Fires and Distortions

2 Replies

Daniel Kuehn comments on Steven Horwitz’ piece on stimulus and business cycles. A few points of my own, in response to Daniel,

  1. Daniel writes, “I am much less worried about the distortions because I think the market does a good job at ensuring the survival of good arrangements of production.” This doesn’t address Horwitz’ argument, because government intervention may (and does) distort the very market processes which allocate capital throughout the structure of production. This process is in large part dominated by the ex post role of prices, or profit and loss. If government is creating artificial — that is, otherwise non-existent — profits and subsidizing losing industries, then the market process of capital allocation is being subverted;
  2. You can’t separate the concepts of resource allocation (“picking winners and losers”) and efficiency. The market is usually preferred precisely because the patterns of allocation achieved by means of its processes is relatively more efficient (as compared to, say, socialism). If you think that resource allocation can be more efficient, and you advocate “nudging” the market towards this utilization, then you sacrifice the alternative allocation that the market would have achieved;
  3. We could also touch on how can we know what is efficient (what is the best use of each and every good in the economy?);
  4. Daniel provides an analogy of a house suffering from a fire instigated by faulty wiring. The house also suffers the risk of being washed away, but the presence of the fire makes this consideration of secondary importance — what matters now is putting out the fire with a water hose. If I understand it correctly, the house is the economy, the fire is recession, the water hose represents stimulus, and the flooding represents structural problem. Ironically, they analogy can also be used as an extreme example of the kind of things Austrians are worried about: at the extreme, putting out the fire with water may force the homeowner to have to rebuild the house, meaning in the end the house wasn’t really saved. For the economy, not only is this a problem — with the added dimension of capital consumption —, but the alternative theories of recovery work towards the same end as stimulus (or hosing) does.

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  • Daniel Kuehn

    1. Right – that one sentence you quote doesn’t address the argument. I say elsewhere that our view is that the market is not as impaired as Steve suggests by government. Now people may disagree with me on whether or not that’s a risk, but you can’t say that I’m somehow questioning the role of the market process in picking sustainable and beneficial arrangements of production. If we could just argue about whether or not government is having that effect you describe that would be grand. Instead we have to get told things like we don’t think the market process works or we don’t care about sustainable production patterns we only care about aggregates like GDP.

    2. This is the difference between micro and macro efficiency. I would agree that I am saying there is no guarantee that the market will always be macro efficient and that there are macro improvements that could be made. I agree they aren’t perfectly separable. But they are largely separable. Like I said the other day – it takes a lot of Hayekian or Harberger triangles to fill up an Okun gap. You are allowed to argue that the Harberger triangle far exceeds the Okun gap if you want, and we can argue about that. But that’s an argument. People can’t tell me I don’t acknowledge points about micro efficiency because we disagree on the triangles and the gaps. I do. Our disagreement is over the impact of policy on the market process, not on the market process itself. Let’s not pretend our disagreement is fundamentally about the market process.

    3. is tough.

    4. So on that analogy… there are two Austrian responses: (a.) your house is actually not burning down, it is washed away by a flood, (b.) the fact that you think your house is burning down shows you don’t understand why a flood is bad. I think the Austrians would be wrong about (a.), but that’s something we can argue about. (b.) is stupid, and yet I hear it from Austrians all the time.

    • http://economicthought.net/blog JCatalan

      1. The reason I quote that sentence is because you use it to imply that stimulus advocacy isn’t the same thing as advocating replacing the market process of profit and loss. My point is that stimulus does replace said market process (where stimulus makes an impact — I’m not accusing stimulus advocates of favoring socialism). And so, when you write, “but you can’t say that I’m somehow questioning the role of the market
      process in picking sustainable and beneficial arrangements of
      production,” our response is that yes, yes we can. The entire reason we need stimulus is because, allegedly, the market process is not allocating resources as well as you think you could through stimulus.

      2. The disagreement is both about the impact of policy on the market process and about the market process itself. The entire reason you advocate stimulus is because of a deficiency in the market process.

      (On [3], I would say it’s impossible.)

      4. I think this is where the analogy breaks down. Broadly speaking, we’re not disagreeing about the problems we’re in. We both believe there is a recession, and to some extent we both agree there is a “demand problem” (Horwitz probably more, because Horwitz believes there can be a shortage of money). So, we both know that there’s a fire that threatens to burn down the house. We’re just disagreeing on what’s the best way to put out the fire. All analogies stop working, and this one may not really get across the meat of the issue. This being said, there is some truth in [a] (ABCT v. confidence-driven demand shock).