humblebrag column admitting to certain errors that have accumulated in his columns. The tone was, "yes I've gotten things wrong, but none of these examples reflects any very deep mistakes in my assumptions, and since I'm owning up to my errors, all is good." The most intriguing of the admissions, to me, involved the economy of the United Kingdom. Krugman has been using "austerity" as a whipping boy for years now. Every impulse toward hardening the money supply or cutting public expenditures, in any country toward which he turns his gaze, is "austerity" or the cult of the "austerians" and a bad thing. One sometimes gets the impression that Krugman coined "austerians" to pun on "Austrians," and to try to use the failures (as he sees them) of austerity policies as arguments against Austrian economics. A silly pun, if that is what is intended. Anyway: the U....
I'm reading through a book by Hunter Lewis, co-founder of Cambridge Associates and the Mises Institute. The book is WHERE KEYNES WENT WRONG (2009). I'm mentioning it today because of the material in the chapter "How Keynesian was Keynes?," which I found intriguing. About much of the material in the rest of the book, I'm long since jaded, but some of this was new to me. In 1948, writing in the American Economic Review , John H. Williams said he had had a conversation with Keynes (the famous economist had died between that conversation and this article). Keynes allegedly told Williams "that the easy monetary policy was being pushed too far, both in England and here [the US], and emphasized interest as an element of income, and its basic importance in the structure and functioning of private capitalism. He was amused by my remark that it was time to write another book because the all-out easy money policy was being preached in his name, and replied...
I recently encountered a neat little dialog written by JP Hochbaum entitled "If Keynesians and Austrians were horticulturists." I don't draw the same conclusions from it that he does, but I admire the brio he brought to his analogy, and I've done my best to hijack it below. I haven't gotten his permission to quote it at length, so I won't. The gist of it is that the Keynesian wisely wants to water the dying plants. The Austrian economist (supposed to be the butt of the analogy) wants to rely on the natural water cycle, allowing the plants to die if they don't get rain. "We need to wait for the sky to give us rain." Now think about this ... isn't the Austrian in the right, even given the terms of Hochbaum's analogy? I think of the plants in question as capital investments of various sorts. So some investments succeed (grow and bloom), some investments fail (shrivel and die). Any investment should be allowed to fail. There should b...
Nobel Prize winning economist Paul Krugman, pictured here, whose writings for the mainstream press have made him easily the most visible Keynesian of our day, issued a challenge to Austrian economists recently. For those of you who may be new to such discussions, I'll explain the jargon. The Austrian school is the tradition of Hayek and Von Mises, [and for the record, Hayek too received a Nobel Prize], a school built on a subjective understanding of economc value, that is, the view that something has value because one or more individuals want it -- regardless of, say, how much labor or how impressive a technology was necessary to create it. Also integral to the "Austrian" school are distinctive views about economic calculation, the demand for hard or honest money, the bases of interest rates, and certain meta-theoretical ideas as to how economics ought to be studied. What especially sticks in Krugman's craw, though, is the Austrian view of the business cycl...