This is just too funny. Ah, sometimes it’s fun to be an economist.
Is Krugman still trying to do economics?
But perhaps most of all, conservatives like Canada as an example of “expansionary austerity,” a country that grew its economy while slashing public spending and debt. Squeezed by high interest rates, a left-of-center government instituted big spending cuts in the 1990s; as a result, Canada’s level of public expenditure as a share of its economy has fallen to match America’s.
OK, there’s Canada, does look like it has fallen, and the big fall was from 1992 to 2005 which Krugman decided better not to show in his article, although obviously that’s what Josh Barro was talking about.
There’s the USA for comparison. Clearly trending upward.
The cockroach seems to be more anti-MMT than anti-Keynesian.
I may be having a slow brain day but I can’t see what the Kontradiction is supposed to be.
In the recent posts Krugman is frustrated with conservatives who use Canada as an example of ‘fiscal austerity’ apparently causing economic expansion.
But in the 2012 price you link to he uses Canada as an example of a economy in depression that doesn’t show symptoms of deflation or falling wages.
These seem like two completely different and mutually inclusive themes that just both happen to reference Canada.
In the recent case, Krugman says 1990s Canada cannot be used as a model for the US today. There are confounding differences. Anyone who tries to use 1990s Canada as a model for the US today is on Team Cockroach. Cockroaches point out the similarities while Krugtron douses them in caustic difference.
In the 2012 case, Krugman argues explicitly “Canada in the 1990s is a good model for America now”. Krugtron points out the similarities while Team Cockroach… well, we’re not sure where they stand.
Each side has its “just so” stories and tries to support them with cherry-picked evidence and presumptuous framing. The other side refutes those stories with its own evidence and presumptuous framing.
In Krugman’s recent piece, I see bombast, rhetoric, and ugly characterizations combined with a notable lack of self-examination, clear explanation, or fair standards broadly applied. I think Bob is mostly complaining about the last bit.
Also, in the great cockroach squash of 2010, Rowe implies that austerity was over in 1995, and look how the economy takes off! This supposed ending of austerity does not square with Henderson’s charts, so maybe Rowe is getting cute with definitions, or maybe he has an actual refutation I’m not aware of (quite possible, even likely).
I agree with the “I see bombast, rhetoric, and ugly characterizations..” bit.
But I’m not sure that saying “Canada is not a good example of how ‘fiscal austerity’ works” makes it inconsistent to also say “Canada is a good example of a country in recession that does not have deflation”.
And thanks for the pointer to Rowe. Here are some relevant posts:
The WCI piece is by Stephen Gordon, not Rowe.
The way you can tell: If a post has cool charts and figures, it can’t possibly be authored by Nick Rowe.
Oops, these posts are by Rowe’s fellow blogger at WCI, Steven Gordon.
Whoops, I’ll take the blame for this one. The blog header screams Rowe to me, but of course he’s one of several (the most prolific by far?).
Good point on the charts Bob, I’ll try to keep that in mind next time.
I actually had exactly this thought when I read Bob’s post, but I’ve come to the view that, well, Bob just doesn’t care for Krugman at all, and I’m prepared to cut him a lot of slack in this regard. Plus I don’t understand economics anyway….
Are you guys kidding me? Do you think I would ever write a post saying, “I can’t believe the Keynesians are pointing to the 1920-1921 Depression as if that has some relevance to the Great Depression,” when I’ve got this article floating around? Of course I wouldn’t do such a thing, even if I thought Krugman in a particular post made a comparison that wasn’t valid. He is unbelievably uncharitable with his opponents and merciless in his condemnations, such that we always have to carefully parse his words to come up with a way that maybe he actually wasn’t *literally* contradicting himself.
I think Krugman is simply taking 2 aspect of the Canadian experience and saying that one is relevant to today and one is not.
If you had written 2 article saying
1. Economists who think that monetary easing helped in 1920-21 (and this can be used as a lesson for today) are mistaken.
2. Price flexibility helped the recovery in 1921, and that can be used as a reason to support polices that encourage price flexibility today.
Then similarly there would be no contradiction, would there ?
Transformer, you’re asking me “there would be no contradiction.” Right, there wouldn’t. I said in the OP that Krugman didn’t have a literal contradiction.
Notice in your 1. and 2., you don’t have me saying, “I can’t believe these idiots keep saying the Depression of 1920-1921 is a model for today’s policymakers,” and then “The Depression of 1920-1921 is a good model for today’s policymakers.” That’s what Krugman did. No it’s not a contradiction, but it’s still absurd.
I think when Krugman says “I can’t believe these idiots keep saying the Canadian Depression of 1995-1996 is a model for today’s policymakers,”, I’m seeing an implicit [in regards to fiscal austerity] and you’re not.
Krugman would probably agree with me – but I suppose that’s really beside the point.
Bob, I read your posts pretty much every day, and I read the Times every day, and always read Krugman’s column. The part of Krugman’s writing that I find a little hard to take is his certainty about the motivations of those who don’t agree with him. Although I don’t think commenting on the motives of others is always out of bounds (for example, I don’t think it’s unfair to suggest that the motives of certain Fox News personalities are to spread a kind of political propaganda for pay and little else), Krugman appears to assume that certain conservative economists who don’t agree with him are defective people. If you’ll forgive me for pandering, while I recognize that you and I would not agree on a great many things, you strike me as a person who holds sincere beliefs and generally respects the sincere beliefs of others. Krugman, in my view, could use a little more Murphy in his attitude toward his economic and political opponents. I understand he believes some “conservative” economic ideas have prolonged the misery in the West since 2008 and he’s very angry about it. But there is a fine line between righteous indignation and plain self-righteousness. People on this blog believe certain Keynesian ideas have prolonged or caused the misery since 2008. They seem sincere to me too, and aside from the few who really are over the top, it seems to me that only history will really “decide” who’s correct, assuming either side is really or mostly correct. In other words, if you are in part complaining about Krugman’s uncharitableness, I agree with you.
LK, where are you? We need to be reassured how Keynesian theory is always vindicated no matter what happens.
What was the point of this post?
To laugh Dan.
like that, only verbal.
Bob, surely you mean it’s ALWAYS fun to be an economist!
“With this context, you can understand why today’s conservatives and libertarians look with great interest at the Canadian example: It seems to show that the Keynesian warnings about cutting government spending in the midst of a recession are bogus, doesn’t it?”
Only if, as pointed out before, your idea of Keynesian theory is a caricature. Keynesian theory does not say that contractionary fiscal policy will always lead to recession, when the domestic private sector or demand for exports might provide a sufficient level of aggregate demand.
Not to mention:
(1) that the US is Canada’s largest trade partner, taking most of its exports. But Canadian austerity began from 1995, and most of the depreciation in the Canadian dollar relative to the US dollar happened from 1991 to 1994 before the austerity.
(2) the loanable funds model of interest rates you use is false. Canada has an endogenous money supply and Bank of Canada sets the “overnight rate”.
(3) “crowding out” as in mainstream neoclassical theory and in your argument does not occur in Canada. The Canadian central bank effectively neutralises the effect of the government’s transactions with the private sector, by adding or draining reserves from the private banks when necessary during the course of the day.
“Only if, as pointed out before, **your idea** of Keynesian theory is a caricature. Keynesian theory does not say that contractionary fiscal policy will ALWAYS lead to recession…”
The only problem here, is that the word “ALWAYS” never appeared neither in the whole mises canada post nor here. You are caricaturing Murphy and at the same time you are accusing him of doing so. This is funny.
You should have read Bob’s original post. Bob said:
“The experience of Canada in the mid- to late-1990s shows that it is entirely possible for a government to engage in relatively large spending cuts without plunging the economy into recession”
That logically implies that Bob thinks Keynesians believe that, if the government engages fiscal contraction, it must necessarily plunge the economy into recession.
Bob is wrong.
His implied view of Keynesian theory is a caricature, just as his ignorant statements about Keynesian theory in The Politically Incorrect Guide to the Great Depression and the New Deal.
Everyone knows that “crowding out” is a myth. Who would deny that the very same resources can be in two different places at the same time? Just because something is being used to dig holes and fill them up again doesn’t mean that it cannot be simultaneously used for something people actuallly want. Just another dumb Austrian argument.
Speaking of caricatures and full-blown incomprehension…..
the classic Austrian business cycle theory collapses once it is shown that the unique Wicksellian natural rate of interest cannot be defined outside a one commodity world, right?
That is entirely correct and there is no caricature. The classic expositions of the ABCT and all other modern versions use Wicksell’s unique natural rate of interest or its functional equivalent.
Let us quote from an eminent and highly knowledgeable Austrian economist:
“In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 ) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it. ….
Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 ) continued to talk of ‘the’ originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 ) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).
The only one here who doesn’t understand the issues is you, bob roddis.
“Lachmann’s demonstration—that once we pick a numéraire, entrepreneurship will tend to ensure that the rate of return must be equal no matter the commodity in which we invest—does not establish what Lachmann thinks it does. The rate of return (in intertemporal equilibrium) on all commodities must indeed be equal once we define a numéraire, but there is no reason to suppose that those rates will be equal regardless of the numéraire. As such, there is still no way to examine a barter economy, even one in intertemporal equilibrium, and point to ‘the’ real rate of interest.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 14)
And with those words, it logically follows that all modern published versions of ABCT are flawed, whether Bob Murphy admits it or not.
It’s just a model. A tool to help explain the real world. But it’s not the way the world works. And it’s not a good model if people are going to spend a century arguing about it.
The clueless Phillip Pilkington (“Wonderful post, which I learned a lot from” –LK) once and for all explains the core Keynesian idea as “that the marginal efficiency of capital (MEC) is basically THE EXPECTED PROFITABILITY THAT INVESTORS THINK THEY WILL RECEIVE on their investments measured against the present cost of these investments.” The entire Keynesian façade is based upon ignoring and suppressing the BASIC, UNAMBIGUOUS and UBIQUITOUS Austrian analysis that this occurs due to the prior false, artificial, distorted and unsustainable price, investment and capital structure induced by prior new funny money injections as Pilkington demonstrates:
Keynes opens with a very clear quote on what he thinks to be the key determinate:
“The Trade Cycle is best regarded, I think, as being occasioned by a cyclical change in the marginal efficiency of capital, though complicated and often aggravated by associated changes in the other significant short-period variables of the economic system.”
Recall that the marginal efficiency of capital (MEC) is basically the expected profitability that investors think they will receive on their investments measured against the present cost of these investments. THE KEY COMPONENT IN THE MEC IS, OF COURSE, INVESTOR EXPECTATIONS. Keynes is clear on this and distinguishes himself from those who claim that a rise in the rate of interest is the cause of the crisis. He writes:
“Now, we have been accustomed in explaining the “crisis” to lay stress on the rising tendency of the rate of interest under the influence of the increased demand for money both for trade and speculative purposes. At times this factor may certainly play an aggravating and, occasionally perhaps, an initiating part. But I suggest that a more typical, and often the predominant, explanation of the crisis is, not primarily a rise in the rate of interest, but a sudden collapse in the marginal efficiency of capital.”
A rise in the rate of interest will typically precipitate a recession…….But the actual cause of the crisis is, as Keynes says, a collapse in the MEC. Consider the case of the 2008 recession. This recession was initiated by a fall in house prices which led to a fall in housing construction.
Hayek 1975: These discrepancies of demand and supply in different industries, discrepancies between the distribution of demand and the allocation of the factors of production, are in the last analysis DUE TO SOME DISTORTION IN THE PRICE SYSTEM THAT HAS DIRECTED RESOURCES TO FALSE USES. It can be corrected only by making sure, first, that prices achieve what, somewhat misleadingly, we call an equilibrium structure, and second, that labor is reallocated according to these new prices…..The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that THIS EQUILIBRIUM STRUCTURE OF PRICES IS SOMETHING WHICH WE CANNOT KNOW BEFOREHAND BECAUSE THE ONLY WAY TO DISCOVER IT IS TO GIVE THE MARKET FREE PLAY; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.
Your Hayek quote just confirms that in the Austrian theory of how economic coordination is supposed to be achieved in modern allegedly “hampered” market systems there is a primary and very great emphasis on a flexible price and wage system, in which prices and wages have a tendency to be adjusted towards market clearing levels, even if the whole system never reaches Mises’ final state of rest.
Hayek’s theory is severely flawed, because most prices in the private sector are set as mark-up prices/administered prices.
Such mark-up prices cannot be “distorted” away from market clearing values, because they are not set to be flexible market clearing prices in the first place.
It is not the price system that equates supply and demand in most modern markets, but direct changes to production, capacity utilisation and inventories.
So let’s assume two things. There is an equilibrium and we’re not at it. It sounds like you both accept that, even if you call it different names ( equilibrium vs ERE).
Are you guys just arguing about HOW the economy moves towards the equilibrium?
The PK position on whether there is a real world tendency to general equilibrium or some state similar to general equilibrium (like Mises’ final state of rest) is, no, there are strong reasons for rejecting the idea (the branch of Austrian economics associated with Lachmann takes a similar view).
What we are talking about here is a narrow part of this alleged general tendency: the Austrian/neoclassical idea that supply and demand tends to be equated in product markets by flexible prices.
As I said, to the extent most real world markets match supply with demand, it happens by direct adjustments to production and employment, or in your standard mature firm, by capacity utilisation changes.
Most prices just aren’t very response to demand changes, and certainly aren’t sufficiently flexible to have a tendency to market clearing in the neoclassical or Austrian model. There is a similar story with wages.
Therefore Bob roddis’ endless ranting about how prices are “distorted” makes no sense with respect to most prices, because they are never even set in the way his theory requires in the first place.
I didn’t say achieves equilibrium, I said moves towards it. So right now things are out of balance, more people want iphones than there are iphones. So there is a pressure here.
Is the dofference that Roddis says the price will rise until pressure ends and you say Apple will make more? He’d be wrong there.
Now take an example where Roddis looks right, the price of tea leaves or wheat.
Entrepreneurs will change prices, styles, colors, models, sales locations, production levels etc.. as they see fit without the threat of violent government intervention. LK’s claim that Austrians insist that Entrepreneurs will only change prices in the face of changes in the world is HIS BIG LIE (which we’ve refuted here over and over and over 566 times before).
“Now take an example where Roddis looks right, the price of tea leaves or wheat.”
Yes, Impatient, there are markets with such flexible prices, and to the extent that the demand curves of the products there are well-behaved, conventional supply and demand analysis has merit.
Yes, demand will tend to be matched to supply by price changes there.
But the fact is, first, that markets where this is the relevant analysis — true flexible price markets — are a minority of markets these days.
Just look at the evidence on how big the flexprice sector really is for, say, the US
Secondly, bob’s analysis here still does not work, because he assumes that
“credit money” (what he calls funny money) — the type of money the private sector can create from nothing — and the extra demand it creates is somehow illegitimate or immoral.
This is absurd. Any sophisticated enough capitalist economy will have most of its broad money supply as credit money: e.g., negotiable bills of exchange (important mainly historically, but not so much now), negotiable promissory notes, private bank notes (historically). negotiable cheques, bank “deposit” money are all vital to a functioning capitalist.
This analysis assumes that
“credit money” (what he calls funny money) — the type of money the private sector can create from nothing — and the extra demand it creates is somehow illegitimate or immoral.
“Credit money” masquerading as 100% reserve notes is indeed illegitimate and immoral. “Credit money” per se, is a whole other story.
First, private banknotes did not “masquerade” “as 100% reserve notes” — they are IOUs or debt instruments. Why? Because they said so usually with the words “I promise to REPAY on demand” and because the underlying contract was a mutuum, not bailment.
Secondly, negotiable bills of exchange, negotiable promissory notes, and negotiable cheques — which were much more important historically as credit money — are clearly IOUs.
Not every bank note holder knew they were holding only a credit instrument. History has shown that bankers and governments purposefully made people believe it was money.
LK, even if you believe Roddis is wrong on the theoretical considerations on how free market prices are determined, it does not logically from this that the prices we see today are not distorted, that they are the same prices we would have otherwise seen if we did in fact have a free market.
The whole Keynesian theory presupposes the existence of free market prices that otherwise would exist if it weren’t for Keynesian policy prescriptions.
We are not arguing about HOW the economy moves towards equilibrium.
1. I say Hayek’s “single natural rate of interest” is just a silly model he used in a vain attempt to reflect reality. Whether it is useful or not is irrelevant to basic Austrian analysis.
2. I say the term “market clearing prices” is just a silly model used by some Austrians in a vain attempt to reflect reality. I don’t like it and I don’t like to use it. LK says that makes me an idiot who does not understand Austrian analysis. We don’t need to repeat that argument for 57,000th time.
3. Hayek’s use (in my quote) of the term “equilibrium structure” is nothing other than what prices would be without government intervention, especially in the realm of artificial creation of credit. It’s not really an “equilibrium” and he specifically deemed the term “misleading”.
4. The FUNDAMENTAL Austrian insight is the notion of economic calculation which is facilitated by prices resulting from voluntary exchange. Prices which result from violent intervention, especially via artificial credit expansion, are false, distorted and misleading prices which induce an unsustainable price, investiment and capital structure
5. The analysis set forth in paragraph 4 above is completely suppressed, ignored and distorted in Keynesian analysis because it is so obviously true. Even a fairly state general outline of the Austrian analysis competely disappears, every day, every time via every Keynesian in the galaxy. Keynesian analysis is fraudulent and a hoax.
6. LK insists hysterically every other day that paragraph four does not reflect fundamental Austrian analysis whatsoever and that therefore, I am an idiot, the Vulgar Internet Austrian.
There we are.
Why unsustainable? In point 4 which is your main one. Imagine you get a perfect market. Then LK comes along and taxes you at a steady rate. That’s going to change prices and so on, but why wont that just settle down after a while? Why is it unsustainable?
The key point of Austrian analysis are the price distortions caused by artificial credit expansion.
Also, we can argue Austrian theory or we can argue the nonsense which LK claims is Austrian theory.
Well it sounds like you are changing what you call the fundamental point, but ok. What is artificial credit expansion?
“The key point of Austrian analysis are the price distortions caused by artificial credit expansion.”
So how can there be “price distortions” in most markets when most prices there are normally set by the private sector as mark-up prices and do not normally even respond to demand changes? lol
(1) no, the natural rate or its functional equivalent is used in ALL expositions of the ABCT. So according roddis all versions have a ” silly model” at their heart. In truth, it is a devastating flaw.
(2) ” I say the term “market clearing prices” is just a silly model used by some Austrians in a vain attempt to reflect reality”
Not just be “some” Austrians: the term and concept — and the tendency to flexible prices that tend toward market clearing levels — are used by ALL Austrian economists. It is fundamental part of Austrian price theory and the theory of economic coordination.
Whatever “theories” roddis is talking about that don’t just it aren’t Austrian economics, but some eccentric invention of his own devising.
(1) The absence of an “s” does not refute ABCT. You have not once shown how mortgage rates being 4.045% here and 4.048% there, constitutes a refutation of ABCT. The natural interest rate without an “s” is just a placeholder for what we mean by the distribution of free market rates.
(2) Roddis has his preference.
You have not once shown how mortgage rates being 4.045% here and 4.048% there, constitutes a refutation of ABCT.
(3) “Hayek’s use (in my quote) of the term “equilibrium structure” is nothing other than what prices would be without government intervention”
His “equilibrium structure” is a set of flexible wages and prices that tend towards clearing, thereby tending to equate supply and demand in product markets and the labour markets.
Yes, opposes central banks, but that is hardly the only part of his analysis here.
(4) is all dependent on the false ABCT and the assumption of a real world tendency to flexible prices that tend toward market clearing levels. Roddis cannot understand this.
The “assumption” is the observable fact that undistorted prices provide essential information about supply and demand which do not come into existence otherwise when the population is subject to violent intervention, especially in creation of credit. Prices allow entrepreneurs to change prices, styles, models, sales locations, advertising, production levels, lines of production etc… as conditions change.
The claim that Austrians insist that entrepreneurs only change prices is a lie we’ve refuted over and over. More importantly, I’M not saying that entrepreneurs are stuck exclusively with price changes as opposed to levels of production, styles, etc…
Again, LK is making his same dumb and dishonest argument that we’ve refuted so often before that people here consider him a troll.
And yet, you continue to debate him on the same grounds as in the previous 3,123 posts.
“The claim that Austrians insist that entrepreneurs only change prices…”
I did not say that “Austrians insist that entrepreneurs **only change prices*”.
“Does the Austrian theory of how economic coordination is achieved in both ideal free market systems and how it should be achieved in modern hampered market systems involve a great emphasis on a flexible price and wage system, in which prices and wages have a tendency to be adjusted towards market clearing levels, even if the whole system never reaches Mises’ final state of rest?</b"
A “great emphasis”? Yes.
So now it is quite obvious that you are shameless liar, roddis.
And if you bother to look closely it was Bob Roddis who provoked this argument on this thread.
I was happy pointing out the flaws in your Canadian austerity post.
It’s roddis who wants to talk about ABCT and prices.
Why do you want the last word?
Mark-up prices do adjust. It is why we don’t see unchanging mark-up prices over time. Prices keep gradually rising because of inflation affecting cost prices.
In a free market for money system, where real goods production outpaces money production, we would see gradually falling mark-up prices as a higher supply of capital goods makes capital goods prices fall, and therefore mark-up prices fall.
1. The Pilkington article and argument is new, isn’t it?
2. “Impatient” was asking me questions.
Yes, M_F you are pathetic liar and abuser of straw man arguments.
I have never said that mark-up prices are “unchanging … prices over time”. Your statement refutes nothing and pretty much shows us how you have no actual arguments.
Thanks for admitting that ALL prices adjust and tend towards clearing in a free market.
You can say anything you want happens in a purely hypothetical, imaginary flying unicorn world.
But we’re not interested in imaginary flying unicorn worlds inside your head, but the real world.
One of core reasons for why Keynesian intervention is called for, is to reverse what otherwise would be falling prices in a free market.
So, central banks are forcing prices upwards by printing whatever quantities of fiat money that will bring that about.
To then say aha, the reason why free market theory on prices is wrong is because “in the real world”, which of course is the very world you want to have occur with central banks forcing prices continually upward over time, that we observe prices rising over time and not falling over time, is beyond stupid. It is total ignorance of not only your own theory, but the reason why you observe what you observe.
Please don’t tell me that your counter-argument to FREE MARKET price theory is that “Idiots, in the real world we see prices rising over time, not falling.” OF COURSE we see prices rising over time. Central banks are purposefully trying and succeeding to make prices rise.
Do you not know why prices rise over time? You do realize it is because of central banks right?
What is artificial credit expansion? A banking system that has the privilege of creating funny money loans out of nothing certainly qualifies. A system of loans where there are no true “loanable funds” qualifies.
And I forgot, Austrian theory DOES NOT STATE HOW PRICES ARE “SET”.
“The market operates by shifting the height of prices so that again and again demand and supply will tend to coincide.” (Mises 2006 : 156–157).
“The market interaction brings about a price at which demand and supply tend to coincide. The number of potential buyers willing to pay the market price is large enough for the whole market supply to be sold.”
(Mises 2011: 101).
Somebody never read Mises.
Mark-up prices adjust to changes in demand by way of demand changes affecting cost prices.
Mark-up prices are not market clearing prices in the sense required by Austrian theory, and that is proven by the way they nearly always rise in recessions.
I’ve never denied that what Mises said is true. It does not preclude entrepreneurs from changing styles, models, colors, production levels, production lines etc… to deal with changing circumstances which are reflected in prices paid or not paid.
Give it up, LK. It’s pathetic.
And since nobody here ever said that businesses never change “styles, models, colors, production levels, production lines etc” you are inventing straw man arguments.
Your Austrian theory says that price adjustment is a major and fundamental way by which markets should tend to achieve supply and demand equilibrium.
Markup prices are flexible prices, they flex by way of costs changing.
Mark-up prices changing — mainly upwards — when costs change is not a point of debate here.
The point is that such prices are not sufficiently flexible to bring about a tendency to market clearing in product markets.
You have no reponse to this,
But mark-up prices are in fact “sufficiently flexible to bring about a tendency to clearing”.
You have not refuted this.
‘“crowding out” as in mainstream neoclassical theory and in your argument does not occur in Canada. The Canadian central bank effectively neutralises the effect of the government’s transactions with the private sector, by adding or draining reserves from the private banks when necessary during the course of the day.’
Just because the Canadian central bank effectively neutralises the effect of the government’s transactions in terms of it leading to inflation doesn’t mean they haven’t crowded our private sector investment that otherwise would have taken place.
You have utterly misunderstood the point.
Bob is arguing that Canadian fiscal austerity from 1995 reduced government borrowing, and thereby reduced interest rates (a reverse crowding out effect), so that this was the real cause of the Canadian interest rate falls:
“The answer is simple: The federal government very quickly went from borrowing 4% of GDP to running a string of budget surpluses. When a huge player drops out of the market for loans, what happens to interest rates? They fall. Indeed, that’s the logic behind the “crowding out” objection to massive government budget deficits. To spell it out: If we understand that big government deficits can drive up interest rates and crowd out private investment–without relying on the monetary authority to exogenously tighten as part of the story–then if the government suddenly slashes its borrowing we should understand why interest rates can fall without exogenous monetary expansion.”
He is utterly wrong, because it is all based on a worthless loanable funds model of how the Canadian monetary system works.
In reality, the CB in Canada controls interest rates, and neutralises the effect of the government’s transactions with the private sector, by adding or draining reserves from the private banks when necessary during the course of the day.
This would be clear to anyone who has studied how Canada’s CB actually works:
Lavoie, Marc and Mario Seccareccia. 2006. “The Bank of Canada and the Modern View of Central Banking,” International Journal of Political Economy 35.1: 44–61.
Well, I agree with you that Bob’s interest rate story is flawed – interest rates were almost certainly lowered by the CB as part of a monetary stimulus policy.
But your “crowding out” theory is flawed too. Fiscal austerity combined with monetary easing will lead to a shift of investment from the public to private sector. No matter how you try and define it away this is because there will less “crowding out” with greater fiscal austerity.
LK do you even counter-factual?
The CB only determines the short-term rate, not the long-term one. If it tries to maintain an artificially low short-term rate for too long a time, it will either get inflation (which discourages private investment) or a bubble. Thus, Bob Murphy’s story stands.
That depends on your framework.
In mine the CB could probably maintain whatever nominal rate it wanted but not be able to control real rates.
Point is: Krugman is FOS. End of story.
Carry on …
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