Putting aside the philosophical question of whether or not Keynesian spending is morally correct, can we also say that it does not do what is ascribes to do? That it simply doesn’t work?
Has the government actually been able to stimulate the economy to the point of recovery and at the same time manage the inflation risk?
I ask because I think that this latest crisis should be considered the ultimate proving grounds for Keynesian theory. If we are able to see an economic recovery and a managing of inflation as well as a fiscal move to reduce the debt following said recovery, will this prove that Keynes was right?
If we see inflation or a prolonged recovery or an increase of unemployment or another bubble being blown up by the excess credit creation and expansion of the money supply by the Fed, will this prove that Keynes was wrong for good?
Keynes: In a depression, increase G.
Real Life: You can’t increase G w/o shrinking C, I or Xnet by the same amount.
Actually we have both inflation and unemployment now, something keyne’s theories don’t deal very well with. At the very least they do not recommend the kind of monetary policy floating around. Keynesianism just happens to validate what the politicians want to do, so they use it as a post facto justification. Practically all economic laws, like anti-trust legislation and patent laws are justified retroactively by the mainstream economists.
No! It will prove that we didn’t stimulate hard enough! Keynesians are predicting that the stimulus stuff won’t work because its too small. Some of them want the government to spend 300% of GDP to get us out of this mess.
What I don’t get is how some economists try to brush away the effects of the stimulus by saying that we’ve only spent around $200 billion of it. Yet, at the same time, the effects of this stimulus have actually had the “maximum impact on growth”, thus we need a second one. I don’t get it; if there is still around $500 billion in spending and tax cuts to give out, then why is the maximum impact represented in the first $200 billion? It seems to me that these guys are really just making blatant assumptions.
What do you mean by “work”? Do you mean increased employment? If so, then it has completely failed. Do you mean increased the standard of living? If so, then it has completely failed.
But this is not what they are spinning. What they are spinning is that a depression was avoided. Logically, that is impossible to have been done with deficit spending. Factually, it is impossible to prove or disprove.
To add to this a little, banks are in paralysis mode. They aren’t lending and are instead keeping excess reserves at the FED. This huge increase in the monetary base hasn’t found it’s way into the rest of the economy yet through the normal process (loans etc) - hence why price inflation is flat currently. This situation can’t last forever. The FED will eventually have to choose: reign back in the money supply and trigger a deep depression, or leave things as they are and get hyperinflation.
Even if there had been no porkulus and GDP increased 1,000,000,000%, they would simply have argued that GDP would have increased 1,000,000,001% with porkulus.
“Economic recovery” - Does this mean increased GDP (which we know is an inherently flawed statistic?)
“Managing of inflation” - Does this mean “price” inflation in the mainstream sense? Isn’t the stock market a bubble right now, along with the treasury market and housing (which I believe is being prevented from bottoming)? Where would treasury yields be right now without “quantitative easing”? Where would mortgage rates be if the Fed didn’t purchase $1.2 trillion worth? How can the Fed stop its money creation? If it did, mortgage rates will rise, treasury yields would rise. What about the coming commercial real estate debacle? The Fed has painted itself into a corner. Instead of proving Keynes right, it seems as if the there is a crack up boom in our future.
“Fiscal move to reduce the debt” - I don’t think so given what our democratically elected leaders are doing to us. The debt must increase in order to continue the implementation of socialism.
Finally, what time frame would be assigned to determine “success”? I believe the entire “recovery” from 2002 to 2007 was nothing more than a malinvested bubble. It proved nothing, except that the Austrian explanation of the business cycle is correct. I believe Keynes has already been proved wrong for good. I believe Mises has already been proven right.
To me, this thread illustrates why empirical work is so frustrating.
If the economy continues to get worse after the stimulus, does that mean no stimulus could have worked? Not necc. It is not intellectually dishonest to suggest that a bigger or different type of stimulus might have done the trick. And it is very hard to evaluate the truth content of such a suggestion based on historical evidence (no true experiments in macroeconomics, etc).
Maybe it would help to think of the question from the other direction. What evidence would you have to see to believe that Keynesian economics is correct? If the economy gets better after the stimulus, will you change your mind about Keynes??
Or, “What evidence would you have to see to believe that Austrian economics is correct? If the economy gets worse after the deficit spending (and money printing) will you change your mind about Mises and the Austrian school?”
The problem is, the methodologies are not reconcilable. They are completely different and at odds. Austrian theory seeks to explain how the economy actually works. The Austrian asks, “How can Keynesianism possibly work? Please explain how this could be. Don’t show me government statistics and mathematical formulas. Rather, just explain how printing money and deficit spending can do anything except damage the economy.”
The Keynesian then hands the Austrian a bucket of formulas and a stack of reports, saying the Austrian is simply ignorant of mathematics and cannot converse in the mathematical “language of economics”. So, the conversation ends. I believe the two schools of thought are irreconcilable.
Keynes will never die, because his theories are grounded in psychology more than economics. The main premise is that human beings are completely irrational, and basically retarded. When that’s your premise, you can never fail (animal spirits, and “speculation”). Keynesian economics is not really economics. Either way, the fiscal stimulus has been a disaster, unemployment continues to rise, while the monetary stimulus may lead to the end of western civilization.
Isn’t there any way that his theories can be empirically disproved so there’s no more ‘two schools’ stuff? Why are economic theories so hard to prove or disprove? I mean if this effort fails shouldn’t that just be the end of it?
Well then what’s the point of asking the question if we can never know for sure? I’m not going to accept anything without proof. If neither school can be proven correct then it’s not a scientific question anymore. It just becomes a matter of opinion. Like whether or not God exists. Can’t know for sure.
I am sure many people on this forum believe that, but I do not think it is actually so. First, if methodological differences were so important, why are mainstream micro and Austrian micro so similar? Sure, Mises and Rothbard launch some (what I think are misguided) attacks against the mainstream theory of the consumer (utility v. value scales), yet their conclusions match every single micro textbook I’ve ever read. If the differences in methodology were really all that important, why don’t we see bigger differences between the mainstream and the Austrians?
Second, I don’t think most Austrians conducting research today act as if they believe in praxeology. For example, just earlier this year you had Peter Boettke of GMU praising the exclusively empirical work of Lin Ostrom for expanding our knowledge of institutional development in response to “market failures”. Or Robert Mulligan of Western Carolina University published an empirical analysis of the Austrian Business Cycle Thoery only a couple of years ago. The fact is that Austrians seem to be leaning more empirical, these days, not less.
But if we want to pull this point back around to our original conversation, there is simply no way you can derive Austrian Business Cycle Theory a priori. It can’t be done, if for no other reason than that it relies on assumptions that simply must be based observation (market structure is important, how people formulate expectations are important, the cost of transferring resources across sectors is important, among many other things that simply can’t be known without observation).
Now, I am personally not a big fan of methodological discussions. I believe methodology is important to study and I have actually taken a course in the Philosophy of Science and one in Economic Intellectual History to better understand how economics “should” be done. But it isn’t what turns me on. So let’s no go too far down that road.
I am not versed in the philosophy behind the existance or the non-existance of God, but you can come to rational conclusions in terms of economic thought.
Ok. So there should be some way to rationally and objectively measure the effects of these policies and determine whether they were effective or not correct?