Advocates of Reason: 23 January 2012

Man has only one tool to fight error: reason.

— Ludwig von Mises

1.  David Glasner, “Advice to Scott: Avoid Accounting Identities at ALL Costs.”  My two cents: Paul Krugman calls accounting identities the law, but what if the accounting identity does not reflect reality (such as, S=I)?

2.  “Lord Keynes,” “Austrian Substitutes fo GDP.”  Complete disaggregation of the economy, at all points of analysis, is ridiculous — the structure of production, individual stages of production, et cetera, are all aggregate concepts.  Thank goodness that no serious Austrian economist argues in favor of complete disaggregation.  You have to know when an aggregate is okay to use, and when you are using the right aggregate.  I do not know anything about Austrian replacements for GDP (except that there are quite a few of them), but they are not meant necessarily to deaggregate, but to make the aggregate more reflective society (whether they are successful towards the end is another topic altogether).  But, the “Austrians hate aggregates, but use them and are therefore hypocrites” is just as wrong and as tired as the “I am an Austrian and I hate aggregates” argument.

3.  Michele Kelemen, “New U.S. Ambassador Already Facing Critics In Russia.”

4.  Steven Greenhouse, “More Lockouts as Companies Battle Unions.”  Between 1933– 37 we saw a strengthening of labor unions.  Is the 2008–? period one of a return of power to employers?

5.  Paul Krugman links to Daniel Kuehn’s new comment on the Depression of 1920–21.  Is it time that an Austrian weigh in again (I have noticed a lot of silence after Daniel published his paper in the RAE)?

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      • Yes, I understand that. Ex ante this is true in equilibrium, but in the real world this is not always the case. In fact, I would say that the ABCT hinges upon the fact that investment is greater than savings.

        • This (investment > savings) is often the rationale used to claim that the ABCT is an “over-investment” theory, rather than a malinvestment theory.

        • I think “overinvestment” is useful to give an image of what ABCT is about; but ABCT is not an overinvestment theory (it could just as well be an overconsumption theory). ABCT tells us not that there is overinvestment, but that many investments are left incomplete, because there are not sufficient capital goods to complete certain investments.

          Anyways, I think most Keynesians would see S=I as a valid identity even ex ante, because I think that most Keynesians recognize that we live in an equilibrium world — even if this means a tendency towards equilibrium (dynamic equilibrium). S=I, like economists such as Krugman have been arguing, doesn’t argue causality; but they would show how causality proves S=I. Incidentally, on Sunday the quote of the week has to do with S=I and is an excerpt from a Heilbroner paper published in 1942, on almost the same exact argument being debated today on the blogosphere.

          • I just read my comment about and noticed that I wasn’t very clear. Ex ante, E always equals I. The part where I said “in the real world this is not always true”, I was talking ex post. Sorry, I should have been more clear on that.

  1. Jonathan:

    1. I see Kuehn’s two articles as verifying the long-held libertarian belief that the 1920 depression (and preceding boom) were caused 100% by the government. Where is the evidence that the market fails and thus even needs stimulus?

    2. What do you make of LK’s assertions that the depression[s] of the 1890s somehow invalidates Austrian theory or validates the need for “stimulus”? That occurred during a period of fractional reserve banking, right?

    http://socialdemocracy21stcentury.blogspot.com/2012/01/us-unemployment-in-1890s.html

    • With regards to the Depression of 1920-21, that’s interesting that you point out that this is a recession that most people seem to generally agree that it was artificial — it was a product of WWI inflationary policies. But, most economists believe that there are many reasons a recession can occur, and you see that in Daniel’s differentiation between a supply-side crisis and a demand-side crisis (where the latter would follow, more or less, what Keynes lays out in The General Theory); that is how Daniel justifies the fact that the policy prescriptions necessary after 1929 were not the same as those necessary in 1920-21.

      As per Lord Keynes, I usually don’t like to address his arguments. He has disagreed with me on this before (naturally), but I really don’t think he has a full grasp of the literature he is using to back his argument. He also tends to cherry pick the evidence he uses to push a particular point. I, of course, do not accept fiscal stimulus as a solution anywhere, so as for the period between 1894-96 “invalidating” Austrian theory I disagree. The problem is that that period is understudied, and especially so by Austrians — e.g. Selgin and Horwitz look at inflexibility in the banking system (i.e. unable to meet the demand for money), while Rothbard looks at gold/silver agitation and “note pyramiding.” I don’t really know who’s right and it’s been a while since I’ve looked at that period (when I researched for my article on Higgs’ book, The Transformation of the American Economy, the period after ’94 wasn’t really relevant, because that marks the end of the great industrial growth I was looking at). For what it’s worth, I think both answers are incomplete, although maybe together there may be some explanatory power.

      • For what it’s worth, I see no evidence that “Lord Keynes” even understands the concept of economic calculation and I’ve told him so about 75 times to no avail. Where does Rothbard write about the 1890s?

    • Fwiw, I think LK’s attitude when he engages ideas he doesn’t agree with has significantly matured. Sometimes, I have to admit, it’s hard to engage him only because my breadth of reading doesn’t cover the topics he talks about.