So we have two parallel universes the only difference between them being one follows Hayekian and the other Austrian econ? Else, what “real world empirical test” is he alluding to?
“Your friend is clueless; he doesn’t understand either position. Keynes was empirically and definitively refuted in the 70s with staglfation. We had a negative savings rate in 07 (huge aggregate demand), and yet we’re in a major recession. The interest rate has been at 0% for quite some time, and yet the economy is stagnating, and unemployment remains at 10%.”
Here is his response to stagflation:
Except that Keynsians have a ready explanation for stagflation that fits cleanly within the model – in its most basic form, it can be described using the difference between the short-run and long-run Phillips Curves, a feedback loop between inflationary expectations and results. (The issue is laid out in the latter section of these slides.)
I just saw those slides. There is nothing there explaining stagflation. At least not directly, maybe some of those concepts led to the keynesian explanation of stagflation, but in any case, there is not an explanation of stagflation from a keynesian point of view. Your friend is bullshiting you.
Btw, ask him how the potential output is calculated, because that is how they calculate the output gap. He will tell you that they stimate it, and then you can go and tell him that what they are doing is not science, since they are puttin their models before the real data.
Thanks for the response.
" there is not an explanation of stagflation from a keynesian point of view."
Do you mean there is no Keynesian explanation of stagflation, period? Or do you mean there is there isn’t any in these slides?
They key here is not whether we have inflation vs. deflation. But how each is being measured by Keynesian vs. Hayek.
I meant that there is no keynesian explanation of stagfaltion from a keynesian point of view on those slides.
I would hit him hard with the fact that they are putting their models over empirical data. That is no science.
I have another friend that appears to be on the fence, also involved in the Keynes vs Hayek discussion. He states:
“So given the economic crash (for lack of a more precise term) in 2008, and the subsequent, mostly Keynesian, actions to stimulate the economy, what would the Austrians have predicted to happen to the economy? Is it consistent with the state of the economy today?”
Granted Austrians are not readily one to predict the timing of events, but can infer future circumstances from deducation, I would say that Austrians would have predicted a prolonged recession/depression because of TARP, bailouts, and monetary inflation.