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Good is Bad, Bad is Good
From The Daily Capitalist
In George Orwell’s brilliant novel Nineteen Eighty-Four, one of the characters, Syme, in discussing the nature of Newspeak, says “It’s a beautiful thing, the destruction of words.” Newspeak was a systematic attempt by the dictators of Oceania, a totalitarian society eerily similar to North Korea, to control thought by eliminating words that gave rise to ideas they disapproved. What Syme and Orwell are talking about is that the destruction of words is the destruction of ideas.
There is a parallel to this in contemporary economic thought. Mainstream economists, Keynesians, Neo-Keynesians, and Neoclassists, would have you believe that what common sense would call “good” is now “bad.” Conversely, “bad” is the new “good.” I don’t mean to suggest that we are heading toward becoming a North Korea. My point is that that the experts seem to abandon common sense and yet most people instinctively understand that good is good.
Common sense is the crux of Austrian theory economics. Austrians look at how individuals act, not how "economies" or "nations" act or behave. Ludwig von Mises, the greatest Austrian thinker, and in my opinion the greatest economist, entitled his great work, Human Action (not National Action). The Austrian School was referred to by the Germans as the Psychological School because its analysis started with individual action and how those actions would either attain or fail to attain the goals sought by individuals. In other words, it involves a lot of the "common sense" that guides human behavior most of the time. It is comforting to know there is a philosophy of economics that conforms to what human being actually do rather than how some economist thinks we ought to behave.
Examples of economic Newspeak flourish, especially if you listen to President Obama’s economic team. My favorite example is the present conflict between consumer spending and consumer saving. Since the crash, consumers have cut back on spending and are increasing their savings. Most economists are saying this is bad for the economy; they urge us to spend, spend, spend to save the economy.
Actually, it is just the opposite: saving is the road to recovery.
It seems rather obvious that during a downturn of the economy it would be natural for people to save more and spend less. They are uncertain about their jobs, the values of their homes have plummeted (about 30% since the peak in 2006); their stocks have declined, and their debts are high. Isn’t it common sense that people are doing the rational thing by saving? This is something our parents and grandparents understood well.
Yet Keynesian economists, the dominant economic theory today, tell us that consumers should be spending rather than saving. “Don’t you realize,” they say, “that 70% of our economy is based on consumer spending. Why do you think we have all that unemployment? We won’t recover until we can get people to starting buying stuff again!” Since we aren’t spending they have got the government to do our spending for us. Paying one man to dig a hole and paying another man to fill it is, under Keynesian theory, the path to recovery.
According to their logic, we had the biggest financial bust in world history because consumers wrongfully just stopped spending. If that was the case, it’s funny we didn’t hear these guys warn us about too much consumer spending during the housing bubble.
To explain why saving is good and why economists are wrong, we have to ask why we keep having these boom-bust cycles. Here is where common sense really has been thrown out the window by mainstream economists. Almost all economists believe that you can make the economy prosper by printing huge amounts of new money and throwing it at the economy to make it grow.
Does it make sense that by printing more pieces of impressive looking green paper that you can create wealth? If that were the case, why aren’t the Zimbabweans the richest people on the planet? Yet, this is what economists believe and this is what the Fed practices.
To cut this short, this is exactly what the Fed did starting in 2001. Over a five-year period, the Fed reduced its Fed Funds rate from 6% to 1%. Money flooded the economy. Housing projects that made no sense but for the cheap money and the false appearance of paper prosperity, were hugely over produced. When the Fed stopped the gusher of money in 2006, the whole thing collapsed and pulled the economy down in the biggest bust the world has ever experienced.
Consumers, as we are referred to by economists, lost $10 trillion of wealth in the bust, and were left with huge debts from their wild spending. They borrowed against the value of their homes, they borrowed on their credit cards, and they borrowed to buy big new cars. Now about 25% of Americans have more debt on their homes than the homes are worth.
So what would you do in those circumstances? Spend more? I don’t think so. And that is why consumers are saving. Yes, it reduces consumer spending, but how else are we going to save when unemployment is high and wages are stagnant? Savers are making rational, informed choices and economists just can’t see that.
There are two major benefits from savings. You could say that reduced spending doesn’t boost the economy and it causes housing and other asset values to decline. But that ignores a critical point, and one that is hindering recovery: how else are you going to get rid of the homes and commercial real estate and that were overproduced during the fake boom? This really is simple economics: supply and demand. As prices fall, buyers will be attracted to the market, and gradually the excess disappears. The longer those assets and their related debts hang around, the longer this recession will last. This, I believe is the most critical issue in the economy right now: by letting the economy solve the problem of all these overproduced assets, credit will start flowing again.
Another critical benefit is that new savings builds up capital for future expansion. In addition to the $10 trillion lost by us consumers, the entire wealth of this country was reduced by maybe another $30 to $50 trillion (these numbers are hard to pin down). With all that capital wiped out, you may ask where the capital will come from to finance a revival of the economy once the dead wood is cleared away. We already know that it can’t be done by printing money. It can only be done by savings.
I say, “Thank you my fellow Americans for doing the right thing to help our economy recover. Please ignore the economists. Take care of yourselves and you’ll be taking care of the economy.” Good is good. Bad is bad.
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I am not about to consult with Wall Street or any of the so called Experts.
Just today faced with a new month of household expenses, needs and wants I was able to make decisions based on fixed spending, followed by needful spending and repairs or upgrade spending then secondary spending such as Ammunition and last of all spending for fun such as eating out or going to a mall. Instead we might spend 9 bucks for a bit of bowling and bring 4 dollar walmart pizza home and call it our night out for the month.
We dont spend. Then again we only spend what we must and save the rest.
I like the way the Austrians must think. However reaching back to our own Colonial Times, did we not have a Mr. Paine write a book called "Common Sense"?
My only regret is not buying Ford Stock when it was 2.00 recently because it is now about 10 or nearly. It would have been a good buy if I had the guts to jump in. If I did, It would have been cashed out and sold off by now.
It's a lot like referring to the stock market as "gaming" instead of "gambling."
Nicely said! Thanks Econophile!
I have a bunch of newspeak for you too. When the word "redistribution" appears in the US, people don't see an economic concept about what EVERY service providing state goes through, but the face of Vladimir the local soviet member doing a lap dance on your unborn children while consfiscating your rice for the big guys at the party to feast on.
Similar to "gun control", which should be measures to avoid gun crazyness on a society, in American newspeak translates to "Vladimir, the head of the local soviet, is wanting to bring us down by taking away MY GUNS, the measure of my freedom is reflected on the size of mah guns!"
I could go on and on with other newspeaked words such as "socialism" or "keynesianism" but it's more of the same. But I'd like to close on a note about econophile's most beloved economic religion. If the greatest point of Austrian economics is to look at the individual action rather than the group, then I guess it's worth shit as HUMANS ARE SOCIAL ANIMALS. Having an autistic vision of human experience can't be good for explaining what goes on, much less for prediction making. UNLESS you believe like what once your beloved Maggie Thatcher said: "There's no such thing as a society", in which case if you put your money where your mouth is, you should go live back up the trees and demand nothing from society anymore.
You must be right. I don't do ANYTHING until I consult my entire peer group. It's the only way I can make economic decisions. Otherwise, I won't be invited to their cocktail parties and that's WORSE THAN DEATH.
"... Almost all economists believe that you can make the economy prosper by printing huge amounts of new money and throwing it at the economy to make it grow."
This is correct, however much you disagree with it. IF the trillions are going to the right place, they can indeed make an economy grow. If I lend or give my kid $50.00 to begin a lemonade stand, on a fairly hot day on street with some walking traffic, there is a strong likelihood that he will buy lemons, honey, water, ice, a stirrer, cups, hire a second person to help out full time or part time and if he charges a price that includes all his costs and a profit, he should make some money and the net effect is growth, however atomic.
IF, however, he opens his stand up in the Kitchen, and his only customers are his parents and others in the house he will likely lose the entire $50.00.
So it's not a matter of should the government do a Keynes, but WHERE and How Much and if wisely directed can be the fuel to begin new industrial ventures, just like any other capital properly invested.
Admittedly by the time those who are truly in charge of the government get their ducks in a row to exploit the government's 'investment', rip off the taxpayers little, if any, of the money will do the good that it could.
In theory, Keynes works. In practice it has proven to be an unmitigated disaster.
Which is it? Lend, or give? An economy can churn a lot of money and thereby "grow" (gag) an economy. But the lent money is DEBT. Had the Fed or Treas decided to give us all $100K instead of giving (loan=debt) it to the banks -- what a difference that would have made. No, giving (creating a paper-for-paper swap is not economically viable) money to the banks is like your giving all your kid's potential customers money in hopes that they would spend it on your kid's lemonade. Ooops.
Either/Or.
If lent, then a portion of the sales would be a return of the principal to me.
Anyway the point is that we agree. Giving money to the banks was the exact wrong thing to do IF the economy was the issue.
But as anyone who has even a smidge of sophisiticat....sophistcita....knowledge about the real allegiance of Paulson, Summers, Bernanke, Geithner, Blankfein, Dimon, Mack and the rest of the shmendricks on Wall Street, this was only about giving politically connected assholes who were going to lose fortunes with trumped up MBS deals trillions because they are the Elite, our Royalty.
Alrighty then, we are on the same page. I think it can all be boiled down to a simple looting of the treasury before the ultimate collapse (a conduit for confiscation of all the worthwhile assets). Everyone knows what is going on and why. There is no "we didn't see that coming" that is credible from the guys at the top. That was a diversionary tactic -- which failed.
Not to defend Keynes, but I was under the impression that his theory has a second facet that is rarely, if ever, mentioned--the money that is spent during the lean times is the money that was SAVED during the good times.
It appears that our economy has evolved to the point that it cannot tolerate savings.
This whole "crisis" has been very interesting to me for so many reasons. I've never been particularly savvy when it comes to anything financial, but I do happen to have a little common sense.
I bought a house in 2005, which has supposedly lost nearly 50% of its value. But the truth is, it hasn't lost any value at all - until I sell it. I had a 401(k), which was reduced by nearly 40% as well. But the truth is, I haven't lost anything there, either. Until I need to take the money out.
There have been over 2 million foreclosures so far. There are nearly 130 million housing units - that are owned by somebody. This means that less than 2% of all homes are in foreclosure. And because of that, we are in a "crisis", where 27 million people have to lose their homes and jobs, etc., etc.
Much as I try, I fail to understand the true "crisis" here, mainly because it makes no sense to me how such small numbers could lead to such great distress.
I feel lied to and manipulated and, if I let it, it could drive one insane, couldn't it?
Anyway, I found this interesting:
http://www.census.gov/compendia/statab/2009/tables/09s1152.pdf
Put that 401k balance and that home equity on your financial statement -- then go try to get a loan. You don't have to sell something to realize a loss.
"The subprime mortgage problem is only a tiny, teeny, infinitesimally small part of the housing situation." ...said by too many SMART people.
You are correct. The present crisis was deliberately manufactured to change America social, political, and economic systems.
100 years ago, the Bolshevik leader Lenin stated that "We must destroy the old world and then, on its rubbles, we will build our new world." The history tends to repeat itself.
Well, ok, but tell us more about the tits....
Normality has 2 types,official propaganda and unofficial disaster real life.How long can this game of charades carry on.
You and bitch tits should get together but to your point, it can go on longer than you can remain attentive to it.
The catholic church refused to believe the earth was not the center of the universe for 400 years after i was discovered that the sun was. People still vote thinking that it will get them where they want to go. Clinton is still a snake and Bush as dumb as a viewer of The Real Housewives of Jew Nersey.
newspeak claims that people are saving
bullshit
people don't have as much money to spend
not borrowing more does not equal saving
the "saving" newspeak is designed to give the impression that people are still making just as much money as ever, which is fucking bullshit
If I have it right, the term "savings" as defined by current economists is the difference between payrolls and spending. It looks like not enough weight is given to debt reduction in this equation. The debt reduction variable is omitted. Thus "savings" is not the equivalent to what we normally describe as stored wealth. The amount allocated to "savings" is derived rather than calculated.
If Austrian economics were so good, why did Arnold Swartzeneger go to Kalifornia?
If Americans were so smart, why did they elect such fools for Congress and President(s)?
Why did so many people go so far into debt?
Why will these festering, nightmarish problems linger for many years?
Answer to the above, because WE are STUPID, silly.
The Austrian economists simply happened to be of Austrian decent, they were not economists for the Austrian government.
Why is there a political, financial, and economic catastrophe in America right now?
Yes, all the above definitely have made their contribution. But the main culprit is a disintegration of America moral and ethical standards when runaway fraud, thievery, and corruption became not only acceptable but also justifiable.
JP Morgan stated that the America prosperity was built on a free-market economy and the protestant religion. By now, these two vital ingredients are gone!
Historically, the most successful Jews were stateless money changers. It did not change during the last 2,000+ years. One century ago, Jewish Bolshevik gangsters destroyed Russia with their socialist experiment. Then they have ruined the Wiemar Republic in Germany. And now, it is an American experiment.
Each time, terrible consequences have followed. It will not be any different this time around.
Oy vey.
Not exactly, it's because we trust and hope to much.
Trust to other people is inborne instinct, making us happy
and making our lives easy, so we do it any time, we, slaves of
our gens and mems.
Lying and cheeting in our anonymous coplex society isn't punisched
any more. So we are deemed to fall because increasing fraud demotivates
creative ones, so it is like in totalitarian system, overall production must go toward null.
Not exactly, it's because we trust and hope to much.
Trust to other people is inborne instinct, making us happy
and making our lives easy, so we do it any time, we, slaves of
our gens and mems.
Lying and cheeting in our anonymous coplex society isn't punisched
any more. So we are deemed to fall because increasing fraud demotivates
creative ones, so it is like in totalitarian system, overall production must go toward null.
Unfortunately a lot of people got into debt by doing the things previous generations had got away with,the essential things in life are severely overpriced,housing,etc.The politicians and banks must take the majority of the blame for lending in the first place.What a mess.
People won,t spend because they may not have a job or security,however if they do spend the item might be cheaper in a couple of months.Is there any real way out of this apart from Hyperinflation.Everything that had value appears to be gradually destroyed apart from Gold,commodities and food.Everyday the swings get wilder,how much longer can the markets carry on not showing reality,come to that what is reality any more.No ones in work,everything apart from above becomes worthless and the DOW at 20,000,impossible,I wonder ? ........
Newspeak is already here. Does anyone remember when the word "insurgent" was created to replace the word "guerilla"? It was right when the US invaded Iraq. Traditionally the word guerilla had a positive association in the US, as the US supported all kinds of guerillas fighting against communism for decades. Now, it wouldn't do to have the enemy referred to as guerillas because that implies that Americans are invaders/occupiers.
So the media/govt manufacture "insurgent", a new word with no prior connotation (a clean slate). It's not even an English word. What the fuck does it mean? Do insurgents insurge? What the hell is insurging? Totally fabricated word. What's interesting to see now is that in articles, magazines, and public discourse in the last 5 years, the word is used so often in place of "guerillas" even when the subject matter deals with wars long before Iraq in 2003.
So there you go, invent a new word when a current word might imply something negative about you, and then rewrite history to try expunge the old word as much as possible.
As for savings vs. consumption, it's not a black and white issue. There's a balance between the two that's appropriate. Investment is financed out of savings but on the other hand consumption/production (two side of the same coin) are economic activity. The PTB determined however that economic activity must be pushed upward at all costs (the sky's the limit!), future consequences be damned. This is why we have all this free money, stimulus programs, etc.
It's like sprinting down a track - you've got to find the right pace, if you try to pump your legs too quickly you'll lose balance and fall forward.
insurgent "one who rises in revolt," 1765, from L. insurgentem (nom.insurgens ), prp. of insurgere "rise up, rise against, revolt," from in- "against" + surgere "to rise" (see surge). An obsolete verb insurge "to rise in opposition or insurrection" is attested from 1535. Not trying to conflict your analysis, an old an obsolete word is easily revamped for a newspeak career.
Today's Newspeak is "muddle through."
I don't know exactly what's going to happen instead of a "double-dip," but whatever it is, we are going to be forced to muddle through it. (dead green shoots?)
Well, until everyone gets tired of muddling, that is, then they'll move onto the next meaningless catch-phrase designed to deny that we are still muddling.
Any guesses as to what that might be? How about "holding tight?" (instead of being washed down into the swirling bowl)
The word "insurgent" was created hundreds of years ago.
You're absolutely right, but so is Zerozen. His point is still valid if the word insurgent is absent from the collective contemporary lexicon, which it was before Iraq/Afghanistan.
You're right, I stand corrected.
Nonetheless, it didn't enter common use in the media until the Iraq war (my observation). I'm still convinced it's because using "guerilla" would send across the wrong message to a public that was supposed to support the war.
Right on in your observation econophile ! Todays NYT does analysis on which tax breaks stimulate economy and jobs growth most " Tax Cuts That Make a Difference" by David Leonhardt . Major conclusion is " cash for clunkers" type tax incentives because they stimulate immediate consumption. So here we go again---more consumption is the goal when dumb slobs have already been goaded into over spending on credit, leveraging house assets and now in fear of job loss . Obviously , as you say , under these circumstances its time to save. I would add another point which is the question " who really gains most when US consumes beyond ability to pay". The answer is financial industry, and China suppliers. Sure some US retailers and suppliers gain but the cards are stacked in favor of the former . Conclusion is the global economic model is broken and not in our favor. Therefore our options are-- change the economic model, austerity, or more ruinous Keynesian debt as far as the polititians can see. I suppose changing the polititians is another option but thats another topic for another day when all other fails . Beware what you preach Alan, Ben ,Hank, Tim and Larry ---you may be held accountable.
Let us make it very simple: all these "new age" economists, starting with Karl Marx, believe that "common people" are just very stupid and have no idea what is good for them. At the same time, all these "God Chosen" people have all the right answers as well as they have a God-given right to impose their views and their ways of life on the rest of us.
We know who these special people are:
Truth is truth. Sadly , this is spot on.
Don't look now, but "God's chosen people" are trying to bring back slavery, starvation, and brutality as we speak.
They're called tea baggers and conservatives, who are bought and controlled by the financial elite.
Don't look now, but "God's chosen people" are trying to bring back slavery, starvation, and brutality as we speak....They're called tea baggers and conservatives, who are bought and controlled by the financial elite.
I'm an atheist, a teabagger and an anarcho-capitalist. Your stereotypical assumptions seem to have fallen short of the mark. Imagine that.
I'm one who hates both sides of our mainstream political spectrum equally....but if memory serves me correct is was the conservatives who voted against the bailout of the financial elite.
Your bias is showing, libtard.
Government is the problem. Partisan hacks are government sleeper agents who exist solely to shut down honest intellectual discussion. You don't even know you are doing it.
Sickening.
Amen.
we need to exhume McCarthy.
The complete book Human Action is available for free here.
http://mises.org/resources/3250
Interestingly enough the majority of the people who saw and warned about the colapse in housing and the stock market in 2008 were Austrian Economists. Yet they still get no respect.
They weren't only Austrian:
for example Steve Keen has developped a quantitative model based on Minsky's insights which is infinitely more valuable than what Austrian economists bring to the table (who do not have any quantitative model).
The only thing Austrians can say is "let it crash" which comforts libertarians and other laissez-faire ideologues. They seem to have no idea how this will end and prefer to ignore the kind of social disruption that will result, that's why they get no respect.
Austrians would strongly disagree with you, Christina. I've read Keen. Minsky was another Neoclassical economist from whence Friedman came up with his Monetarism. You ought to read Mises or Rothbard before you say what you say. I would turn around your statement and say your heroes "seem to have no idea how this will end and prefer to ignore the kind of social disruption that will result." Why hasn't anything the Neoclassical economists have recommended done anything to prevent the social disruption you fear? In fact by prolonging the recession, millions continue to suffer from unemployment.
well said. They're not just prolonging, they're enlarging
I've read Mises and Rothbard. They have no recommendations on how to deal with this kind of crisis of deleveraging. All they have to say is how to avoid it (with absolutely no track record to validate their assumptions on the utility of value scales and that it is impossible for action to demonstrate indifference), but not what to do when it's there.
If you are so well versed on Austrian economics, just let me know what they propose on how to deal with this kind of debt delationary crisis. Not what they propose on how to avoid it.
A bit too late for that.
The problem with Austrian economics is that it has absolutely no quantitative model so it has no clue what is comming if we let the economy crash.
btw Neoclassical economists such as Bernanke and Summers are not following Minsky's model whatsoever... Neoclassical economics ignores the role of debt and of financial asset purchases on aggregate demand and assumes equilibrium which Minsky doesn't. So neoclassical economics is as bankrupt as Austrian economics.
I don't think you've understood Minsky at all.
Dear Chrisina:
Thank you for all of your comments. But, with all due respect, I believe you don't have a grasp of Austrian theory, nor do I believe you have studied Mises and Rothbard. Forgive me if I'm wrong, but I believe you are BS-ing your way through this discussion. I see frequently commentators who claim they have read Mises, but it is clear from their comments that they haven't, or if they did, they didn't understand it.
First, you assume that doing nothing is a failure of theory and that the Austrians have no clue as to what happens and they care nothing about the consequences. If you had read Mises, you would understand how wrong you are. Mises discusses in detail the consequences of the cycle and what we can do to "cure" the problem.
You flippantly dismiss one of the comments about comparing the 1920 recession to the 1929 recession. In the 1920 recession the market crash was initially greater than 1929, and unemployment was initially higher. Both were very similar and the Fed was primarily responsible for them. Yet the 1920 recession was over in 18 months and the 1929 recession turned into a depression that lasted almost 25 years. The Dow didn't regain its pre-Crash level until 1954! The difference between the two events was that Harding did almost nothing, whereas Hoover and FDR did plenty. The Great Depression was caused by doing something.
You like many statists believe that it is the duty of the government to do something. Yet history has proven that those somethings were usually disastrous. What you miss is that a lot goes on in the economy without the need for government interventions. Recessions cure themselves rather quickly, because that is the nature of human action. Deleveraging goes on, capital is allocated away from malinvested projects into profitable ventures, and prices find their level. Recessions are never painless. The question is: how long will it take for the process to occur? All of the present fiscal and monetary interventions by the government and the Fed have done nothing to solve our problems and have delayed a recovery. That has been a disaster for the millions of unemployed. So much for doing something. I challenge you to give me an example where government interference has actually cured a recession or depression.
You also mock Austrians for failing to come up with quantitative models. I am sure that is what you were taught in school. But this statement makes it quite clear that you don't understand Austrian epistemology, which was thoroughly discussed in Human Action and also by Hayek in his ground-breaking work. There are reasons why we don't think that econometrics is the pathway to economic truth. In fact I would say that econometric analysis has been a failure of "modern" economics. I would surely like to know what models you think have yielded "truth."
Lastly, I am quite certain that you haven't read the Austrian when you say it didn't exist in the 19thC. Wow. The school of thought goes way back to the scholars of Salamanca in the 1500s, up through the French liberals of the 17th-18thC (Turgot, Say, Cantillon) and Bastiat in the early 19thC. This tradition of thought flowed through the first Austrians, Menger, Boehm-Bawerk and others in the 1870s, through Mises who wrote his first great treatise discovering the causes of the business cycle in 1912 (Theory of Money and Credit), up through today. Menger's thought gave rise to the name "Austrian School" and it stuck. Menger discovered the ground-breaking concept now called the Marginal Revolution.
You obviously like to debate, but argument doesn't always yield truth. I am happy to discuss things with you, but you can't just fake your way through this kind of discussion.
Dear Econophile:
Thank you for your reply.
First, I didn't claim to have "studied" Austrian Economics. I read the two books I mentionned earlier and I frequently turn to the mises website in order to make myself an informed opinion. I have also read various criticisms of the Austrian School and have come tto some of the conclusions I mentionned earlier, notably that its political implications, Libertarianism and laissez-faire policies will only bring havoc and misery. You have obviously come to different conclusions.
Rather than claiming that Mises discusses in detail what can be done to cure the problem (I insist on cure, not prevention, it is too late for this), why don't you write a post detailing such cure. I have never seen this discussed on Zerohedge. All I've read can be summarised by "let the economy crash, free market forces will reestablish themselves and the depression will be cured (while ignoring that the unintended consequence will be a civil war between the tea bagging adepts of libertarian policies and the progressive ones or a revolution ignited by the rapid destruction of the middle class' wealth that will result from a rapid debt liquidation). Although I am member of ZH for just a few months, I have been lurking here for more than a year and have read nothing different. So what's the cure Mises advocates other than let the free-market forces reign in?
Minsky's conclusions were not those of neoclassical economists that governments should intervene to try to reflate assets, for that is impossible to stabilise a financial system that has become instable and can only prolong or delay the necessary deleveraging. Minsky actually shows that there is no such thing as a "cure". Rather than attempting to cure an uncurable problem, governments should focus on social measures that try to ease the pain that is the consequence of the deleveraging process on the least prepared segments of society. We can't just throw them in the dustbin of society, now can we? Austrians who have no clue how strong the pain will be (they have no quantitative models so they have no clue if the pain will be severe enough to test social cohesion) assume that it will be short lived and sufficiently mild so that society will not break up. Minsky shows that this is a completely wrong assumtpion. Not only will the deleveraging process take several decades WITHOUT intervention (longer with), but the pain will be so strong if governments do nothing to put in place the necessary social stabilisers that it will result in complete havoc and misery that will destroy society.
Steve Keen has shown that Minsky's model results in the opposite conclusions to those of neoclassical economists. Notably it refutes the neoclassical assumption that declining wages will cure the problem. Rather than curing it, it will only aggrevate it. Minsky refutes the multiplier effect of neoclassical economists when the financial system has become instable. Minsky includes Ponzi dynamics, disequilibrium, financial instability, all concepts that neoclassical economics ignore. To state that Minsky was just another neoclassical economist is a statement of ignorance. What have you read from Minsky?
It is paradoxal that Austrians would have a "cure" when their main conclusions would be laissez-faire, ie let it crash and get the government out of doing anything.
As to the 1920 recession, it is laughable to bring it as a comparison to our current crisis when it had absolutely nothing to do with it. Our debt deflationary crisis was caused by decades of artificially debt induced growth. We have a debt/GDP ratio in te USA of more than 330%, in 1920 it was less than half and we had all the cheap energy we could want. It was a purely cyclical recession, ours is secular, caused by a massive debt bubble combined with the end of cheap energy (a rapidly declining EROI). Market crashes are in no way shape or form an indication of the severity of recessions. You should know that by now. Unemployement in 1920 was not higher if you compare what is comparable, ie U6. The laissez-faire policies that resulted from the 1920 recession actually paved the way to the bubble that caused the great depression. Just look at a curve of debt/ GDP for evidence. It's strikingly clear that debt/GDP started accelerating dring the 1920s. So the Austrian precepts succesfully stopped a recession to only cause an even bigger depression, exactly as the laissez faire policies that reigned in the US after Reagan succesfully stopped a recession to only cause the mother of all bubbles.
The great depression was not caused by government doing "something". It was caused, like our depression, by years of ultra liberal laissez-faire policies by government who did nothing to prevent private banks to take over the economy, force financial deregulations in order to induce the highest debt bubble of their time. It was the abandonement of the most dirigist elements of policy, forced upon us by the laissez-fairist mantra of the Chicago School ( eg the US-forced collapse of Bretton Woods, the abandonement of Glass Steagal, the relaxing of reserve requirements, the refusal to regulate the derivatives market and the shadow banking system, the diminution of the highest tax rates) that caused the debt bubble we have now. The proof of this is that first debt/GDP remained more or less constant after WWII and prior to the abandonement of such policies. It is only after Reagan and Thatcher came to power that the total debt/GDP ratio started skyrocketting : just look at a graph of total debt/GDPand you'll clearly see when the cancer that is killing us started. Secondly, the debt bubble is the lowest, and the savings rate the highest, in those economies who have had the most dirigist and social-democratic governments (ie China, Germany, Canada, Scandinavia), not in the countries who have let the financial system and the FIRE industry artificially lead their economies such as the UK, and the USA.
You like many libertarians believe it is the duty of government to do nothing. Yet history has proven that doing less is utterly disastrous. Note that I say doing less than what would be required and not nothing, as the Austrian track record on Governments doing nothing is inexistent. The main problem is that adepts of Austrian Economics and other libertarian ideologues continuously seem to want to rewrite history to satisfy their biased worldview.
I don't mock Austrians for not coming with quantitative models. It is them who mock qunatitative models :
"The impracticality of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations. If it were only caused by technical insufficiency, at least an approximate estimation would be possible in some cases. But the main fact is that there are no constant relations. Economics is not, as ignorant positivists repeat again and again, backward because it is not "quantitative." It is not quantitative because there are no constants. Statistical figures referring to economic events are historical data. They tell us what happened in a nonrepeatable historical case." Mises, Human Action p.56
To claim that Austrian Economics dates back to the 1500s shows that it is based on pure ideology and ignorance of the historical evidence that followed during the next 500 years. Austrians hate quantitative data because the evidence in the data refutes their dogma. You are proving my point by making such pronouncements. Mises, and Rothbard after him have developped quite a few major ideas after Bastiat and other pre 20th century thinkers (eg on monopolies, on the refutation of neoclassical public goods, on the refutation of the theory of externalities, etc...). Mises' ideas on the purely ordinal value scale were new. If you had understood Mises and Rothbard, you would know this. Moreover Rothbard falsely accused neoclassical utility functions of assuming cardinality, and as Arrow and Debreau demonstrated, it is not the case.
Most of the conclusions of the Austrian School are flawed because they are based on the flawed assumption that only preferences demonstrated in action are real. It is obvious to anybody with half a brain that me purchasing a product at a price P doesn't indicate in any way shape or form that I wouldn't have a preference or not if that product were priced at P + M. That I can't know what that preference would be like doesn't indicate that that preference nevertheless exists in my mind. How many times have you said to yourself that you'd buy a product at 500$ but would also buy it if it were 100$ more but wouldn't if it were 200$ more expensive ?
I am happy to discuss with you, but you need to come up with better arguments in favor of Austrian Economics (if there are any).
Chrisina:
I feel I am denting my pick with you. You consistently misrepresent Austrian theory as well as history. I think you know enough to start an argument, but you really don't understand it at all. You seem to have a dislike for libertarian ideas without grasping what they stand for. I find it difficult to discuss ideas with you because all you want to do is to argue.
You form of argument is common: you set up a strawman (what you think is Austrian theory) and then you knock it down. Easy enough to do. Then you respond to my comment by, in essence, saying that I am full of crap. Not a good way to argue.
You like many liberals (I gather so from your comments about Reagan) just buy into the conventional wisdom about "laissez-faire": another strawman argument.
I am not a Minsky expert and I agree I shouldn't have lumped him in with the Monetarists. He has some unique ideas about debt. I haven't read him, but I have read about him, both praise and scorn. I have read several of Keen's pieces and don't agree with his conclusions. Perhaps you have read Shostak's critique of Minsky as well. So we disagree. Fair enough? I don't wish to mischaracterize Minsky's ideas so I won't discuss them because I would just be quoting Shostak or critiquing Keen. Yet, you feel free to mischaracterize Austrian theory by the buckets.
I wish to clear up your ideas about the quantitative-qualitative thing. This debate goes way back in history to the mid and late 19thC between the German Positivist school (historical school) and the Austrian "Psychological" school. I don't wish to go into it here, but let's say there was a vigorous debate and the Historical School was followed by Classical, Keynesian, post-Keynesian, and Neoclassical schools. You call it quantitative.
It is not as though the Austrians don't fool around with data; they do. It is that they don't believe that historical analysis of data is very accurate and the models thrown out by econometricians have been pretty inaccurate, as you would agree. I suggest you read Hayek's Nobel lecture, "The Pretense of Knowledge" to understand what he and Mises meant by not being able to rely on quantitative analysis as a source of truth. As I mentioned before, it's a fundamental epistemological issue. I think this is pretty significant, but you disagree. Personally I don't think you really understand it.
As far as the "cure" I think I stated that "doing nothing" is not doing nothing, and I went into the things economies have to go through to get fixed. You disagree, fine. But I say it is gross exaggeration and misleading to claim there will be blood in the streets with this approach.
I have written about policies many times here and on The Daily Capitalist about what I would do to solve the current problems. Most of our problems are a result of government action, so I have ideas about what to do. Here's a simple version: 1. End mark to make believe, extend-pretend, etc. and all the other fake balance sheet tricks to keep banks propped up as zombies--alive but burdened with bad CRE debt that clogs up their balance sheet and freezes credit. 2. FDIC action to require banks to deal with bad debt which will result in clearing off bad debt-assets, closing banks when necessary, and let capital go to profitable banks. 3. Form a new RTC to deal with all the bad CRE the FDIC will end up with. 4. Immediately raise the Fed Funds rate, and do a "Volcker." 5. Repeal Dodd-Frank and most of the Obama-Bush fixes to the crisis (Cash for ..., home buyer credits, etc. etc.) 6. Tell businesses that we won't enact new legislation or raise taxes for 5 years (ends regime uncertainty). 7. Leave town in the dead of night to avoid being hanged. I guarantee that things will get better quicker than what's being done now.
Give me a break here. There is lots of thought behind these ideas. But you wanted to know. Also note that I am not asking for fundamental reforms, just some quick fixes.
Also I asked you where are the triumphs of econometric analysis you favor? Or can you tell me when the "we gotta do something" types of policies have worked? Certainly everything Ben, Larry, and Tim have done so far have failed. And, I can tell you they are worried. Yes, I know Ben is just a Neoclassical/Monetarist. But Tim and Larry are just Neo-Keynesians.
I am dismayed by your toss-off comment about the lack of contribution of Austrian theory to the history of economics. I think that is just a debate tactic to deprecate one of the greatest intellectual traditions of modern times.
Chrisina, this is all I've got for you. I don't have the time. Feel free to keep on commenting, but I am going to end our conversation.
Thanks for reading my article.
If you've actually read Mises and Rothbard (which books? which articles?) you would know why quantitative models are invalid. Hint: read Human Action, or at least part of it.
Rothbard's "The Case Against the Fed" is available for free. Read or listen to the last couple chapters. It involves a transition to a new currency system.
Which, by the way, the US has done over a half-dozen times over its history.