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What about temporary tax cuts?

(Temporary only to make it "fiscal policy" rather than a shift to a more desirable size and scope of government activity.)

Assuming government spending is funded by taxes that depend on economic activity, so that when economic activity declines, tax revenues decline, should government spending be cut too?

Assuming the government provides some kind of means tested charitable support (OK, maybe this discussion should shift to Bleeding Heart Libertarians) and more folks are eligible, should other sorts of government spending be cut?

I'm inclined to think that the fiscal policy implied by "automatic stabilizers" is the least bad option.

Good point Bill. I was thinking of the spending side, but some kind of across-the-board tax cut would at least minimize any distortions.

I think we need to distinguish between ABCT and recalculation, although I know that's tough sometimes. I was thinking of Kling/PSST/recalculation. There are clearly a wider variety of ABCT stories - some involving monetary disequilibrium like yours, some not, etc.

My only point in my response to Tyler was that noting that recalculation goes on (which is essentially all DeLong noted) doesn't make the theory quasi-Austrian. Economic calculation is what makes you an economist, period. You become quasi-Austrian - perhaps - if you think the recalculation process itself plays a major role in downturns, but DeLong didn't seem to be suggesting he thought that. What he and I have been cross-linking for a couple days now has been the point that we don't think recalculation (normal recalculation - not related to some great Austrian or Klingesque rebalancing) can't go on if the interest rate is distorted. The first task is to address that problem, and then recalculation and structural change will go on as it always does.

That doesn't strike me as "quasi-Austrian", and that was my only point.

Steve a lot of your critique in that comment seemed to be my use of the term "incite a downturn". I am completely happy to withdraw that and replace it with "play a substantial role in the downturn".

Slightly off topic but related:

Why are quasi-monetarists agnostic about long-term fiscal deficits leading to pressure on central banking institutions to accomodate deficit spending through inflation?

I have read Bill stating in effect that he sees very little risk that the central banks will ultimately turn to inflation to finance run-away fiscal policy. In other words, the quasi-monetarists do not seem to see the causal link between fiscal policy and monetary policy as being well established.

I believe this is where Peter Boettke has dissented. He has claimed that there *are* consequences to long-term "pretend payments", and that a perpetual policy of stablizing MV via a combination of monetary and fiscal policy in every recent downturn has "enabled" the explosion of large deficits through indirect means. I really wish that some of the quasi-monetarists might engage Pete's point directly, as it seems very important. Does he have a good point, and does it matter? Can we keep making "pretend payments" through borrowing and/or the printing press indefinately?

The key question involves the linkage between fiscal and monetary policy. Is the causal link clear cut, or is this an urban myth that has largely grown up around a non-scholarly layman's view of Austrian economics?

"I think we need to distinguish between ABCT and recalculation, although I know that's tough sometimes."

Not really, DK.

I'm no economist and don't claim to be. I'd also venture a guess that you have had more formal economics education than me.

That all being said, the ideas of recalculation, ABCT, capital structure and heterogeneity are pretty easy to understand correctly and separately at a layman's level. So much so that it becomes ever more obvious to me that trained PhD's in economics like DeLong (let alone you) does not seem to have a strong grounding at a laymen's level in such ideas. This is apparent in the way he discusses things like recalculation. He says things on these matters that do not make sense on a 101 level even though he discusses them as if he's thoroughly studied them and understands them like the back of his hand. It's fascinating.

Like I have said before:

Austrians know Keynesian. The opposite is not true.

DK,

"Steve a lot of your critique in that comment seemed to be my use of the term "incite a downturn". I am completely happy to withdraw that and replace it with "play a substantial role in the downturn"."

Still not right. Recalculation is something that takes place during a downturn. It's not the cause of a downturn in any way shape or form. Rather it's the natural effect of a downturn or bust.

Recalculation is like a bruise or scabbing. First the injury happens and then the healing process begins. But the bruise is not a cause of the injury.

An important point, implicit in Steve's post, is that there is no "demand in general." That concept may be a property of a model, but has no empirical counterpart.

Fiscal expenditures must on specific goods and services. How can one apportion that spending exactly as consumers would if fully employed? No mortal has such knowledge.

If we add Public Choice considerations, the case for fiscal stabilization goes out the window. As we saw in the stimulus bill, spending bills become pork programs for the constituencies of the party in power. They are transfer programs, not stimulus to AD.

Temporary tax cuts have only small, transitory effects. Only the interest on the tax reduction will be spent. There might be an argument for a permanent tax cut, but that seems unlikely in the current fiscal environment.

If one wants to be serious about fiscal policy, one must abolish the AMT. Much (most) of the Bush tax cuts were eaten up by the AMT.

Another issue is that the Fed's monetary policy is at war with fiscal policy. By fueling commodity prices, especially food and energy, the policy is more than offsetting any "stimulus" that might occur.

john v -
They are easy to understand and separate if we keep our vocabulary straight. But a lot of the time the vocabulary is used more interchangably, and that's what makes it hard.

As for how well I know it - not better than some, but I feel like I know the Austrian school as well as just about anyone I've come across that doesn't already affiliate with it - and better than many who claim to affiliate with it.

re: "Austrians know Keynesian. The opposite is not true."

This I have serious doubts about. I get told on a regular basis I think Y=C+I+G so we just need to increase G to increase Y, and I get told on a regular basis that I want the government to plan resource allocation. That's not any Keynesianism I'm familiar with.

re: "Still not right."

Well then my language isn't getting across, because I have nothing wrong with what you said following this. What is the downturn for Austrians? It's a point of revelation of real values if nothing else. If you don't want to call that the first step in recalculation, fine. I don't want to argue about semantics.

Jerry -
re: "If we add Public Choice considerations, the case for fiscal stabilization goes out the window"

It seems to me it doesn't "go out the window", it just becomes ambiguous. For the naive people that are out there that ignore public choice concerns (this doesn't include anyone Steve mentioned in this post), there is only a "pro" to fiscal stabilization if you buy a Keynesian story. For people that do think about these sorts of public choice concerns, like myself and I'd say DeLong as well, you have a "pro" in one column and a "con" in another column.

That seems to come out to "ambiguous and circumstantial" not "out the window".

"They are easy to understand and separate if we keep our vocabulary straight. But a lot of the time the vocabulary is used more interchangably, and that's what makes it hard."

I haven't seen that at all. I think you're mistaking your own confusion for that others. Like I said, I'm no economist but I find the basic premises of these ideas remarkably clear and distinct. Then again, I also took time to get a basic...yet pretty sound for a non-economist...understanding of them.
----------------------------------------------

"As for how well I know it - not better than some, but I feel like I know the Austrian school as well as just about anyone I've come across that doesn't already affiliate with it - and better than many who claim to affiliate with it."

Well, like I said, I don't know jack about Austrian Economics compared to Austrian-based economists of any level of expertise. But what surprises me often is how easily I spot egregious...if not embarrassing...errors by non-Austrian PhD economists when they're discussing Austrian economics. DeLong is a prime example. Krugman is another. On lower levels, I'd expect a little more proficiency from you considering how often you communicate on Austrian-based blogs. But I see fundamental errors as if you just skimmed through a book yesterday for the first time. Your seeming level of interest is in stark contrast to the knowledge you seem to have gotten from it. When you see a lowly nothing like me spot ABC-level errors, you know you haven't even scratched the surface.
--------------------------------------
"This I have serious doubts about."

I don't. The Analytical framework of DeLong is something all economists have to learn. The Austrian School's is not. You take too much granted. Again, When DeLong says basic Austrian stuff that gets a simple "NO. Wrong." from little ol' me, that's bad...for Brad.
------------------------------------------

"Well then my language isn't getting across, because I have nothing wrong with what you said following this. What is the downturn for Austrians? It's a point of revelation of real values if nothing else. If you don't want to call that the first step in recalculation, fine. I don't want to argue about semantics."

No. What you said is totally wrong. It's not semantics. The natural market process that takes place as a result of a downturn cannot "incite" or "play a role in" that downturn. Cause and Effect have a causal relationship...that's it. Effect cannot be the cause. Nothing fancy. As for what CAUSES downturns from the Austrian perspective, it can be a lot of things...often centered around monetary policy and/or something that perverts the role of prices. Yes, that's vague but it's been a while since I learned the basics and I'm a little rusty. HOWEVER, since you claim to have a decent grasp of this stuff, shouldn't you already know??;)

A Recession is the period of time in which widespread resources are pulled from many bad areas and reapplied to others. That's recalculation in a nutshell. If there weren't a recession, this widespread effect wouldn't be happening!

re: "No. What you said is totally wrong. It's not semantics. The natural market process that takes place as a result of a downturn cannot "incite" or "play a role in" that downturn."

You don't think that in ABCT the recalculation of where capital goods should be used in the capital structure - between higher and lower order production processes - doesn't "play a role in" the downturn?

That and the impact of that recalculation IS the downturn, John V. According to ABCT, the observed unemployment of means of production results from the liquidation and reassignment of that labor and capital as a result of the recalculation that entrepreneurs do.

How is that not "playing a role in the downturn"? Please, enlighten me, since you seem so willing to inform me how little I know.

No, Daniel, it's not ambiguous. Public Choice isn't a cost/benefit (pro and con) argument. It's a process argument.

With democratic decisionmaking, you can't get the result postulated by Keynes. Keynes presupposed decision making by an elite of wisemen. The best text on the topic would be Buchanan and Wagner, Democracy in Deficit.

I'm not sure I follow what you mean by "wisemen". You don't think Keynes had liberal western democracies in mind especially?

DK,

"You don't think that in ABCT the recalculation of where capital goods should be used in the capital structure - between higher and lower order production processes - doesn't "play a role in" the downturn?"

That is what is happening in the downturn...or...as a result of the downturn. It doesn't play a role in the downturn in any causal way. When there is a bust and then a downturn (caused by whatever factor), the recalculation is what takes place as a RESULT of it. If "incite" and "play a role in" are supposed to imply a causal of some kind, it's wrong-headed thinking. Moreover, these ideas show attempts to prop up prices of any kind during this recalculation as being the wrong-headed policies that they are if the goal is to move from downturn to recovery.

"How is that not "playing a role in the downturn"? Please, enlighten me, since you seem so willing to inform me how little I know."

Look, let's just go back to what you said in the beginning. You implied a causal relationship in an incorrect way. Recalculation and downturn are almost the same thing from an Austrian standpoint. You seem to be refusing to just speak of them in that parlance.

"I'm not sure I follow what you mean by "wisemen". You don't think Keynes had liberal western democracies in mind especially?"

Perhaps. But the point is that for all Keynes's insight, it rests on an overly uncritical and unquestioning and unrealistic view of the process of governance. It doesn't work in practice as it does in the theories that need that theoretical competence that is assumed. Such government competence is taken for granted by those who so willingly push for policies that involve the government doing many complex economic policy tasks. It is the height of irony that these same economists are quick to point out flaws with market process but not the governing process that is needed to "correct" the flaws. A huge double standard.

Public Choice, in this respect, is an enormous blind spot now for many "Keynesians, as it was for Keynes in his time.

That's the point Jerry is making (sort of)

DK,

On this last note, this is precisely the thinking that Don uses in this post from today:

http://cafehayek.com/2011/04/as-compared-to-what.html

John v -
Well no, it's not causal - but it is what the downturn is. How does "play a role in" imply cause? I think you are getting way to hung up on my word "incite" which is precisely why I took it back. Entrepreneuers recalculate, and then as a result of that recalculation capital and labor gets liquidated, reallocated, etc. That's all I meant. You are making this way more complicated than it needs to be.

re: "Look, let's just go back to what you said in the beginning. You implied a causal relationship in an incorrect way."

The "cause" in ABCT can be any number of things, but it is always a realization that calculations made on the basis of interest rate signals that do not reflect real savings were poor calculations.

re: "Recalculation and downturn are almost the same thing from an Austrian standpoint. You seem to be refusing to just speak of them in that parlance."

Arnold Kling is specifically associated with what has come to be called "recalculation". His approach is removed from ABCT insofar as it doesn't primarily involve an initial elongation of the capital structure in response to low interest rates. A lot of Austrians get bothered when Arnold's recalculation story is called ABCT. I refuse to speak of them as identical because the words are understood differently in different contexts.

Jerry -
One of my favorite lines from Keynes: "One blames politicians, not for inconsistency, but for obstinancy. They are the interpreters, not the masters, of our fate. It is their job, in short, to register the fait accompli"

This is not a man that entrusts economic calculation to "wisemen". This is a man that had a great deal of impatience for the wisemen of his day, and who always operated within the framework and understanding of a liberal democracy.

"Personally, he [Keynes] was an elitist, and his idealized world embodied policy decisions being made by a small and enlightened group of wise people." -- Democracy in Deficit, p. 78

"Keynes tended till the end to think of the really important decisions being reached by a small group of intelligent people, like the group that fashioned the Bretton Woods plan."
-- Roy Harrod, Keynes' biographer, quoted on p. 79 of Democracy in Deficit.

"Nonethless, the theory of output as a whole, which is what the following book purports to provide, is much more easily adaptable to the conditions of a totalitarian state..." -- Excerpt from Keynes' Preface to the German edition of the GT.

I'm not sure you are reading the German foreword in quite the way he intended it: http://factsandotherstubbornthings.blogspot.com/2010/07/keyness-foreword-to-german-edition-of.html

That's my take.

Also ich denke dies ist nur ne Trendsache

Daniel,

How do you know how I read it? I just quoted it. How would you (mis)read it?

Mankiw/Weinzierl supports O'Driscoll's position (check the bold sections): http://coffeehouse-economics.blogspot.com/2011/03/mankiwweinzierl-exploration-of-optimal.html

Daniel just doesn't want to admit that his hero, who primarily hung out with Fabian socialists, was in the end an advocate of totalitarianism -- even though the totalitarians themselves proclaimed that Keynes had written precisely about their ideas. He can be more stuborn than the facts at times.

Advocated totalitarianism??

This is getting pointless. I'm dumbfounded this crap is even passing the smell test for you.

An advocate=/=publicly advocating totalitarianism.

I mean, do you think Pal Pot or Hitler or Stalin were publicly advocating all of their policies, at least in any honest way?

It's a little disappointing that what started out as a potential source of agreement between prominent Austrian economists and prominent Keynesians has descended into a debate about whether Keynes advocated totalitarianism. I would urge people to get back to the fruitful discussion about how "recalculation" fits into a uniquely Austrian account of recessions.

First we need to define terms. I'm not sure if Arnold has explicitly defined "recalculation" but I take it to mean the following: “To calculate again, either to correct previous errors or to incorporate new economic conditions”

Given that economic action takes place over time, there is a constant process of calculation and recalculation. This is the latter part of the definition above, the "incorporate new economic conditions". This seems to be what Daniel is getting at when he says "Economic calculation is what makes you an economist, period". This is true, but to me this merely reflects that "all" economists accept the key insights of the Mises/Hayek critique of socialism. It's not that these aren't "Austrian" insights, it's that on this subject "Austrian" insights are part of the mainstream. (Note: I'm assuming that an appreciation of the Hayekian knowledge problem does not automatically lead to libertarian policy conclusions - i.e. that it is possible to acknowledge them, take them seriously, yet still think on some issues central planning is preferred to laissez faire. There is still a big debate about whether economists "accept" these insights or truly *get* then, but even Hayek was unclear on the power of this in his 1945 paper). In short, "calculation" doesn't make you an Austrian, but this is an Austrian contribution.

However there's another source of recalculation according to my definition - "to correct previous errors". I think this is where the uniquely "Austrian" element comes in, because it begs the question "what errors?". Daniel is right that all economists accept that at a microeconomic level this process is always occuring, but the essence of the ABC is the "cluster of errors" - i.e. the fact that this isn't a business as usual micro process but a widespread macro one.

Accepting that recalculation and structural change takes place does not make you an "Austrian", but accepting the "cluster of errors" is a strong signal that you are headed that way (or at least that a deeper understanding of Austrian econ would be worthwhile).

The debate shouldn't be about trying to label people as Austrians against their will, but finding common ground to better understand the economy - and clearly this "recalculation" process is an opportunity to constructively engage with non-Austrians.

Good thoughts aje. I think you have struck on the real difference. Austrians see downturns as the working out of "clusters of errors". What I was trying to clarify to John V above is that to be strictly "Austrian" that has to incorporate points about the interest rate and the capital structure (which Kling's often doesn't). Kling's recalculation in that sense, isn't a "cluster of errors" at all - it's more of a "cluster of previously good ideas that aren't the best idea now". He specifically talked about the depression in PSST terms, and the reallocation of resources away from agriculture. But the resources weren't previously in agriculture because interest rates were too low or because errors were made. They were in agriculture because that was the PSST that made sense for quite a while.

I think what needs to be clarified is exactly what DeLong was talking about when he was discussing structural change. As you have said, everyone essentially agrees that structural change goes on. But you need price signals for that change to occur. Keynesians assert that downturns occur when one particular price signal - the interest rate - is distorted and too high. We don't talk about "clusters of errors" because there's no cluster to speak of. Normal recalculation and structural change can't go on if a substantial share of investment opportunities are taken off the table because of what's going on with interest rates and demand.

If anything I think noting that recognition of structural is not Austrian is an attempt to preserve the uniquely Austrian contribution of clusters of errors governed by changes in the interest rate. It's not just any sort of major structural change (a la Kling), it's a very specific kind of structural change. I think it's an important contribution that ABCT has to make (I probably part ways with DeLong on that), although I'm still somewhat agnostic on how important it really is.

Anyway - interest rate distortions of a functioning market are central to both ABCT and Keynes, but in quite different ways. It's not especially central to Kling's recalculation. It's worth keeping the contributions of Keynes, the Austrians, and Kling/Schumpeter distinct not because I don't like synergy (I do - I think there's too much acrimony between these camps), but because you lose the real contributions of each if you don't keep them distinct.

I haven't followed Kling's arguments closely, but I agree with what you've written. My recollection is that he explicitly rejects the lenghtening/shortening of the capital structure that plays such an important role in ABC.

DK,

"Arnold Kling is specifically associated with what has come to be called "recalculation". His approach is removed from ABCT insofar as it doesn't primarily involve an initial elongation of the capital structure in response to low interest rates. A lot of Austrians get bothered when Arnold's recalculation story is called ABCT. I refuse to speak of them as identical because the words are understood differently in different contexts."

But you need to keep in mind that Recalculation is simply a spin on the "The Calculation Problem". But again, I really don't see the confusion between these different terms (ABCT, Recal. etc.)

"What I was trying to clarify to John V above is that to be strictly "Austrian" that has to incorporate points about the interest rate and the capital structure (which Kling's often doesn't). Kling's recalculation in that sense, isn't a "cluster of errors" at all - it's more of a "cluster of previously good ideas that aren't the best idea now"."

But DK,

If you truly just "see" things through the Austrian analytical framework, you realize this is how the economy is always working. I sense a lack of "background noise" in your understanding of different concepts that, at once, allows these items to be distinct yet related.

Arnold's point, to me, is quite simple to grasp on a basic level from an Austrian POV.

Patterns of production and innovation are always changing and "recalculating". Flux is the constant. Whether the recalculation (small r) is understood as a constant process or as a seismic shift in Arnold's "Recalculation" (big R) is really beside the point. On a foundational level, I see the two concepts as different types of the same idea in terms of how to view the economy. Your wording displays a disjointed understanding of how all these concepts relate eachother in an overall POV about the economic process.

There are moments when daniel has trouble getting Maynard to see what the point of his revolution is...

john v -

Go to mises.org and call Arnold Kling an exemplar of ABCT.

You will get reactions, I promise.

Perhaps they will make my point better.

Von Pepe gets major style points for that one.

I think the main difference of opinion here is regarding the marginal-efficiency of capital and liquidity-preference.

I've never really understood Daniel Kuehn, Delong, Krugman or Keynes on that subject. But, I think that's the point of disagreement. Daniel talks about the interest rate being a price in two markets rather than one.

re: "Von Pepe gets major style points for that one."

:)

Perhaps - I'd say steve has trouble getting Maynard to be the sort of foe he wants him to be.

"John Maynard Keynes, the founding father of liberal economics, served on the British Eugenics Society's board of directors in 1945 -- at a time when the popularity of eugenics was rapidly imploding thanks to the revelation of Nazi concentration camps. Nonetheless, Keynes declared eugenics 'the most important, significant, and I would add, genuine branch of sociology which exists.'"

Jonah Goldberg, Liberal Fascism, p. 250.

Kling has basically punted on the whole issue of production structure & the logic of choice across time, he's agnostic on the issue, shading into admission of saying he isn't familiar enough with the topic enough to discuss it with any competence.

More economists should be so open, honest, and forthcoming in this regard.

By comparison, Krugman and endless others happily lay down deep judgments on domains of economics they patently have essentially zero competence speaking about. (See Garrison on Krugman on Hayek, for example.)

Someone wrote,

"I haven't followed Kling's arguments closely, but I agree with what you've written. My recollection is that he explicitly rejects the lenghtening/shortening of the capital structure that plays such an important role in ABC."

Like all post-war / post-Keynes macro economists, Kling favors talking about the labor side of things, while saying as little as possible about the production structure side of things, beyond the obvious (i.e. we aren't building).

So Kling emphasizes labor heterogeneity and mostly ignores production process heterogeneity.

Someone wrote.

""I haven't followed Kling's arguments closely, but I agree with what you've written. My recollection is that he explicitly rejects the lenghtening/shortening of the capital structure that plays such an important role in ABC."

Me on Keynes, particularly as I've been reading his General Theory:

http://zatavu.blogspot.com/search?q=Keynes

Keynes in his own words is far worse than I imagined.

Of course, Richard Ebling discusses Keynes better than I can:

http://www.thefreemanonline.org/from-the-president/keynesian-economics-and-constitutional-government/

Recalculation doesn't even make sense in the Keynesian framework, where capital is simply a homogeneous blob, and where the structure of capital consists of merely a single phase of production. Simply put, it entirely dismisses economic calculation, and the role of the entrepreneur, altogether (which is why Keynes called for the euthanization of the "rentier").

People like Daniel Keuhn like to re-write history. They argue that Keynes wasn't really a Keynesian.


>Why are quasi-monetarists agnostic about long-?>term fiscal deficits leading to pressure on >central banking institutions to accomodate >deficit spending through inflation?

>I have read Bill stating in effect that he sees >very little risk that the central banks will >ultimately turn to inflation to finance run->away fiscal policy. In other words, the quasi->monetarists do not seem to see the causal link >between fiscal policy and monetary policy as >being well established.

Bill?

Like me?

I have been pessimistic about the long term fiscal situation of the U.S. for decades (yes, I am old enought that it is decade_s_) now, and I have been expecting that the result will be high inflation.

My view is very "public choice," with worries about the current crop of central bankers being replaced by irresponsible populists when the political gain to inflation is great enough.

But I don't see the current quantity of base money as having much to do with that long term problem. And I don't support bad monetary instititions because government might choose to inflate away debts.

A better monetary consititution than we have today would certainly help. And I am all for cutting government spending, reducing deficits, and reducing debt.

I do agree with Sumner, however, that decent monetary institutions (or even policy given the current scheme) would reduce budget deficits and debt in the short term. I don't think it would do much to help the long term fiscal outlook, and so my long term pessemism about inflation.

For what it is worth, I think that the Federal government should usually run a budget surplus and so grandually pay down the national debt, but if the economy goes into recession, the surplus should be allowed to shrink a la automatic stabilizers.

Bill Woolsey's proposed policy in the last paragraph was pretty much how the US historically operated: surpluses in normal years, and deficits only in war years. It operated under the gold standard, which provided the monetary discipline he seeks in his penultimate paragraph.

Keynes might have been an elitist, but Hayek wasn't exactly the guy next door either; there is elitism and elitism; just like there is rationalism and rationalism.

"Keynes might have been an elitist, but Hayek wasn't exactly the guy next door either..."

Hayek, author of The Knowledge Problem, proudly argued that knowledge dispersion generally conferred comparative advantage to individuals to choose in the myriad of particulars of time, place, and circumstance over centralized planners/designers; Keynes, like most wanna be socialist planners, was an egomaniac who wanted to substitute centralize designs for emergent orders.

There is no moral equivalence between Hayek and Keynes.

I think we are missing the boat here. We are arguing about simple tax policy. But since there seems to be problems with both fiscal and monetary stimulus it is clear that something else is needed. (after all, the government HAS to Do something right?)

It is clear to me that we have a lag in aggregate demand because everyone already has what they need. I therefore propose that the government institute a program whereby they go to citizen's homes at random and destroy their property. If random consumer goods are destroyed then it only stands to reason that this will be a huge boost to demand.

Now some might think that this will fall afoul of the fifth amendment guarantees, but that is a takings clause, and this is not a taking. I feel sure that the legal minds that produced the Obama health bill can come up with the proper justifications.

You can associate Hayek and Mises with any trivial point of view you want, but you're only destroying their historical and academic reputation. You confuse theoretical arguments and nuances with day-to-day morality contests. If two of the greatest economists and public intellectuals between the two world wars and immediately after weren't part of an elite, then I don't know what you call an elite.

P.S. And in case it matters, the day-to-day "moral equivalence" between Keynes and Hayek was pretty good, otherwise they would not have been such good friends.

There was nothing trivial about Hayek's contributions. Calling him an elite economist is acceptable, obviously (as my daughter would say duh!). But I would not refer to him as a elitist (aka egomaniac). Quite the contrary; the interviews I have viewed that were done with him showed him willing to say often that he didn't know the particulars of this or that. Remember the title of his final book? The Fatal Conceit. It wasn't titled that because Hayek thought that individuals were too cocky about their abilities to make decisions for themselves?

Also; regarding the P.S. above: In the interviews Hayek gave he talked about being friends with Keynes and that they never talked economics.


Allowing MV to tank in a slump absolutely makes things unnecessarily worse, but ensuring stabilized nominal GDP or MV is only a necessary not a sufficient condition for a sustainable recovery.
--
I'd put this into the Dept. of Huh? Not allowing MV to tank means taking proactive policy action, and you've already stated that B-52 has done "way too much."

How "much" would you have the Fed do, then? And in any event, how can you be sure that the Fed's inevitable under-, nay over-shoot, is better than simply allowing MV to "tank"? I'm not even arguing that you're wrong, I'm just surprised at the implicit confidence in Fed policy.

Further, is it even possible to stabilize MV in general, without distorting _particular_ prices?

James H:

I one imagines MV slumping temporarily, can one imagine this occuring without distorting particular prices?

And even if it shifts to a permanently lower level (not likely) can the transition occur without distorting particular prices?

While it is likely that money creation will impact particular prices, the thought experiment where such a change occurs as a bolt from the blue is really not realistic.

Bill Woolsey,

Thanks for responding. The answer to both questions is "no." But how does one choose between taking (too much) action, and not acting at all? I.e., why is some form of money creation (with all its attendant distortions) necessarily preferable to allowing MV to follow its own course (with all the attending distortions)?

Perhaps there is a coherent argument that says MV "tanking" is almost always worse than the Fed, say, taking "too much" action. My surprise was at Steven's implicit confidence that MV could be stabilized in such a way that the outcome would be necessarily preferable to doing nothing.

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