Now hear Friedrich Hayek sing a song of savings....
December 5, 2012 8:33 AM   Subscribe

Deck the Halls with Macro Follies: is at it again, with their signature brand of musical Austrian economics lessons poking fun at Keynesian stimulus. Sings Thomas Malthus: ♫Silent Night♫ No shoppers in sight... ♫ The general glut has caused our plight ♫ Spend your money to clear our shelves! ♫ In consumption we'll save ourselves! ♫ Underconsumption is born—I view your savings with scorn...♫ (previously, previouslier) Still no NGDP-level targeting songs, sadly.
posted by anotherpanacea (15 comments total) 5 users marked this as a favorite
So, like religion, their economic theories rely on the repeated chanting of their beliefs, rather than on verifiable facts.
posted by 1970s Antihero at 8:43 AM on December 5, 2012 [13 favorites]

Does it include a link to a universe where the economy behaves as Austrian economic theories predict?
posted by eagles12 at 9:02 AM on December 5, 2012 [8 favorites]

Good King Wenceslas said:

"These old men don't understand
Scansion, rhyme, or humor;
They deserve a reprimand
From their Saint Consumer.
None of them can recognize
Poetry or beauty.
Leave them to their hoots and cries:
That is all our duty."
posted by Rustic Etruscan at 9:53 AM on December 5, 2012 [8 favorites]

this is amazing! tweeted to my econ dorks XD
posted by liza at 9:58 AM on December 5, 2012

Hey, wait, big guy, dressed in red, giving according to need....

Where are those tracks by Marx and Engels!?! I always like to hear them at the Great People's Winter Gift Celebration!
posted by GenjiandProust at 10:23 AM on December 5, 2012

So, like religion, their economic theories rely on the repeated chanting of their beliefs, rather than on verifiable facts.

They don't need "facts" to tell them that hyper-inflation has always been just around the corner for years without any evidence! Logic demands it!
posted by Sangermaine at 10:24 AM on December 5, 2012

Honestly, I think we have EconStories to thank for the fact that lots more people know anything about economics at all. They're on the same level as "Schoolhouse Rock" - and their Rap Battle between Hayek and Keynes gave a pretty fair shake to each side. There's no reason to scorn them.
posted by corb at 12:29 PM on December 5, 2012

The implication being that the economy never operates at less than its full capacity.

Under certain conditions, they are correct. The only way to long term prosperity is through increasing productive capacity. We increase our productive capacity by savings. Call these conditions normal.

But under different conditions, call these conditions depressed, the economy operates stably at under full capacity. Under those conditions, yes, spending money increases growth, until productive capacity is reached and until conditions slide back to from depressed to normal.

This is the modern synthesis in economics and it works. I think of it as similar to Newton & Einstein in physics. Under most circumstances, Newton's equations work. But under different, extreme circumstances, you need Einstein's general relativity to understand the world.

Similarly, where the economy is operating at an equilibrium at full capacity, Classical economic rules apply. (And Austrian Economics is a classical school.) Hence, future productivity and prosperity is dependent upon savings, and all things being equal, government debt in tandem with a current account deficit (meaning there is a net foreign trade deficit whereby foreign money and thereby obligations to foreign actors are used to fund increases in or maintenance of future productivity) while temporarily making it seem like an economy is richer than it is by allowing it to consume everything it produces, entropy being what it is, will lead to a decrease in the wealth of an economy in the long run. In fact, the argument is basically that a recession is just that: a decrease in wealth due to earlier overspending and the commisurate decay in productive capacity, which takes effort to maintain and increase. And there's a certain element of incomplete truth to this & some normal recessions, although there are shocks that do in fact lower the full potential of an economy other than debt, public or otherwise, an example being the energy shocks of the'70's.

In making that argument, the Austrians et al are like a physicist who ignores Einstein by maintaining that the conditions where Einstein's equations are relevant do not exist anywhere.

The problem is that it's quite clear that the economy can operate stably at an equilibrium at under full capacity. And in that case government debt does not jeopardize future productivity growth because both consumption and savings can both increase together without the necessity of foreign resources, or in the context of a closed economy, an economy can increase consumption without allowing future potential to decay. And it can do so with pure consumption spending, although governmental long-term investment is even better. In fact, it maintains future production by engaging resources that would otherwise decay from disuse.

And the thing is that the respective policy prescriptions of the two theories, while useful in their own economic milieau, are actually counterproductive in the other.

Hence the Austrians' blindness classical economic theory's failure under depressive conditions means that we should ignore their policy proposals under current conditions.
posted by JKevinKing at 3:01 PM on December 5, 2012 [1 favorite]

I'm sympathetic to this line of argument, JKEvinKing, but I've always wondered: how much is full capacity? How do you know when you're at "full capacity"? How can you be sure you're below it? Everything seems to depend on how you choose your trend line.

In 1948 workforce participation was 58.3%. Today it is 63.8%. It's been as high as 67.3% (in 2000, before the crash) for a brief period and in some of our best years it was hovering around 61%. Then before the 2007 crash it was about 66.4%. Meanwhile, workforce participation is up among the elderly. (source)

Which of those years was full capacity?
posted by anotherpanacea at 3:42 PM on December 5, 2012

anotherpanacea, I think the answer to that is that 'full capacity' is a moving target, similar to 'full employment'. Sometimes it is higher and sometimes it is lower. It's difficult to nail down specifically what numbers constitute full capacity or employment and it's probably more important to look at trends rather than absolute numbers, but looking at the overall economy can give a general idea of whether or not we are close to them. If rates of growth slow, that may indicate that we are falling away from full capacity or employment, but it may also indicate that we were growing too fast ('overheating') and need to slow a bit to be on a maintainable track, but you don't know without looking at several other indicators.

For instance, with those participation rate numbers, the participation of women in the workforce has certainly had an impact on the absolute numbers, but you'd have to also include household income and labor productivity to determine if there is a higher percentage of the population working because there is more work to be done or whether more people are working but each is working fewer hours on average. You could also include changes in growth rates for the population as a whole compared changes for specific groups (e.g., if the population is skewed toward the old or young then you might see lower labor force participation rates due to people retiring or still being in college). And there are many other factors that go toward giving context to those data points.

Aside: My intermediate macro textbook had a listing in the back of what constituted full employment for each year for the last ~50 years - my professor joked, 'Who knows what full employment was for all those years? The author of the textbook.'
posted by IFAQ at 6:06 PM on December 5, 2012

Your answer suggests that this isn't a case of applying Hayek at full capacity and Keynes below it, which was the original contention. If we don't know when we're at full capacity, then we won't know which model to apply or when to switch.

I'm sympathetic to the Minsky-ites and I suspect Delong and Krugman are right on the policy. But they are always so sure that we're below full capacity and that this isn't the new normal, and it all depends on whether we're talking about the ten-year trend or the post-war trend or the twentieth century trend. There's a way to figure it out according to some very good DSGE models, but how do we predict the models' fallibility in what may or may not be new circumstances?

And of course, that was Hayek's complaint: he was skeptical that models and aggregated data could ever be an adequate substitute for local knowledge, especially local knowledge aggregated through prices.
posted by anotherpanacea at 7:57 PM on December 5, 2012

DSGE models are worthless crap, and I wouldn't suggest using them for much of anything, especially not
'capacity utilization', which pretty much requires firm-level surveys.

However the argument that because X is difficult to measure means that we default to assuming X=100% is obviously stupid.
posted by moorooka at 10:19 PM on December 5, 2012

You misunderstand. I don't think X is 100% right now. But that's because I think X is so vague that it'll always be possible to argue it's too low or too high. So you never escape Keynesian stimulus: there are always capacities that COULD be deployed, if things were really bad.

World War 2 was full capacity. But I'm happy that we're not living under those circumstances. My octogenarian grandfather is pretty spry; he'd love to useful, if he was needed. But I'd rather he enjoy his retirement!

A much simpler model is to keep nominal GDP growth stable, and to provide a non-temporary safety net for those who can't find work. Or just for everybody: give 'em a basic income guarantee. Human beings are more than resources and capacities to be utilized.

If you separate the state's management of the macro-economy from the welfare state function, you'll have more stable growth AND more justice. Or so I would argue: for data, you've got to hit up folks like Scott Sumner.
posted by anotherpanacea at 4:02 AM on December 6, 2012

As someone who prefer's Hayek's theories, I could actually see a really strong argument that Keynesian dynamics are useful for recessions. I tend to favor the idea that without a hard crash, the problems will not be fixed, but could easily be convinced that there is a better way for the duration of the recession/depression. But I don't think there's anyone out there who is advocating for Austrian theories during the majority of the time, and Keynesian ones during hard times. It's either all-Austrian-all-the-time, or all-Keynesian-all-the-time. And that's the problem - and also what prevents people from supporting different measures in times of crisis - they know those measures will never go away.
posted by corb at 6:35 AM on December 6, 2012

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