Wednesday, July 18, 2012

Sources of Austrian Confusion

Brad DeLong expresses his feeling about how deeply wrong wrong wrong Austrian economics is.  I am in complete agreement with that feeling.  He describes his rebuttal in terms of a present need for safe and liquid assets, hence what we need is continuing monetary expansion.  That's not exactly my story, I side with those (like Stiglitz) that believe that monetary expansion at this point can't do much, and what is needed is increased government spending.  Yes, spending, because one person's income (and job) is another person's spending.  More money can just be hoarded.  And beyond even that, what I call for is a vision, and I have such a vision, a vision of a renewable energy and sustainable transportation, a vision which requires public planning and direct investment on scale hitherto unimagined except in the case of World War II.  I believe that there is no alternative to having government lead the way on the transition needed with planning and direct investment.

But none of us (I'm including DeLong, Krugman, Stiglitz, and others in this us, though we may disagree on other things) believes that progress can be made as long as world governance remains unable to respond to the current unemployment crisis in a positive manner.

And one of the main things that precludes such positive action are the ideas of dead economists, and in particular the dead economists of the austerian Austrian school like von Hayek and von Mises.  I would include later conservative economists of the post-Friedman era at the University of Chicago, for example Robert Lucas, and freshwater types in general, however much they may deny (sometimes quite well on technical grounds) their Austrian core thinking.  WRT Milton Friedman himself, he believed government should expand the money supply when needed, so he would actually be in a middle position now, possibly agreeing with Brad DeLong.  What Friedman opposed was direct government investment through spending.

Brad gives a great example of Austrian nonsense in his post.  My comment was this:

I suspect there are fundamentally different models of ethics at work here. Hard money, not surprisingly, appeals to people with the strict-father kind of philosophy. The end game of this pattern of behaviors is replication, essentially, making the world in one's own image, rooting out those who are different (sinners). For of course, one's own image is the only correct one. Only through great toil and suffering is happiness achieved. That hard work and suffering, of course, is the work whose byproduct is the replication of one's own self, and also endless accumulation of wealth for enabling the power that replication requires. Other people may see this as tyranny, fascism, imperialism, etc, and would just as soon be left to their own vices.
The other model is something like utilitarianism. The goal here is the greatest sum of human happiness, aka utility. Within the realm of economics, this appears as greatest amount of income, which follows the greatest amount of spending, since one person's income is by necessity another person's spending. Things that arbitrarily slow down spending, like hard money, are counterproductive. In this model, it is saving just for it's own sake (rather than for the purpose of funding future consumption, or managing future risk) which is the greatest vice. The ethics of economic acts might well be computed by determining their effect on the velocity of money, or more generally, value. Giving has the highest virtue in this regards, followed by spending, followed by financial investments, followed by bank deposits, to ultimately the greatest vice of all: hoarding assets that someone else might have a better use for. Why, that's goldbuggery--not surprisingly it's totally anti-social. By hoarding gold, and therefore keeping the price of gold high, we are inhibiting those who actually make useful things from gold. But stuffing bank notes into a mattress is also a way of destroying demand, which is also bad when demand is in shortage.
Demand, by the way, is constantly reduced by profit. Capitalist supply does not produce its own demand, it produces it's own demand less the saved part of profit, as Marx correctly pointed out. Therefore it only follows that as long as there is profit, and some of it is saved rather than spent, there are going to be problems keeping demand high enough.

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