naked capitalism

Andrew Bissell says:

The word “unpleasant” appended to Keynesianism is pretty redundant. Generally speaking, all things Keynesian are unpleasant, particularly the outcome of actually following Keynes’ policy prescriptions.

Advocate increasing government power in times of economic stress, cloak it in scientism and imbue it with false certainty by misuse of mathematics, and excuse its every shortcoming and failure by saying, “well, we didn’t apply the theory *just right* that time, let’s give it another go!” and voila! … you’ve got yourself a theory that has great appeal to politicians and the financial elite, is too abstruse for most people to understand and therefore oppose, and moves about the world like a zombie, gathering more converts the more economies it infects.

When, oh when will the world finally be rid of this doctrine? More from the Mises guys and less from Rodrik and the Keynesians, please!

john says:

. If the Massive amount of Crimes were actually prosecuted you would have Freeze and Gridlock just like the Civil System. You would also need thousands of Prosecutors and supporting staff and additional Courts.

Maybe part of the promised 2.5 million jobs?

Anonymous says:

Sys Test..

Independent Accountant says:

Andrew Bissell:
I agree with you. I was first exposed to Austrian economics as a student at the University of Chicago in 1973 when I stumbled across a book by von Mises. Years after the fact, I realized Mises was right and Chicago was wrong! I have blasted the scientism we see in economics for decades. With the advent of the quants, it’s gotten worse. By the way, Keynes was a mercantilist. Read Keynes General Theory for yourself. I have.

Anonymous 8:02AM:
I’ve been blogging on this for months. The Justice Department is badly misnamed. Study the careers of some US attorneys like Mary Jo White or Don DeGabrielle. You’ll barely believe what you read. As to contract enforceability in US courts, study the “gold clause” cases of the 1930s. I have posted on “Moscow vs. NY Justice”. You read, you decide.

Andrew Bissell says:

DownSouth,

Your reply is symptomatic of exactly the kind of disturbing trend in social acrimony that could accelerate this crash to epochal levels.

I sympathize with the desire to punish the bankers, severely. Many of them deserve that (including your new Treasury-Secretary-to-be), but most do not. Take, for example, a twenty-something electrical engineering major who bought into the Greatest Bull Market of All Time. I’m in my mid-twenties myself and I can tell you that very few people my age saw what was coming because we lived in a world where the central bank had always kept the plates spinning, and when it’s been that way your whole life and the wondrous public schools screw you out of a proper education in history, you think that’s the way it always WILL be.

This person, persuaded of the permanence of Wall Street’s dominion, may have gone for a quant job at Lehman Brothers in securitization banking or some such. Given the way they encouraged employees to own LEH stock, he may have poured all the effort of his 100+ hour work weeks in his salad years into paper securities that are now worthless. (I’m a math major, I tried this myself and was spared this fate only by the great turn of luck in flunking my interviews and not landing the job.)

Yes, these people deserve some shame and derision, which Saturday Night Live will surely heap upon them. But I guarantee you that we have also learned a lesson from this that we will remember in our bones for as long as we live. Ours will be one of the most cautious generations in this country’s history.

Neither you nor Barry Ritholtz are helping anything by advocating sending these saps to some Thunderdome in the Nevada desert, there to tear each other apart to provide amusement and exorcism-of-bad-feelings to serve as distractions from a nation in decline. Just as a lot of people saw fake “value” in every nook and cranny of the economy on the way up, you and Barry are doing your utmost to _overlook_ every potential source of value as we head into a decline, where they are even more precious and urgently needed.

Incautious, wreckless speculation can’t just be pinned on the bankers. It never would have reached the heights it did if it hadn’t been embraced, to some degree or another, by almost every citizen of this country. I was certainly one of them. I owned lots of commodity stocks early in this year and only avoided catastrophe by deciding to trust Marc Faber’s forecast over Jim Rogers’. Let me put it this way: since I didn’t yet have an understanding of what was going on in the financial system, I had to basically throw a dart between two brilliant commentators I followed and hope that it landed on the right one. Such are the uncertain, incredibly perilous conditions that 70 years of Keynes, Chicago, and the Federal Reserve’s capable stewardship have bequeathed us.

Andrew Bissell says:

Greenspanism is just Keynesianism with a good dollop of Chicago mixed in, and a few cherry-picked pieces of deregulationism that, when taken out of their proper context and thrown into the recipe, produce disastrous results.

Unlike a few Austrians I actually don’t believe that a consistently Austrian system would permanently banish manias and panics from the human experience, but it *would* help keep them contained and less threatening by distributing responsibility for monitoring financial risk. As Jim Grant points out, Citi was a very safe bank back in the 1890s when its depositors were responsible as individuals for assessing the risk of keeping their money there, and knew that they and they alone would eat the losses if they were wrong. Contrast that with the ultimate effects of the FDIC, which discouraged caution by allowing depositors to believe that this role could be safely deferred to the government. A typical centralization-focused, Keynesian-style solution to the problem of bank risk, which by making it appear that the risk had been abolished, has greatly magnified its force.

But I’m a hopeless dinosaur for suggesting that there is anything of value to learn from the 1890s, I’m sure.

Mikkel says:

How’s that go: something like in physics 95% of observations are explained by 10 principles and in economics 95 principles explain 10% of observations.

Austrian economics hasn’t be “disproved” any more than the others, there are just pluses and minuses to each system. The 1800s saw a pretty good version of an Austrian system and look what happened: we still had the economic cycle and it was still roughly at the same timescales, but each downturn was worse and each upturn was sharper. There were still contractions but that’s because they are a natural result of malinvestment, and there will always be that.

However, under an Austrian system it’s pretty much impossible for super bubbles to form, so you could argue that it is easier to live through downturns. Plus, I’ve seen studies that suggest the overall economic growth is the same, but under hard currencies the variance is larger. So really it’s about picking your poison between more stability culminating in a massive global crash, or less stability with sharper individual recessions.

Part of the problem is pretending like the different schools of thought are actual objective studies of universal behavior rather than de facto socio-political systems in themselves. Just because you can have a very accurate critique of why things went wrong (which I think the Austrian school is the best about the Great Depression) doesn’t mean that doing the opposite will make things right.

Another part of the problem is that no school incorporates nonlinear systems theory, players with asymmetrical information, etc.

Mikkel says:

About the Rodrik thing in particular I found it interesting since he was at least acknowledging we are a debtor country. But I also thought that it has a disconnect from, uh, reality. I have no problem with his view that global trade must be balanced as that’s something that Yves has been hammering on, but how exactly would worldwide stimulus accomplish that?

First of all, consumption can drop way faster than we can bring industry on line. Also it’s doubtful that Japan, Germany and the oil states really have much use for more consumption, and China would slow to get income disparity to lessen and infrastructure in place where their populace could consume drastically more.

Also, basic materials were skyrocketing earlier this year partly because of growth concerns — and now the plan is to literally double those? We would run out of cheap oil and metals very quickly.

My other critique is that his plan calls for massive global coordination and going out on a limb that everything will work. If we stimulate as much as we need to and then the creditor countries don’t or can’t play their role, there would be a very good chance for a currency collapse and de facto bankruptcy. His suggestions do make sense from an economic standpoint but they also seem to have a low chance of everything going just right and potentially cataclysmic consequences if something breaks.

Andrew Bissell says:

“His suggestions do make sense from an economic standpoint but they also seem to have a low chance of everything going just right and potentially cataclysmic consequences if something breaks.”

This is something I’ve been trying to hammer home to a friend of mine, who kept asking how you could *allow* the banks to fail when we *didn’t know* what would ensue if they went under. He bought into the new party line that the Lehman bankruptcy was somehow the cause of this whole mess, and that if only the government had stepped in, the Dow would still be defying gravity at 14,000. But like I kept telling him, we *don’t know* what will happen with the bailout/reflate-at-all-costs solution, because *it has never been attempted before*!

Mikkel says:

“In one of his recent newsletters, Jeremy Grantham shows a long-term trend line that suggests this is mistaken, that despite the best efforts of All the Fed’s Horses and All the Fed’s Men, long-term growth rates have stagnated under the modern monetary regime.”

Is that adjusting for population growth differences? It was my impression that once you do then they are very similar of around 2% real growth (assuming you regress to today’s population).

Of course the question then becomes how much of our recent “growth” should count since it was unsustainable and based on debt. But that goes back to the point that the main problem is trade imbalance, and that problem has been seen throughout all of history and again is economic system independent. Although I find it hard to disagree with an assertion that our policies encouraged the trade imbalance to get much worse than it would have otherwise.

The sci-fi novels are right IMO. I mean I wouldn’t say “survival” but I’d say volatility is necessary for “technological progress” which I think is hard coded into human nature as an evolutionary adaptation due to the fact that we were so ill prepared for surviving without it. The amount of everyday stuff that we have that was directly or indirectly a result of war is ridiculous.

gloomboom.com says:

I totally agree that all schools of economics have failed. Remember that in the final analysis it is the actions of each one of us that determines the viability of our system and with such undisciplined actors one can only achieve the outcome that we now see.

ruetheday says:

Wow, looks like NC has been invaded by the Austrian brigade.

There are MANY problems with Austrian economics:

– Their radically aprioristic epistemology and methodology. Start with a few “axioms” about human behavior and deduce all of the facts of the universe from there. “No amount of empirical evidence to the contrary can ever prove us wrong”. Not.

– An incoherent capital theory that requires a bunch of ad hoc assumptions like the “natural rate of interest”, the “degree of roundaboutness”, and the “average period of production”. Sraffa spanked Hayek so hard on the natural rate of interest that Hayek stopped writing about economics altogether afterwards.

– A complete ignorance of the role of money and finance in the workings of a modern capitalistic economy. Austrians view money as a medium of exchange and ignore its other functions. They see finance as the supply and demand of loanable funds mediated by the interest rate. To be fair, mainstram neoclassical economics takes a hit here as well.

– A normative ideological bias that permeates every attempt at a positive description of the economy. “Government is always and everywhere the problem and markets are always and everywhere the solution.”

Yes, neoclassical economics has many problems and we need something to replace it. Austrian economics, however, is NOT it.

Andrew Bissell says:

Surely there’s a Weisbergian column to be written about how the failure of bailouts to fix everything is really the fault of the Austrians, whom we should never listen to again.

Max says:

Anonymous a said…

Grenspanism – failed.

Marxism is branch of classical economics. Everything before marginalism is classical.

Juan says:

Max,

Only to mention that what is probably Marx’s best known (and in its three vol completeness least read) work was titled:

Capital: A Critique of Political Economy

As a critique it built on but also divorced itself from classical economics.

Sraffa also seems to occupy a fairly unique space.

Both are worthwhile.