[29.3.2012 16:30:28] Dominik: I have done some reading on austrian school
and even though I havnt taken a 5 year Keynesian course at cambridge, I just
cant imagine austrians being wrong. It all makes perfect sense. While
keynesianism to me just doesnt. Krugman keeps repeating that the war got us out
of the Great Depression, he even said 9/11 might be good for the economy. This
"broken window fallacy" was dealt with by Frederick Bastiat some 200
years ago. And just the stuff on the surface in terms of how successful
austrian economists are - Mises and Hayek predicted the 1929 crash, Rothbard
predicted 70s staflation and there have been literally dozens of austrian
economists on the air before 2008 predicting a recession coming. For example,
see http://www.youtube.com/watch?v=2I0QN-FYkpw
...
[29.3.2012 17:49:20] Dominik: Though I have searched for criticisms of
austrian econ and I yet havent found anything that hasnt been disproven on
Mises.org.
...
[29.3.2012 17:49:19] Alexander : I am not Keynesian
[29.3.2012 17:49:37] Dominik: really? I thought you were advocating Krugman
the whole time )
[29.3.2012 17:54:49] Alexander : He is one of the many good economists. But
his ideas are clearly not an essance of my thinking. Particularly the ideas
that he puts forward in his popular reading rather books rather than textbooks.
These books are good for someone who wants to have some idea about what is
going on but are a bit useless if you really want to get into the meat of the
argument. I bet he knows hell a lot about the economy but the books he writes
for the general public is not the place I would expect to find his argument. He
puts only the conclusions there and suppots them with some vague
half-historical arguments. If you want to question his conclusions you have to
go back to the roots I believe. I was on his side because you were attacking
him and I do believe that Keynesianism is the way to go now but we need a
modified version of it and Austrians might help in some ways to modify it.
[29.3.2012 17:55:40] Dominik: :)
[29.3.2012 17:56:18] Alexander : I am more Keynesian simply because I
believe other schools are more wrong (or so I believe at the moment), although
I dont have too much to say against monetarists.
[29.3.2012 17:56:53] Dominik: Im not sure you can really take two schools
of economic thought that you find interesting and fuse them together. They are
inherently and philosophically antithesis of each other, not only in
conclusions, but also in methodology.
[29.3.2012 17:58:33] Alexander : Of course not. That is why I believe at
the moment Austrians can't be the major school. I will read more about that but
I believe there philosophy and methodology is inherently inferior. However some
of their ideas could be taken. But I am clearly not too much qualified as yet
to judge.
[29.3.2012 17:58:41] Alexander : Austrian ideas of creative distruction
process and suggestion to let the financial system collapse sound for me a bit
naive and unnecesserily cruel and wasteful.
[29.3.2012 17:58:56] Dominik: ...
[29.3.2012 17:59:06] Dominik: Theres just so much to say to that ))
[29.3.2012 17:59:53] Alexander : Neoclassical base their ideas on rational
expectations hypothesis which I just can't believe to be realistic and I think
the current crises has brought this school to the ruin.
[29.3.2012 18:01:29] Dominik: Its not destruction, its an allocation of
resources to where they are supposed to be - i.e. where the consumers want them
to be, not where politically connected central planners in the govt want them
to be. And look at the history - have you heard of Crisis of 1920? In the first
year, it was WORSE than 1930! The govt didnt do anything (save for taking the
interest rates to record high) and the economy restructured and production was
up agian in a year.
[29.3.2012 18:02:12] Alexander : I just used Shumpeter's term.
[29.3.2012 18:02:33] Alexander : I have studied it in detail.
[29.3.2012 18:02:34] Dominik: of course some companies went bankrupt, some
people lost their money, but the damage done in the long term was much much
smaller than if the central bankers tried to perpetuate the "boom"
[29.3.2012 18:03:07] Alexander : I don't think many economists belive that
CBs should perputuate booms...
[29.3.2012 18:04:29] Dominik: i thought keynesians wanted to continue with
the boom, that they see the recession only as a plague that must be get rid of
asap
[29.3.2012 18:04:31] Alexander : 1920s was more because of the attempt to
return to the Gold at overvalued exchange rate. I am not sure what Austrian
standing on this is but Keynes personally was massively unhappy about that
fact.
[29.3.2012 18:05:25] Dominik: (btw one of the major stand points of the
asutrian school is free banking, or at least a gold standard)
[29.3.2012 18:06:19] Alexander : No. Keynesians see recession as
consequance of massive banking deregulation and huge macroeconomic risk
externality that Greenspan as well as the dominant new classical school failed
to take into accout.
[29.3.2012 18:07:29] Alexander : You see. That is the problem I see with
Austrians. Banking can never be free. It is an area where there is a massive
externality. Muuch more serios than in smoking or car driving or whatever...
[29.3.2012 18:07:52] Dominik: Just answer this: if Keynesianism is so
right, howcome Keynesians are so wrong? In MELTDOWN, you can read quotes
from Bernanke, Paulson and others speaking in 2008 that the economy has never
been stronger.
[29.3.2012 18:08:25] Alexander : Indeed they said that. But I would not
claim this to be Keynesianism.
[29.3.2012 18:08:34] Dominik: While Peter Schiff has been warning about the
massive debt, distortions of market, moral hazard, corporatism and artifically
low interest rates for years. And many other Austrians as well.
[29.3.2012 18:08:57] Alexander : Low interest rates were simply not that
important for THIS crisis.
[29.3.2012 18:09:15] Dominik: Generally the state is that most economists
are monetarist or keynesianism. And most economists were clueless about the
crisis.
[29.3.2012 18:09:35] Alexander : And distortions of the market came as
direct consequance of banking deregulation.
[29.3.2012 18:10:09] Dominik: As i talked about before, deregulation is a
problem when you have moral hazard.
[29.3.2012 18:10:11] Alexander : No. Most of them were monetarists or
rather new classicals. Keynesians was in retreat for the years before the
crises.
[29.3.2012 18:10:46] Alexander : So you need such regulation that will
eliminate or at least minimise moral hazard.
[29.3.2012 18:10:50] Dominik: So yes, deregulation might have done its
small share, but that is only because it enabled much more mkt distortions by
encouraging moral hazard.
[29.3.2012 18:11:25] Alexander : If we have rubbism regulation for me it
means that this means that we need better regulation rather than no regulation.
[29.3.2012 18:12:23] Alexander : Eliminating regulation will simply injure
the financial system and the econoomy as a whole. But it is questionless that
the whole system requires radical reforms.
[29.3.2012 18:12:36] Dominik: You know, austrian school at the moment is BY
FAR the largest growing school of economics. People are attracted to it like
never before. And that is because they see that the current economic paradigm
has failed, while the ABCT (austrian business cycle theory), not only explains
everything, but has predicted ALL THREE of the largest recessions in the last
century
[29.3.2012 18:13:48] Alexander : Greenspan relied on new classical rather
than Keynesian theories. The current paradigms were based on the rational
expectation hypothesis and the efficient market hypothesis that appeared to be
very very wrong indeed.
[29.3.2012 18:13:48] Dominik: A side note - moral hazard is when you deal
with other peoples money. When a bank is dealing with the money of taxpayers,
because it knows that if it fails, it will be bailed out. As Peter schiff said:
capitalism isnt privatized gains and socialized losses, its privatized gains
AND privatized losses.
[29.3.2012 18:14:49] Dominik: OK, let me google what austrians have to say
about Greenspan, I only know they detest him :).
[29.3.2012 18:15:09] Alexander : I do know what moral hazard is. I dealt
quite a lot with it in many contexts and in the context of this crises in
particular.
[29.3.2012 18:15:34] Alexander : I am not a great fan of greenspan as well
although I do favour Bernanke's policy.
[29.3.2012 18:16:03] Alexander : What I am saying is that there are many
ways to deal with moral hazard and the way you are suggesting is an inferior
one.
[29.3.2012 18:16:53] Alexander : This is a big problem. ANd we HAVE to deal
with it. But it is not necessery to abandon all the current macro theory and
let the whole banking sector collapse or whatever. THere are more civilised
ways.
[29.3.2012 18:17:35] Dominik: What about this. Obama (together with his
keynesian econ advisors) predicts that without bailout and stimulus there would
be 10 percent unemployment, while WITH there would be 8 percent unemployment.
Turns out its 12 percent, even worse that WIHOUT IT, BY HIS OWN FORECASTS.
Howcome Keynesian forecasts always go wrong? BTW: Keynesian Predictions vs.
American History http://www.youtube.com/watch?v=6XbG6aIUlog
[29.3.2012 18:19:33] Alexander : To start with Obama might have had his own
motives for predicting nice and positive future when US now is in a shitty
situation because many people are unemployed there for more than 3 years by now
and thus have great trouble finding job.
[29.3.2012 18:20:07] Alexander : I don't think we will see U in USA belowe
8% in the next 5 years but this does not mean that we should stop fighting it.
[29.3.2012 18:21:54] Alexander : Second, You can always find Keynesian
economists who give wrong predictions and you can always find Keynesian
economists who give correct predictions (see Roubini) simply because there are
hell a lot Keynesian economists and many of them are of questionable education
and intelligence.
[29.3.2012 18:22:53] Alexander : It is not too hard to find a set of
Keynesian economists who predicted all the recent crisises when you are allowed
to pick economists with a hindsights.
[29.3.2012 18:23:14] Alexander : And it can't be that hard to do this for
Austrians.
[29.3.2012 18:23:49] Alexander : I need to go now. I think we should live
it till we are in a pub. When would you have time?
[29.3.2012 18:23:52] Dominik: One more thing. I think the fact that
austrianism is still a minority in fact adds to their trustworthiness. Most
keynesians dont know shit about austrian school. Honestly, how much austrian
econ do even cambridge professors know? When i first told willetts about it, he
almost seemed to have never heard it, by now he still doesnt know who Rothbard
is (3rd most important person). On the other hand, austrians are very well
educated in keynesianism, after all, they were taught it in school. E.g. bob
murphy tends to always add in the keynesian view (and then refutes it). You can
google videos and articles and books by austrians on keynesianism. Its not like
they are living in their own world, exactly the opposite! Keynesians are living
in their world, incapable or reluctant to study austrian econ.
Bob murphy in particular is the nemesis of Krugman - he has written dozens
of articles refuting almost everything krugman has made, he has invited him to
a debate - which krugman has never accepted. On his whole blog, krugman
mentions austrians like once and he shows complete lack of understanding of the
theory.
[29.3.2012 18:24:46] Dominik: in other words, current keynesians are
keynesians most liekly because they were taught keynesianism. Austrians are
austrians, because they were taught keynesianism, but made sure to read up on
Hayek and Mises and Rothbard as well, and found out its simply superior.
...
[29.3.2012 18:32:18] Dominik: This is nice from wikipedia: Methodology is
where Austrians differ most significantly from other schools of economic
thought. Mainstream schools, such as Keynesians and Monetarists, adopt
empirical, mathematical, and statistical methods, and focus on induction to
construct and test theories. Austrians reject empirical statistical methods,
natural experiments, and constructed experiments as tools applicable to
economics, arguing that while it is appropriate in the natural sciences where
factors can be isolated in laboratory conditions, the actions of humans are too
complex for such a treatment because humans are not passive and non-adaptive
subjects. Austrian economist Jeffrey Herbener has argued that "there are
no statistical characteristics to human behavior. It is purposeful rather than
random, and changeable rather than constant".[30] Austrians argue one
should instead isolate the logical processes of human action. Mises called this
discipline "praxeology."[31] The Austrian praxeological method is
based on the heavy use of logical deduction from what they argue to be
undeniable, self-evident axioms or irrefutable facts about human existence.[32]
[29.3.2012 18:33:12] Dominik: what do you think abotu the wiki quote?
...
[29.3.2012 18:41:54] Dominik: also, keynesians agree that austrian school
has some contributions - the concept of marginal utility, opportunity cost,
economic calculation problem... all those were discovered by the austrians. Not
even keynesians will claim Hayek didnt understand the economy. But austrians do
claim that about keynesians, because they just get almost everything wrong.
[29.3.2012 18:42:23] Dominik: (in the austrian view)
[29.3.2012 18:42:33] Dominik: btw do you know about the KEYNES VS HAYEK
videos?
[29.3.2012 18:44:07] Alexander : Yep))))
[29.3.2012 18:44:16] Dominik: both?
[29.3.2012 18:44:28] Alexander : No. Just one. Is there the second one?)
[29.3.2012 18:44:31] Dominik: it seems to me, its enough just to watch
those videos and one finds out who is right
[29.3.2012 18:44:32] Dominik: yes
[29.3.2012 18:44:37] Dominik: even a short third one
[29.3.2012 18:44:44] Alexander : Ill have a look))
[29.3.2012 18:46:12] Dominik: keynes keeps repeating extreme spending is
necessary, that the war got us out of the depression... It is hayek who rightly
corrects that the stimulus / new deal didnt help at all and that the war might
have increased nominal gdp, but didnt recover anything. The economy recovered
when the new deal was repealed after WW2.
[29.3.2012 18:49:34] Dominik: and went on to achieve prosperity, for that
matter
[29.3.2012 18:51:49] Alexander : Keynes was a bit less clishe that he is
shown there and acted according to the needs of the time) THe idea of balancing
budgets in the midst of depression was not the most genious one and he did his
best to refute it. http://sms.cam.ac.uk/media/761745 Dont bother with the
video. Just have look at the last couple of minutes when there is Hayek talking
about Keynes
[29.3.2012 18:52:09] Alexander : The rest of the video is a bit useless.
[29.3.2012 18:53:11] Dominik: Hayek in the second video "When the War
ended all your friends cried disaster (!), yet the economy thrived and grew
faster."
[29.3.2012 18:58:37] Dominik: Why do you keep avoiding the point that the
recession is a sign that malinvesments were made that must be corrected for?
Respond to the point directly.
[29.3.2012 18:59:17] Dominik: By your logic, isnt any business failure bad?
[29.3.2012 18:59:59] Alexander : Why would all business failure be bad?
[29.3.2012 19:01:13] Alexander : By my logic there are externalities that
need to be eliminated. Bad businesses have to fail that is normal. But there is
no need to ruin the whole economy for the sake of couple of bad businesses to
fail and allocation of resources to become a bit more efficient)
[29.3.2012 19:01:45] Dominik: because two big firms collapsing is IN
PRINCPLE the same thing as a sceond hand corner shop having to close down
because ppl can now (thanks to the change of regime to capitalism BTW) afford
to buy new clothes.
[29.3.2012 19:02:19] Dominik: show me when that ever happened
[29.3.2012 19:02:19] Alexander : No. Second hand shop closing does not lead
to bank runs
[29.3.2012 19:02:48] Alexander : It is not the same in Principle
[29.3.2012 19:03:00] Dominik: you know, im arguing for the natural state.
Youre (and keynesians) are arguing for massive interventions in the economy,
for massive spending and thus taxation (at least in the future), so the burden
of proof is on you.
[29.3.2012 19:03:17] Alexander : No need for massive spending and taxation
[29.3.2012 19:03:43] Alexander : I am both hands for reducing the deficits
(probably not now but deffinitely in the nearest future).
[29.3.2012 19:04:05] Alexander : Regulation does not have to take the form
of stupid spending.
[29.3.2012 19:04:44] Alexander : Spending is usefull sometimes, but it is
not the remedy you need to use to your left and right.
[29.3.2012 19:05:07] Alexander : There are better reasons for allowing
banks not to fail now than simple fiscal policy arguments)
[29.3.2012 19:06:34] Alexander : It is just that I dont want to see panic
in the financial markets, credit crunches and bank runs... Although some of
these banks will have to fail eventually. But let them do so once they are
investment banks and do not have links to commercial banks
[29.3.2012 19:07:15] Dominik: If youre so worried about bank runs, why not
abolsih fractional reserve banking?
[29.3.2012 19:07:21] Dominik: Austrians have been calling for that for
ages.
[29.3.2012 19:07:28] Dominik: A bank run would NEVER happen again.
[29.3.2012 19:07:49] Alexander : It is simply not the best time to cure
moral hazard by harsh methods right now.
[29.3.2012 19:08:10] Alexander : So what alternative do you suggest? To
have 100% reserves?
[29.3.2012 19:08:18] Dominik: Yes.
[29.3.2012 19:08:24] Dominik: Of course
[29.3.2012 19:08:26] Alexander : )))))))
[29.3.2012 19:08:40] Dominik: to lend money that you dont have? Doesnt that
seem fraud to you?
[29.3.2012 19:08:52] Alexander : That is like curing the war by throwing a
nuclear bomb on the countries that are in te war
[29.3.2012 19:08:53] Alexander : It solves the problem))))
[29.3.2012 19:09:00] Alexander : No. Is using a computer a fraud.
[29.3.2012 19:09:24] Dominik: Either govt regulated as fraud under our
current system, or ideally, abolish state monpoly on money, and the mkt will
make sure FRB banks are eliminated.
[29.3.2012 19:09:44] Alexander : You right now talking to a person who you
dont see. Isnt that a fraud?
[29.3.2012 19:10:05] Dominik: if i payed for seeing that person, than yes
[29.3.2012 19:12:31] Dominik: Btw, even without FRB, the micro goes like
this: A bank fails. People, acting rationally but obviously not fully informed,
start suspecting their banks more. If they see bad accounts, if they see other
banks going under, they will obviously take out their money, because they do not
want to have it in a bad bank. The thing to understand here is that there is NO
EXTERNALITY involved. People withdraw money from bad banks, b/c they are bad
banks. In fact, it helps the economy by getting rid of these bad banks.
[29.3.2012 19:15:16] Dominik: Socialists of all kind (including Keynesians)
seem to view everything as an externality - whether its education, healthcare,
for communists even regular economic success (youre exploting the ppl, youre
hoarding all the resources), for keynesians its banking. Yes, the most
proximate cause of a bank going under is ppl withdrawing their money, but they
do so because they have (usually justified) fears that the bank is bad. It is
the bad banking that causes the panic, NOT the panic that causes the bad banking.
[29.3.2012 19:17:31] Alexander : The externality is different. When one
bank risks excessively it compromises other banks as well because its failure
will simply trigger rational or irrational or whatever panic on the financial
markets. MC>MB as you were taught but on MAcro level. By risking a bank
compromises the whole economy. There will always be excessive risk in the
system. That is what is reffered using the term systemic risk. Leave the banks
alone and we will have too much risky lending. But to be honest with you there
are bigger problems with arguing for no FRB banking))) Do you actually want to
get uni education? How a hell would you finance it if your parents did not have
money??
[29.3.2012 19:18:04] Alexander : How will people get mortgages?
[29.3.2012 19:18:42] Alexander : How are young entrepreneurs with great
ideas but no retained profits to finance there potentially successful business?
[29.3.2012 19:18:52] Alexander : We found a nice solution to this question.
[29.3.2012 19:19:30] Alexander : Let us have financial markets. A
technology that will help us with that.
[29.3.2012 19:20:27] Alexander : Now we find that we allowed that
technology to go wrong.
[29.3.2012 19:20:34] Alexander : There was excessive lending.
[29.3.2012 19:20:42] Alexander : There wa unreasonable lending.
[29.3.2012 19:20:47] Alexander : There was excessive risk.
[29.3.2012 19:21:12] Alexander : I suggest we correct this problems and
keep going. No need to scrap the whole system.
[29.3.2012 19:21:26] Dominik: To tell the truth, i havnt done the reading
on FRB, but to respond to your risk claims: Really? Do you really too much
think risk is an inherent flaw of capitalism? Expected value is made up of the
amount (the VALUE), and the probality (the EXPECTATION, together EXPECTED
VALUE). That is what would happen under a free market system. Unfortunately, we
have all these terrible corporatist - almsot fascist - regulations that cause
moral hazard - the certainty of bailouts, govt imposed limited liability, govt
insurance of mortgages and loans up to some amount... These are what cause the
extreme risking behavior of financiers! capitalism is privatized gains and
privatized losses.
[29.3.2012 19:28:43] Dominik: BTW i havnt even touched the moral aspect of
socialistically stealing from peoplpe (or their chlildren) by taxes and
centrally located officers deciding what to do with that money. And regulations
severely limiting peoples freedom - you can read stuff about the new deal, ppl
were for example fined, even imprisoned, for working during the evening
(maximum working hours) IN THEIR OWN HOME. And then there is the unfortunately
inevitable practical aspect of officers having bad incentives, being
politically connected, there being tons of corruption and lobbying (we have
seen all of this in all stimulus packages) and the same goes with regulations.
So im standing up to the harder challenge here of debating in a purely
theoretical environment where the moral and practical aspects can be overlooked.
[29.3.2012 19:28:46] Alexander : I dont think you understood the arugment.
Excessive risk is inherent in financial markets not capitalism is a whole.
Financial markets simply isnt the same as the corner shop. Excessive risk is
there by nature because of risk externality. Government MIGHT add a bit more by
saving the bad banks. Howeverr it was nnot obvious before crises that the banks
will be saved. And even there who is that that take risks? Traders? Who is that
who answer for the bank? Shareholder. Who is that who is running the bank?
Managers. I can see a bit of a problem there. And I cant see how the great
market force will sort it out.
[29.3.2012 19:33:38] Alexander : There is a problem with externality and
there is also a problem with incentives being not in line. The system is a bit
too complex and the market forces will be tricked by the complexity of the
system. THe market solution will be to RUIN such a system AT BEST and to make
it very inefficient (even more inefficient that it is now) AT WORST, rewarding
managers and robbing off shareholders. And that is simply far not the best
solution to the prbolem.
[29.3.2012 19:34:10] Alexander : If the complexities of the system trick
the market forces we have no choice but to trick the complexities of the
system.
[29.3.2012 19:35:29] Alexander : This advice obviously does not apply to
other markets othe than finanical markets.
[29.3.2012 19:35:43] Alexander : Corner shops can be safely left to market
forces
[29.3.2012 19:38:36] Dominik: You seem to me a bit dogmatic here. So you
deny any effects of the causes of excessive risk behavior? Also, it seems to me
Keynesians think banking is ALL about expectations. That there is no room for
good or bad investments, which is claerly nonsensical. If banking is all about
expectations, why doesnt just the central bank do all commercial operations?
Expectations would be full, since it can never go under. No, its not about
expectations, about laws, about regulations. Its about actual productivity,
about good or bad investments. Speculation and panics and bank runs are GOOD,
because they serve as a way to get rid of bad banks AS SOON AS POSSIBLE. When i
see this bank failing, i immediately withdraw to save my money from being
wasted on their bad investment. Everyone does this, the bank fails and less
money is wasted. Obviously, lots of money still will be wasted, but that is the
price consumers pay for trusting a bad bank with their money (anyways, this
failure was most likely caused by govt intervention). In short, bad
expectations arent a good explanation of the recession.
[29.3.2012 19:40:03] Alexander : THere is lots of place for good or bad
investment in the theories.
[29.3.2012 19:40:16] Alexander : But there should be room for expectations
as well.
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