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Rogoff says: "Asia may be willing to sponsor the west for now, but not in perpetuity. Eventually Asia will find alternatives in part by deepening its own debt markets."

Rogoff under-appreciates the co-dependency of the China-US trade relationship, specifically China's mercantilist desire to keep the yuan cheap in order to sustain its exports to the US.

Sure they could sell their dollar reserves but they are terrified of the economic consequences, so they won't.

Meanwhile, China's fiscal and monetary mischief over the past few years make Greenspan and Bernanke, Bush and Obama look like pikers. Austrians should be directing some of their intellectual firepower to this paper tiger that frightens Timmy Geithner so much.

Perhaps western governments will also have to cut their spending a lot within a few years.

Many voters don't care much about excessive government spending, as long as the government is borrowing the money from someone else. But when the government goes to the taxpayers for the money. Then you can be sure that all of a sudden many taxpayers will be up in arms about excessive government spending.

"That was the task pre-Keynesian economists set for themselves, and once we finally end the Keynesian era in macroeconomic thinking and public policy, it will be the task of the economist again."

I remember that you already said that the Keynesians were defeated in the theoretical field during the 70's. However, they were defeated by theories based on general equilibrium, but, by using theories that assume the pre-reconciliation of plans the problem of cluster of errors wasn't explained. So they don't provide any decent way out of explaining big recessions. While the hydraulic Keynesians explain the cluster of errors by implicitly assuming irrationality on the part of the actors.

However, I don't think (and I think that all the people in this blog think the same way) that modern mathematical economics can provide a decent business cycle theory because you have the choice to work in a state of equilibrium or you have the choice to work in some mechanical process theory. In the first case the mathematical economist doesn't violate the principles of methodological individualism and subjetivism, but it is static, while the macroeconomic problem is in essence a dynamic one (the micro too, but you can do a loot more using equilibrium analysis in micro settings compared to macro). While in the second one the model is "ricardian" in the sense that there is no individual choice (I think that Kalechi is a "brute" example of this kind of model maker).


I have said that Keynesianism was defeated theoretically in the 1970s, but I have often said the Keynesianism remained influential in the policy institutions and public policy ideas.

However, you raise an important point about the ideas of the 1970s and 1980s in macroeconomics.

But I have never really understood why exactly Lucas's "island model" -- see his Understanding Business Cycles book -- was not accepted and developed more. I know that both O'Driscoll and Garrison have criticized Lucas's "island model" in relationship to Hayek's pre-Keynesian work --- and Kevin Hoover's JEL and later book on New Classical Economics and the two monetarisms thesis is essential reading. But compared to other efforts, I think Lucas's "island's model" paper is an interesting look at a modern theory effort to capture the essence of the pre-Keynesian theory of the business cycle.

"There has to be a reason why businessmen were so highly leveraged, why they took the risk positions they did, and why they put themselves in such a vulnerable position."

There is a reason - it's because the principles of capitalism and classical management disciplines have been ignored for the past thirty years. Instead of businessmen/managers seeking "real productivity", they chose financial engineering and state intervention.

I find it humorous that many believe that the past 30 years has shown the failure of capitalism when it's the exact opposite. Capitalism is driven through improvements in production with the benefits being fairly distributed toward consumers, workers and investors. Nobody can suggest that this is what's been happening.


"I have said that Keynesianism was defeated theoretically in the 1970s, but I have often said the Keynesianism remained influential in the policy institutions and public policy ideas."

Maybe because the macro theories that substituted Keynesianism were so unrealistic and assumed away any coordination problems that Keynesianism remained the only weapon available to the government to fight recessions.

I have only read a little about Lucas-islands model. I have the impression that the model looks like an attempt to explain cycles though coordination failures caused by imperfect information. I read that Lucas was directly inspired by Hayek's works on the topic.

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