More on Mandel, Austrianism, and Keynesianism
Arnold Kling
My take is this: there was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus. Maybe you will live until 83 rather than 81.5 and your pain reliever will work better. In the meantime you will read blogs and gaze upon beautiful people using your Facebook account.
That is Tyler Cowen, commenting on the Mandel Hypothesis, which is that much of the growth from 1997 through 2007 was illusory.
One way to think of the Mandel hypothesis is that we misallocated a lot of resources. First, we built dotcom businesses that had no viability. Then we built too many houses relative to the increase in households, and we put too many people to work creating phony wealth by trading mortgage paper. All along, we spent too much on medical services with high costs and low benefits.
According to both Austrianism and Keynesianism, a misallocation of resources can cause a boom. In the canonical Austrian story, government manipulation of interest rates causes too much long-term investment, leading to a boom, followed by a bust. In the canonical Keynesian story, paying workers to dig ditches and fill them in again can cause a boom.
In the Austrian story, a boom caused by misallocation is a bad thing. In the Keynesian story, a boom caused by misallocation is a good thing. On that, I prefer the Austrian perspective.
However, many Austrians seem to believe that only government manipulation of interest rates can cause a misallocation. Keynesians believe that waves of euphoria and pessimism in the private sector also can cause misallocations. On that, I prefer the Keynesian perspective.
Right now, the Keynesian perspective would say that we can afford to misallocate resources in order to avoid having them be unemployed. The Austrian perspective would say that we need to adjust downward our expectations in light of the fact that a significant amount of the wealth we thought we had a year ago does not in fact exist.
The Keynesian perspective is that the government might as well spend like crazy, because somebody has to. The Austrian perspective is that our ambitions need to be scaled back--both for private and for public consumption.
In the current environment, I think that the Austrian perspective has a lot of merit. We have misallocated a lot of resources, and we have to pay a price for that (on the other hand, I think that the government statistics may under-estimate the welfare gains from innovation, a point which Cowen seems to be making in the quotation above).
I think that the Keynesian perspective is only valid up to a point. Unfortunately, our policies go way past that point. The policies fail to acknowledge that we hold some bad assets, in every sense of the term. Trying to deny the losses by encouraging bank prop-ups and other forms of extravagant collective spending worries me. Such policies risk causing more harm than good.
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Comments
This isn't Hayek's view, see _Monetary Theory and the Trade Cycle_.
"many Austrians seem to believe that only government manipulation of interest rates can cause a misallocation. Keynesians believe that waves of euphoria and pessimism in the private sector also can cause misallocations."
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Euphoria could easily be defined as: optimistic as to the returns from certain investments given the observed interest rate.
Posted March 4, 2009 11:07 AM
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Greg Ransom writes:
The key thing is the coordination of the time structure of non-permanent production resources, aligned across time not only among themselves but also in terms of consumption streams, savings streams, and interest rates.
Ask yourself -- is the digging and filling of holes something that helps re-establish the coordination the time structure of production when you've dug too many holes building houses and dug too many holes building mortgage company office buildings?
Note well that Keynesians, New Classicals, New Keynesians and the rest can't even think about this can't even think about this stuff, much less talk about it -- they are blocked from thought by their models which allow nothing but "K". In other words, by stipulation there is are no time consuming heterogeneous productive processes, there is no time structure of production -- there is no relative price coordination problem in the economy across time and through the production process.
Hayek provides a theory of capitalism which includes the use of productive resources of differing time periods across time -- i.e. he provides a theory of capitalism which includes capital. Keynes and the New Classicals and the New Keynesians and the monetorists and the Real Cycle theorists provide a theory of capitalism without capital -- just "K", which isn't remotely capital, it's a letter in a phony math construct.
See Roger Garrison, _Time and Money_ on all this.
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fundamentalist writes:
Thanks for the honest treatment of Austrian econ! Most mainstream economists battle a straw man version.
As Greg Ransom points out, Hayek believed that a lot of things can initiate the credit expansion that launches the boom. The central bank has the opportunity to slow the boom by raising interest rates even if it didn’t initiate the credit expansion. Austrians are well aware that business cycles existed in the past before central banks. But in the past century most credit expansion has been caused by the central banks artificially lowering interest rates.
Austrian econ includes Keynes’ euphoria and pessimism, but as secondary causes. Euphoria happens after the credit expansion because people think it will last forever and that it is real growth and not a credit induced bubble. Mises and Hayek thought that if people understood the real nature of the bubble they would not participate in the credit expansion and that would dampen the cycles.
The shortage of capital goods causes the boom to bust. The bust reveals the misallocation of resources. In the process of reallocation of resources, unemployment rises and prices fall. People realize that a lot of their savings have been wasted. They panic and pessimism sets in. That, in turn, causes them to want to rebuild savings, hold more cash and re-balance their remaining portfolio away from stocks to US treasuries, all of which cause prices to fall further and feeds the pessimism.
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