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Wednesday, December 24, 2008

NEW KEYNESIANISM, POST-KEYNESIANISM, AND POST-AUSTRIAN THEORY

Happy Imminent New Year, Everybody

And let us all share a hope that in less than a month, with the start of President Obama's administration and a new Democratic Congress to back him up, our country will flourish much more noticeably than in the dismal Bush-W era . . . both at home and globally. 

Today's Buggy Topic

It's found at Carpe Diem, where, alas, a lot of heady and not very informed huffing-and-puffing was expended in dozens of posts in a thread that Professor Mark Perr --- who runs the laudable, data-driven blog --- started with a long quote from someone who said that financial "bubbles" not only are inevitable, but essentially good for free-markets.  The huffing stuff, followed by some name-calling, soon erupted with some followers of Austrian-economics who think that free-markets would work to near-perfection, without bubbles and subsequent recessions, if only we returned to pre-1700 monetary policies

The Austrian View of Money and Banking 

In those days, you understand, all money was strictly tied to gold; there was no "fractional banking" --- which means that banks couldn't keep only, say, 10% of their depositors gold-linked money on hand and lend out the rest through a multiplier effect (creating what's called fiat-money); and to top it off, there were no central banks that could expand the money supply, presumably (in Austrian economics) as much as central bankers' hearts desired.  The result?  There couldn't be any excessive credit-creation that entails a boom phase of economic growth in the business cycle --- full of misallocated investment --- and that subsequently leads invariably to a credit-crunchy and recession.  In fact, there couldn't be a business cycle . . . just steady, non-inflation economic growth.

Yes, there'd be some ups and downs in growth, but all the downs would be easily explicable: existing technologies used in production would be losing steam, capital accumulation based on those dominant technologies would therefore start running into diminishing returns, and economic growth would sputter . . . only for the deus ex-machina to intervene: hard-driving, risk-taking entrepreneurs who would, in a struggle for profits and glory, lead the successful to innovate new technologies and start solid, non-inflationary economic growth again.

Alas,

Austrian economists --- who frown on empirical work as useless (just check your logical premises and deduce rigorously what is and will happen to economies over time) --- forget to tell us that before 1700 all the economies of the world, despite different levels of technological advance, were stuck in a Malthusian trap: any spurts of economic growth for whatever reason would, if they lasted several years or more, would invariably lead the masses to have better diets, reproduce more profusely, and soon enough, population would grow faster and hence per capita income would fall back to an equilibrium-level that existed before the spurting economic advance.

It was only with the industrial revolution of the late 18th and 19th centuries --- pioneered for good reasons by England --- that certain economies in the world began to escape from the Malthusian trap and have been able to sustain increased growth in per capita income despite explosive growth in population . . . both in the rich, the rapidly developing countries, and the more backward ones. (In the very rich ones, which means West Europe, Japan, and the English-speakng world --- plus two or three small Asian dynamos, population growth has fallen noticeably since the high rates of the 19th and early 20th centuries.  In fact only the US, of these rich countries, is near replacement levels --- births more or less equaling deaths each year.  All quite apart, moreover, from immigration.)

Enter Prof Bug's Comments

Overwhelmingly, the posters at Carpe Diem are free-market enthusiasts, though probably 90% have no idea what the differences are between, say, Austrian economics --- a kind of small cult-like group on the fringes of libertarianism --- and the far more innovative, far more influential New Classical economics that ignored Keynesianism, re-linked economic analysis to the classical and neo-classical economists of the 19th and early 20th centuries, and under the influence of Milton Friedman and his students and followers have dominated economic theory for the last 30 to 40 years.

So one aim of prof bug's comments were to enlightened them on this difference.

Crowding that aim in center-stage of those buggy comments is a second objective: to note for the Carpe Diem posting-crowd --- most of whom seem to have never taken economics in college or, if they did, to have forgotten it (there are exceptions!) --- that there are different versions of Keynesianism, often very critical of one another.

Enough Said 

Click on this link to access the relevant thread and the bugged-out commentaries --- a duo to be exact.   In the meantime, if you want to deepen your knowledge, click on this link to a very good article in wikipedia on Keynesian economics --- easy-to-follow and unusually perceptive about the subject.  Note the links at the bottom of that wiki-article to related articles on New Keynesianism and the more radical Post-Keynesian version.

Oh oh.  It turns out that in the initial buggy post Carpe Diem --- there are two others in that thread --- prof bug erroneously listed the same web-address twice.  That left out a link to another thoughtful Post-Austrian Economics article.  Click here for it when you're through looking at the three bugged out commentaries.