Thursday, February 25, 2010


Scott Sumner's Money Illusions

I believe it was the acerbic von Pepe who said to me over email that Scott Sumner was right--the focus on money was an illusion. (This was a backhanded compliment, to say the least.) I tweaked it a bit for my title...

Lately Scott has been giving us sneak peeks at his book on the Great Depression (e.g. here). Scott's big thing is that the Fed needs to keep nominal GDP (NGDP) growing in order to stave off calamities. Scott admits there are other "real" shocks that can occur, such as a giant tax hike. But he's saying that in addition to all that, if the Fed doesn't print enough money to offset a huge increase in the demand to hold cash (for whatever reason it occurs), then that will be an additional kick to the economy. In particular, Scott thinks it was the Fed's timidity that caused the Great Depression, as well as the financial crisis of the fall of 2008.

So step 1, I went to the old Austrian workhorse, the depression of 1920-1921. Based on a site that a reader kindly dug up, we learn that the drop in nominal GDP from 1920-1921 was (almost) 17%. That was as big as any single-year drop during the Great Depression, except for the catastrophic year 1931-1932.

So the question is, would anybody say that the economy in 1931 was better than it was in 1921? According to Scott's theory, you might think that would be the case, since nominal GDP had fallen more sharply from 1920-1921 than from 1929-1930 (down 12%) or from 1930-1931 (down a little more than 16%). Unemployment was 8.7% in 1930, and had risen to 16.3% by 1931. In contrast, unemployment was 11.7% in 1921, but then it dropped down to 6.7% by 1922 and then 2.4% by 1923.

Now in fairness to Scott, he could say it is a cumulative matter, and in fact the figures above support his story. In other words (he could say) the reason unemployment in 1931 was higher than in 1921 (16.3% vs. 11.7%) was that nominal GDP had fallen a cumulative 26% from 1929-1931. So even though the one-year drop in NGDP from 1920-1921 was bigger than any single year drop up through 1931, it was the back to back drops of 1929 and 1930 that broke the back of the economy.

OK in and of itself, that's plausible enough. But how does Scott explain our current crisis? Assuming my late night calculations from the hotel room are correct, nominal GDP fell about 1.3% from 2008-2009. So how in the heck does that give us a ~10% unemployment rate? (You might ask, "What about the cumulative fall from 2007-2009?" But don't, because GDP in 2008 was higher than in 2007.)

Now maybe Scott would come back and refine the growth rates, and show that something happened in the 3rd quarter of 2008 that my annual figures above are smoothing out of existence. OK fine, but I don't think there's any way Scott is going to generate a recent fall in nominal GDP anywhere close the (almost) 17% one-year drop from 1920-1921. And yet, assuming the stats are measuring the same thing, the unemployment back then was just a point or two higher than it has been in our time.

Now let's move on to the decisive issue. Over email I asked Scott about these things, and he said (reproducing with permission), "Yes, there was a huge drop in NGDP in 1921, but I don't see where you are going with this. I agree with the Austrian view that a sharp fall in NGDP is a bad thing, and 1921 certainly supports that, as does 1929-33, when NGDP fell in half. I'm curious to hear your take on it."

So I said, "OK, I'm saying why did the economy escape a decade of depression in the 1920s--in fact had the Roaring 20s--when in the beginning, the 1920-1921 crash was worse (according to your theory) than the Great Depression crash? Did the Fed start targeting NGDP in 1921?"

Then Scott replied:
Bob, The 1921, 1930 and 1938 depressions were almost equally severe, as my theory predicts. The reason 1929-33 was far worse than 1920-21, is that NGDP fell in half between 1929 and 1933. Even by 1931, NGDP had fallen more steeply than in 1920-21. I think 1920-21 fits my theory perfectly, and make that argument in my book.

And yes, Strong was basically targeting NGDP in the 1920s. He said he was concerned about fluctuations in both prices and real output; that's essentially NGDP targeting. NGDP grew fairly steadily between 1921-29, which is why the economy did well. When it fell in half after 1929, the economy did poorly. If NGDP had kept falling after 1921, as it did after 1930, the 1921 depression would have been much worse.

The 1921 depression was short, but deeper than our current recession. It ended quickly because NGDP recovered strongly in late 1922.
(Hang on kids, we're almost to the finish line.) I came back with this gem: "But wait a second, of course if the economy recovers from a depression (whether because of wise Keynesian stimulus, Sumnerian Fed policy, or Austrian chanting) NGDP will recover. But I'm saying, can you point to what the Fed did to cause NGDP to recover in late 1922?"

Scott explained: "The [monetary] Base fell sharply in 1921, and rose sharply in 1922."

OK for those who are still with me, let me show you how difficult it is to square the numbers on monetary base growth to fit Scott's narrative from above.

In the chart below, I have taken the St. Louis Fed's "Adjusted Monetary Base" series, the non-seasonally adjusted one. The data is monthly, which made it hard to see broad trends. So what I first did was construct quarterly averages out of the monthly data.

Then, I constructed 6-month growth rates for each quarter. So for example, the entry for 1920 1Q is 16.3%. What that means is that the average monetary base level in the 1st quarter of 1920 was 7.86% higher than the level in 3Q 1919. Since the base by 1st Q 1920 had grown 7.86% over the past 6 months, that works out to an annualized growth rate of monetary base of 16.3%. OK?

Now that you understand what the growth rates mean, check out this table:

I've put the significant money tightening periods in red, and the loosening periods in green. Now pretend for a minute that you knew nothing of the time periods, and you were applying Scott's theory. You want to predict which periods have the worst recessions.

OK the biggest reduction in monetary base occurs in 1921. It's true, the drop in 1937 is bad, but clearly the 1921 drop is worse. And the drop in 2008 is...oh wait, there was no drop in base. You just saw a slowdown in its growth.

Now at this point, we would expect the worst depression in US history to be in 1921, the second worst to be in 1937, and the third worst in 1930. We wouldn't even expect there to be a depression in 2008. (You can't see it in the excerpts I've given you, but there were other periods post-WW2 where monetary base actually fell or grew very anemically, and yet I don't think [off the top of my head] there were bad recessions in those periods. Clearly not "the worst Depression since WW2" which is what we are currently experiencing.)

OK let's be fair to Scott. He could argue that we need to look at the Fed's rescue of the economy in 1922, when (per Scott's email) monetary base grew rapidly. So we should expect to see the most phenomenal growth in monetary base in 1922, in order to counteract the huge restriction in the base in 1921. Otherwise, it would remain a mystery how the economy bounced back so quickly in 1922.

Uh oh. My measure of base growth was negative through the first half of 1922. And then even when it picked up, the highest it hit was 11.1% in the 4th quarter of 1922. Remember, unemployment had dropped about five percentage points--falling about in half--from 1921 to 1922.

So if the second-half spurt in 1922 explains the dramatic recovery--and indeed paved the way for the Roaring Twenties--then what was the problem in late 1931? The growth in monetary base then was much bigger than in late 1922. And yet we all know that unemployment continued to rise.

A similar puzzle occurs when we look at the huge, and consecutive, growth rates in 1938 and 1939. But unemployment was 19% in 1938, and was still 14.6% in 1940. Scott can give a story about "long and variable lags" to blame the spike in unemployment in 1938 on the monetary contraction in 1937, but how can he explain the post-1921 recovery by monetary base spurts that are pipsqueaks compared to the huge injections frmo 1938-1940?

Up till this point, Scott could maybe get by with a story that involved judicious use of cumulative effects etc. But look now to the green cells in late 2008 and early 2009. !!

I submit that Scott has fallen prey to a money illusion. Of course it can screw things up if our fractional reserve system allows a huge contraction in the money supply when other things are falling apart in the real economy. But just look at the 1920-1921 episode compared to 2008-2009. It is unreasonable to say the basic cause of our current malaise is that the Fed tightened up in 2008 and then didn't open the spigots enough after the crisis set in. The numbers aren't even in the right ZIP code for that explanation.

Back to you, Scott.

(NOTE: I am writing this from a hotel room. I reserve the right to change the numbers above in case I googled the wrong unemployment rate for a certain year, or screwed up the division for computing nominal GDP losses.)

Interesting. As a student in college, I'm always to eager to hear various perspectives such as Scott's (even if they indeed may be wrong). But, to be quite honest with you Dr. Murphy, why aren't most economists open to the Austrian school? I simply don't understand why they sit there and defend the Federal Reserve's actions (even encouraging more tinkering). It just doesn't make sense after 96 years of observing the Federal Reserve. I mean everything that has occurred has run counter to what these economists say on a daily basis.

I could understand if it's some political science professor who gets their information from the Mainstream Media and presents it to a class as undisputed "fact" (we can't blame those looneys for being arrogant idiots).

However is it possible to say the same thing for an economist? I mean, this is there job! I find it extremely hard to listen to mainstream economists in the news or in the classroom when they continually get it wrong, day in and day out.

I know I'm young and have a ways to go in life, but it truly frustrates me to no end to see these men and women dismiss plausible analysis without even taking a step back to think about it! I mean is it that hard to ask?

(Note: this rant was in no way directed at Scott Sumner, just more of me venting my frustration(s) with other economists)
Yikes, sorry about that guys, spelling and grammar was pretty shoddy in that post (it's late, what do you want me to say?)
LVM, the reason the Austrians get short shrift from most modern economists is because the Austrians reject most of the tools of modern social sciences -- population sampling, statistical analysis, and the likes. If you read the works of von Mises, you will not see a single equation, merely assertions of things as being "true" with no numerical support for the assertions. Modern social scientists have an abiding suspicion of people who come to them saying certain things are true a priori, without any numerical evidence in support of it. Too often when we actually measure things, we find out that what we *thought* was true really wasn't. (I was surprised, for example, when I worked the numbers and found that the reason for the high percentage of GDP used for healthcare in the USA was *not* the health insurance companies, because everybody "knows" that the health insurers are the culprit...). So anyhow, now you know why mainstream economists, or really anybody trained in modern statistical research techniques, view the Austrians with skepticism -- it is the refusal of the Austrians to actually work the numbers that make mainstream economists scratch their head and say "not useful."

Back to the article and Robert Murphy... if I put on my Milton Friedman monetarist's hat, I might point out that you are using a strict definition of the term "money" that is perhaps not particularly applicable in an economy where unregulated cash equivalents have become so prevalent, and that the seeming soaring of base money supply has been more than offset by an even greater decline in the value of unregulated cash equivalents backed by the value of a crashing housing market. My Milton Friedman hat has me saying that the reason why monetary policy has not resulted in higher employment is because Alan Greenspan left rates too low too long and did not leave us enough room to drop interest rates to goose the economy. At which point I read your point that the GDP has not fallen sufficiently to justify a doubling of the unemployment rate in the past three years via an interest rate explanation of unemployment, and my Friedman hat starts cutting off the supply of blood to my head as it writhes in discomfort and I swiftly swap it for my Keynes hat and shout "Ahah! I was right, unemployment is predominantly a demand issue!" Except, how do we explain a shift of the entire demand curve so far down in this recession, when it has not happened in prior recessions? My Keynes hat quietly whispers, "zero bounds" but does not tell me why we arrived at the zero bounds when Bernanke at the Fed was so frenetically expanding the Fed's quantitative easing efforts (basically pumping $2 trillion into the economy). Did we truly lose so many unregulated cash equivalents in the economy that even $2 trillion was not sufficient? Or is it that dumping $2 trillion onto the market, paradoxically, drove down interest rates despite the fact that it took securities off the market, because the cash ended up flowing back into the economy and causing a surplus of cash seeking securities, and the resulting surplus bid down the interest rates to the zero bounds?

Perhaps the ghosts of Milton Friedman and John Maynard Keynes ought to get together in a closet somewhere and talk about this, because somehow I'm not getting a full picture from swapping their hats upon my head. That's the problem with dealing with chaotic systems... you can model them, but models invariably tend to run into messy realities that must then be used to adjust your models. Unless you're a modern Chicago economist, in which case if reality disagrees with your model, it is reality which is wrong ;). (That's a joke, BTW, in case any Chicago economist is in the audience and did not know that he was supposed to be amused about his reputation amongst non-Chicago economists ;).
Bob, I agree that monetary base is not a reliable indicator, that's why I'm not worried about inflation despite the doubling of the monetary base in 2008. I was under the impression that you did think it was a reliable indicator, however, as you are arguing that inflation will rise sharply due to the big increase in the base. Did I get that wrong? I always assumed you were more monetarist that me, but this post makes it seem like you are criticizing monetarism.

My view is that the real problem is changes in NGDP. Sometimes falling NGDP is caused by a falling base (as in 1920-21) other times it is due to currency hoarding and gold hoarding (as in 1930-32.) In the latter case the economy might do poorly despite a rise in the base.

My comment about 1921 was not intended as a grand theory that the MB is the right indicator of monetary policy, rather it was simply an observation that a fall in the MB happened to be the cause of the fall in NGDP in 1921.

Most of my book focuses on the gold market, not the base. I see gold hoarding as the primary cause of the Great Contraction, and high wages as the primary reason for the slow recovery.
[T]he reason the Austrians get short shrift from most modern economists is because the Austrians reject most of the tools of modern social sciences -- population sampling, statistical analysis, and the likes.

Arguments like this are why Austrian School adherents must quickly and simply dispose of these nonsensical and uninformed criticisms of Austrian a priori statements. The following are easy to understand examples of Austrian a priori type statements:

A straight line is the shortest line between two points. No two straight lines can enclose a space. Whatever object is red all over cannot be green all over. No two objects can occupy the same place. The purchasing power of a monetary unit cannot be in two places at the same time. The purchasing power of a monetary unit CANNOT be operative in more than one transaction at the same time.

Thus, when a central bank creates money and credit out of thin air, the result is invariably a theft of purchasing power from those holding the old money (A) which is transferred to those holding the newly issued money (B). I think it essential to begin any explanation of the Austrian view with this demonstration that “quantitative easing” is always and invariably based upon theft and fraud. B now has a claim on assets he did not have before and to which he is not entitled. Further, A has been robbed. B will likely spend his newfound money (which he probably borrowed for just this purpose), but he is buying stuff or investing in stuff with purchasing power that is neither morally his nor his bank’s. (I suppose you can attempt to measure the actual results of this spurious mechanism, but such measurements cannot refute the invariable substance of the mechanism. )

Once the substance of this process is grasped, it becomes easy to understand the catastrophe that follows. Value is subjective and the only mechanism to discover value is through free market prices. The pricing mechanism is immediately distorted because B is immediately bidding up the price of resources and the creation of the new money has diluted the value of the old money. Further, this process does not occur all at once or in one place and is virtually impossible to track. It is now easy to understand how central bank money dilution distorts the capital structure leading to malinvestments that are unsustainable and will lead invariably to a bust. Neither Keynesianism nor Monetarism even have a theory of capital structure. Trying to explain Austrian Theory to a Keynesian or Monetarist is like try to explain diminished chord arpeggios to a punk rocker. The Austrian understanding of capital theory is like an accomplished guitarist who knows and can play complex musical notes and chords. The Keynesian or Monetarist is playing air guitar, flailing about with no understanding of the underlying process he’s childishly emulating.

Austrian theory is a theory of coordination - of how the production process is co-ordinated with the tastes of individuals (their time and liquidity preferences), and how monetary dilution fatally deforms this co-ordination.

There is no logical, historical or evidentiary basis to support the Keynesian idea that monetary dilution can result in anything other than theft of purchasing power of others followed by unsustainable malinvestments that will lead invariably to a bust.

By the way, if one wants to hoard gold, that’s the business of the hoarder. One has a fundamental, inalienable, natural and constitutional right to hoard all the gold one desires to hoard. Of course, the idea that hoarding (saving) gold harms the economy is preposterous.

Finally, if you want charts, vee got charts. We've been waiting since 1978 for someone to refute these charts. I'm not holding my breath.
Bob, thank you for your excellent example of why anybody with a modicum of mathematical and scientific knowledge doesn't take Austrian economics -- or anything purporting to be absolute truth based upon a priori statements -- seriously.

Let us take, for example, the first two a priori statements in your list: "A straight line is the shortest line between two points. No two straight lines can enclose a space." This is a model. It describes *a* universe, the universe of Euclidean geometry. This model is useful for a certain set of problems local to *our* universe. It does not, however, properly describe *our* universe, where there are problem sets where non-Euclidean geometries are more descriptive. Take, for example, one man standing on the North Pole and one man standing on the South Pole. How many straight lines are there connecting these two points? An infinity -- if you start at the South Pole and walk in a straight line, you end up at the North Pole *regardless of which direction you started walking*. How many spaces are enclosed by these straight lines? An infinity of spaces.

The point being that by changing one a' priori' statement -- in the case of elliptical geometry, the statement "there is one and only one line through any point p outside of line l that is parallel to line l" turns into "there is no line through point p outside of line l that is parallel to line l" -- you get a completely different model that models the universe in an entirely different way (as a curved space rather than as a flat plane). And the only way to know whether this model is actually the correct model for your problem space is to actually *test it* in that particular problem space by seeing whether actual observed data is what your model would predict -- something which the Austrians refuse to do, and refuse to accept the results when others do it.

So now you know why the Austrian school has the same reputation as the Flat Earth Society when it comes to mainstream economists. The Flat Earth Society starts with the Euclidean a priori statements and arrives at a model of the Earth that does not match reality. A model useful for the localized problem set of making sure a table is level simply fails applied to the problem set of navigating from point A to point B on planet Earth, where in fact the shortest distance between two points is a curve. And the Austrian insistence that their particular set of a priori statements models *the* economic universe rather than a small subset of a chaotic system, and thus they don't have to prove ridiculous statements like "the idea that hoarding (saving) gold harms the economy is preposterous", strikes a similar chord amongst those of us who are accustomed to using numerical methods to model complex systems. Flat Earth Society. Dude.

- Badtux the Former Mathematics Teacher Penguin
This comment has been removed by a blog administrator.
I'll admit to not being a genius like Badtux, but I'm pretty sure a man walking from the north pole to the south pole is NOT following a straight line. A curve may be the shortest *path* between two points *given obstacles that can't be traveled through*, but that hardly invalidates the a priori truth that a straight line is the shortest *distance* between two points.
If Austrian economic theory is correct, then there is no real need for Macro Economists at all. The whole profession would go out of business. Austrian Economics is to the Economic profession what Atheism is to Priesthood. all that would be left are accountants and related professions. That's really what's behind it.
Well, once again I know I'm young and I want to avoid being called "arrogant" (I've been called this before when I've presented counterfactual anlaysis and made a mockery of someone's talking point). But, macro-economics by and large revolves around sophisms shoved down college students throats and even some adults.

There is a reason why Keynesian economics is regarded with suspicion outside of the universities, even if they do not in fact follow the Austrian school.
Mike, once again you fail to see what I was talking about. In Euclidean geometry, the shortest distance between two points is a straight line. In elliptical geometry, it is not. These are two models, each of which is applicable to a particular problem set. The only difference between these two models is a single "a priori truth", one single "accepted truth" different between the two. These two models contradict each other. Yet both are true when applied to different problem sets (the problem set of making a table in the case of Euclidean geometry, the problem set of navigating the surface of the Earth in the case of elliptical geometry). How can two models which are contradictory both be true?! The Austrians simply say, "There isn't, there is only one truth." Yet... yet... applying Euclidean geometry to the problem of navigating long distances on the surface of the Earth simply doesn't apply. How can that be, if there is only one truth and Euclidean geometry is "it"?!

In short, the model posited by Austrian economics may be useful for modeling a particular theoretical economy that may even correspond to a subset of this real economy we live in, but when the Austrians insist that their model need not be tested against actual economic data to verify its validity for describing this economy because it is true because, well, they say it's true, who can take them seriously?

But perhaps this following a priori truth would make my point clearer about why untested a priori truth makes any reasoning man doubt: "Negroes are beings of an inferior order, and altogether unfit to associate with the White race, either in social or political relations". When U.S. Supreme Court Chief Justice Roger Taney made that statement in 1857, it was believed to be the a priori truth. Indeed, even Abraham Lincoln might have agreed with Taney on that matter -- he opposed slavery on grounds of morality and economics, but Lincoln said, "I will say in addition to this that there is a physical difference between the white and black races which I believe forever forbid the two races living together on terms of social and political equality". This was the a priori truth as understood by generations of Americans, both liberal and conservative -- blacks were inherently inferior or at the very least had substantial differences from other races, and would never be capable of living together with other races on terms of social and political equality.

Three words: President Barack Obama. A priori truth as understood by generations of Americans say that he cannot exist. Yet he does.

Are you starting to get a picture of why social scientists might be skeptical of any group that claims that there are "a priori truths" which need not be actually tested to verify their validity?
This comment has been removed by a blog administrator.
LVM, you are describing a failing of all undergraduate education in the United States, not just of economics education -- i.e., professors presenting our current understanding and models of reality as "the" truth, rather than as models subject to modification, enhancement, or even being discarded if it turns out that new data comes in disproving them. This is something that starts at the K-12 level where teachers do this because it makes their job easier, and undergraduate instructors continue the practice for much the same reason. But it does a disservice to students, in my opinion, because what should be happening is that students are taught how to evaluate models and determine validity and applicability, and that never happens.

As it so happens, in most sciences it rarely happens that new knowledge completely overturns old models, generally the old models turn out to be special cases of the new models (such as Newtonian physics being a subset of Einsteinian physics still applicable to ordinary motion at small fractions of the speed of light). But that is because these are fairly mature sciences. Economics as a science is a fairly new phenomenon that could occur only because of a revolution in the understanding of statistical data in the early part of the 20th century, before then it was as much a science as alchemy -- i.e., would-be economists could observe, but had no useful tools to do anything of a scientific basis with their observations. Early economic texts from the 19th century largely consist of anecdotes and hand waving primarily because the statistical tools to do anything else simply did not exist then.

Regarding Keynesian economics, it is one model of how an economy works. There is a temptation amongst economists, due to the youth of the field, to believe that their favorite model, and only their favorite model, is "true", and that all other models are false or at best merely subsets of their own particular model. I think my first response, where I tried on both monetarist and Keynesian hats, might be closer to the truth -- there are aspects of the reality of the chaotic system we call "economy" which comply with both systems, yet neither appears to fully describe everything that is happening when we look at the actual data. For example, Keynesian economics had little to say about the stagflation of the 1970's, despite the fact that it appeared to model well the situation during the Great Depression's deflationary spiral. Too-close adherence to one particular model as "the" truth is a flaw that is all too common in the economics field, and probably one that will eventually work its way out of the field in a few hundred years as the field matures. For now, however, it is wise to be skeptical whenever some advocate of any particular system claims to have "the" truth.
Sidney here..

I'm not an economist, banker, businessman, or social scientist. Nor was I particularly fast on my feet in the classroom decades ago. Just a simple-minded engineer accustomed to observing reality and testing ideas against it, using a little math now and then to enhance understanding. But I know bullshit when I smell it. And the more I have delved into the chicanery of modern banking whose illusory, ever depreciating product is “loaned” into existence to the detriment of our progeny and is forced upon us by ever more repugnant tax and legal tender laws, the more visceral my disgust has become. If nothing else, Austrian thought resonates with my quaint notions of morality, equity, and practicality. Economics, at the day's end, is a behavioral science, is it not?
Deep thoughts:

1. Apparently, Austrian Economics has been finally refuted because in an alternative universe somewhere, one thing can be in the two places at the same time. A typical argument from an anti-Austrian.

2. People who think one thing can be in two places at the same time don't respect people who deny that.

3. Let's be serious. The argument that all black people are allegedly of "an inferior order" is not an a priori argument at all but is necessarily based upon alleged observation of multiple examples. It matters not that the clowns that believe such thought it an a priori argument (although I doubt that they did).

4. I'm not sure which argument is more pathetic: a) That one thing can be in the two places at the same time or b) that "Negroes are inferior" is an a priori argument.

5. Debating anti-Austrians is always a great adventure because you can always learn new ways that people will deny the obvious.
Bob, in *this* universe both Euclidean and elliptical geometry are valid, despite the fact that they contradict each other, and light is both a particle and a wave (*not* a particle moving in a wave, any more than ocean waves are oceans moving in a wave, but both a particle *and* a wave at the same time). And in fact quantum mechanics says that a particle *can* be in two places at the same time and we have experimental data showing that this is true (the famous double-slit experiment in which a single particle passes through two separate slits and interferes with itself). The fact that you are incapable of understanding these due to your own intellectual limitations (and for that matter, I have a hard time with the whole particle and wave thing myself but accept it as true because, well, we have experimental data showing it's true) is irrelevant.

There is probably some truth to the Austrian economics model for some set of economics problems. The problem is that the Austrians a) claim that it is *the* truth applicable to *all* sets of economic problems, and b) claim that they don't need to prove that with data, because, well, just because they say so. I can't take them any more seriously than the Flat Earth Society or people who say "a particle can't be in two different places at the same time" when they say things like that, making assertions that cannot be backed up with actual data simply does not lead to anything useful for modeling the actual universe as vs. some hypothetical one where unicorns are real and cotton candy grows on trees.

Sidney: It appears that your gripe is with capitalism as a whole, which is based upon fractional reserve lending. If you do not have fractional reserve lending, you have a market economy, but you do not have capitalism. The deal there is that capitalist economies where the majority of capital is in banks available to be lent out to businesses and individuals simply operate more efficiently, because they are capable of leveraging the entire current output of the economy in order to produce future output that is paid for via the income produced by that future output. Capitalist economies can thus respond to changes in consumer demand far more rapidly than non-capitalist economies, which must wait for profits to slowly accumulate before they can make the investment needed to meet new consumer demands. That is why fractional-reserve-lending-based capitalism has won out over every other economic system -- it simply works better as a way of generating wealth via adjusting supply to meet demand.

- Badtux the Scientific Penguin
This comment has been removed by a blog administrator.
Can we stick to Scott Sumner's illusion in the comments of this post?

Badtux: why don't you find another outlet for your emotions.
BadTux, I'm not going to argue with you over economic methodology, I just don't have the energy for that...

1) "the seeming soaring of base money supply has been more than offset by an even greater decline in the value of unregulated cash equivalents backed by the value of a crashing housing market" - can you explain what you mean by a "decline in the the value of unregulated cash equivalents". Do you mean a decline in the supply of cash equivalents?

2)A decline in the supply of cash equivalents did not occur; a decline in outstanding credit did. M2 and reconstructed M3 grew throughout the crisis although the money multipliers and money velocity fell. Broad money equivalents falling aren't offset by base money, they are created from it when banks de-collateralize deposits. In other words, broad money substitutes(predominately from bank lending) grow out of base money but are not necessarily stimulated by it.

2) Broad money can can increase from an increase in base money/drop in rates, a regulatory/legislative shift in reserve requirements, a change in capital ratios, and/or (and here's the one i think many people don't want to admit) an exogenous increase in demand for loanable funds. If banks are levered to the max and somebody wants a loan, a bank would have to go to the fed funds market and bid away funds driving the effective fed funds rate up and forcing the fed, to defend the target, to conduct a TOMO(repo) or a POMO(adding a security to the SOMA). This would increase bank reserves necessary to support the increase in broad money caused by a new bank loan.

3) The fed flooded the system with plenty of liquidity and made sure that rates were uber-accomodative, helping to drive us to the zero bound. The problem was 1) the emergence of a severe deflationary psychology in the private sector 2) forced liquidations of over-leveraged positions 3)a crippling debt burden that led to debt repayment rather than new borrowing or rolling over and 4)a hoarding of cash, some of which was pulled from the loanable funds market. All these factors(and some more I'm sure) caused asset prices to tank, the dollar (in terms of other currencies, asset prices, and goods/services) to rally sharply, real debt burdens to increase as real collateral values shrank. Borrowers and debtors paniced, and new borrowing collapsed. Private balance sheets were also not in a position to borrow (from uncertainly, lack of collateral etc) even at incredibly low interest rates. Traditional monetary policy was useless and fiscal stimulus was the only way the mainstream felt the collapse in private demand and borrowing could be mitigated and reversed.

4)The monetary base is irrelevant if banks have deteriorating balance sheets and need to protect their capital ratios while at the same time borrowers are not able or willing to borrow. At some point private demand for loanable funds or fiscal stimulus must increase to a point where banks begin to re-lever and convert the base into bank credit.

Sorry for rambling, as I don't have the time this is just a quick write-up on my thoughts and I'm sure its not very clear. I think part 3 is the important part so let me know if you want me to go into more depth.
I think (4) sums up the situation nicely. I think one of the fundamental issues that has not been addressed by all of these attempts to resolve the financial industry problems is the simple fact that the majority of consumers *AND BUSINESSES* are neither able nor willing to borrow because they're overleveraged.

One way to deal with that is debt deflation -- i.e., inflation. But once we've hit the zero bounds, our models state that printing additional money does nothing -- it simply circulates through the economy once, ends up in a bank somewhere, and ends up stashed back in the Fed's vault because deflationary perceptions lead banks to believe the money will be more valuable to them at some point in the future when the economy turns up and consumers start buying again. Examination of the actual flow of funds data tends to support that assertion, the Fed's monetary easing amounted to around $2 TRILLION last year, and the vast majority of that ended up back at the Fed as bank reserves. (Note, I'm working off of memory at the moment, I do have the actual flow of funds data somewhere and am in the correct ballpark but really, you should verify that for yourself rather than believe something you read on some blog ;-). This tends to indicate that Bernanke waited too long to start monetary easing -- he should have started *before* deflationary expectations set in. But that still doesn't tell us what should be done now to resolve the situation.

Of course, we know the Austrian answer to that question, which is the same as all other answers they give -- "Do nothing!". If there was data to support the assertion that doing nothing will somehow result in this huge debt overhang going away so that the normal operations of capitalism can start again (in particular, the process I mention above where a capitalist economy uses bank loans to fund the capital investment needed to produce the future output that will pay back those bank loans), I perhaps would be more willing to listen to that policy prescription. But at the moment I'm looking in the mirror and seeing Paul Krugman scratching his head asking, "So what do we do now?"

One thing which economists have been shying away from like cats from a water sprinkler is the question of income distribution. You can literally hear the yowls of terror as you start leading them anywhere towards that question, because the reality that we have two classes of Americans -- the consumer class and the investor class -- is a reality that None Dare Speak Its Name. The investor class profited greatly during the past ten years, resulting in a large overhang of investment money that was malinvested in a bubble (see, the Austrians aren't wrong about *everything* ;-). The consumer class, on the other hand, had their incomes actually *decline* over the past 10 years, thereby drastically impacting their ability to consume -- a decline that was masked by overleveraging for eight of those years, but then it all came crashing down. Any solution that will actually increase consumption and thereby cause an increase in demand that will lead to businesses hiring again will by necessity require placing more money into the hands of the consumer class -- which current quantitative easing programs have *not* done, instead placing yet more money into the hands of an investor class which already has more money than it knows how to profitably invest, thereby driving the interest rates on short-term Treasuries to 0%. Perhaps we should go wake up the ghost of Milton Friedman and create a new $1,000 bill, print up a few thousand bales of the things, and drop the loose bills from helicopters over working class neighborhoods in major cities. Hey, it couldn't work any worse than the current quantitative easing program, could it? ;-).
It is is a bit odd to see to someone push the idea that statistics sounded the death knell for the necessity and usefulness of a priori reasoning.

After-all, statistics is a branch of mathematics which is a purely a priori discipline.

By your logic statistics itself is unscientific and I therefore cannot see how the addition of non-science statistics to non-science economics could enable economics to finally bloom into a science worthy of the name.

My take is the opposite of yours. To my mind since economics began 'testing' propositions with a highly flawed understanding of statistics it has regressed quite alarmingly. I doubt whether Adam Smith or David Ricardo would've been conned into believing in the soviet fairytale as so many of their more 'scientific' descendants did in the 20th century.
"I doubt whether Adam Smith or David Ricardo would've been conned into believing in the soviet fairytale as so many of their more 'scientific' descendants did in the 20th century."

That's a bit ironic as it was Smith and Ricardo's labor theory of value that served as part of the foundation for later marxist theory.
Non-economist here. Didn't the fed raise rates, which clobbered the adj-rate mortgages? Did they have adj-rate mortgages in the 20s and 30s?

Because of all this leverage, how can the fed raise rates? Damned if they do, damned if they don't.

Leverage demands continual growth, without interruption. Sorry to say, but the world has seasons. People who save are just waiting for the growing season.

Best wishes from Redbud in Kansas!
One more comment. In grad school accounting, we were taught that leverage works both ways. It seems illogical that our govt could force it to go only one way. --Redbud
Another amazing thing about Keynesian economics is that Bastiat refuted most of it's arguments almost a century before Keynes proposed them. Freddie B. and Freddy H. are probably having a good chuckle right now, wherever they are.
I find it fascinating that someone could refute "Keynesian economics" a hundred years before it was formulated when even Keynes could not agree on what "Keynesian economics" was, changing his ideas several times over the course of his career, and today's Keynesians, humbled by the 1970's stagflation, have changed their beliefs in several important ways compared to the pre-1970's Keynesians. In short, Keynesians adjust their models to reflect observed reality, not the other way around, and as reality disproves aspects of their current model, move on to newer models that better model the observed reality. Saying there is a single "Keynesian economics" which has been refuted is thus nonsense. But hey, typical Austrian -- "it's true because I say it's true!", without requiring any evidence that it's true. Evidence is not needed in the Austrian viewpoint, only their beautiful model, which need not be tested against actual economic data because it's true because, well, they say it's true, doh.

In short, Austrian economics explicitly rejects the tools and methods of modern science, the most important of which is that you must test your models against reality, you can't simply say they're true because they're pretty models. So why does that lead me to reject Austrian economics as an economic school? Simple: I am a utilitarian. We have ample evidence that the tools and methods of modern science -- the most fundamental of which is that all models must be validated with actual data before being accepted as possibly true (and statistical methods are the means via which we evaluate data in an economic context) -- simply work. You are staring at the evidence of that right in front of your face. The computer you're reading this with could not exist without the scientific method, because it was the scientific method which enabled the researchers who developed the transistor and semiconductors to model the movement of electrons through substrates. Given the demonstrable evidence that the scientific method works -- evidence literally right in front of my face -- how can I accept a school of economic thought which claims that, in fact, the scientific method is bunkum? What next, am I supposed to give serious consideration to the ideas of the Flat Earth Society too?

- Badtux the Bemused Penguin
This comment has been removed by a blog administrator.
"How can I accept a school of economic thought which claims that, in fact, the scientific method is bunkum?"

Well, from what I have read of Block, Hoppe, and Rothbard, they do not reject the scientific method for measurable things (such as distance, weight, mass, and other falsifiable things), but they reject using the tools of the natural sciences to apply to value, and utility, which they claim to be subjective and non-quantifiable.

This is why using these tools in economics is a mistake (again, a subjective opinion). Not only does measuring social welfare and gdp tell us nothing about how human's will act in the future (thus giving no objective truths about behavior like we can get from measuring the velocity of a comet), but they also tell us nothing objective about the state of the world as they try to do. Take monks or the Amish as examples; these societies would produce low NGDP yet it is impossible to objectively say that they are worse off or better off then a society with a higher GDP/NGDP/GNP etc. Austrian economics doesn't attempt to measure that which cannot be measured.

Hope that helps clear up some things, and Bad Tux, thank you for challenging those who cling to Austrianism. I find criticism of that which I believe to be true helps me strengthen and/or re-evaluate whether what i believe is true. And for that, I thank you.
Bad Tux sez "I find it fascinating that someone could refute "Keynesian economics" a hundred years before it was formulated" and thus reveals his ignorance of economic theory and history. qed
Michael sez: "Austrian economics doesn't attempt to measure that which cannot be measured."

Nicely put. Will steal that. Though I suspect you already stole it;)
Michael, my objection is that the Austrians refuse to measure those things that can be measured, and when you show your measures to them, basically say that your measures aren't valid because, well, just because. This explanation by you sounds more like a religious cult than something useful for solving real-world problems, and sounds suspiciously similar to the Marxist critique of capitalism, which is that capitalism assigns numeric values to things which the Marxist believes should not be assigned numeric values. Why should I grant Austrian economics any greater validity than Marxist economics?

I must admit to an abiding suspicion of the utility of religions as anything other than solace to those who either are approaching the end of their life or have suffered the loss of a loved one, especially Calvinist religions which, to quote H.L. Mencken, are motivated by the sneaking suspicion that someone, somewhere, is having fun -- and that this must be stopped. The Austrian injunction that the only solution to recession and depression is to take your medicine and accept mass suffering, pain, and misery as simply God's (or von Mises') will, is about as useful as the Christian Scientist's injunction that the only solution to polio and measles is prayer. It is a faith-based injunction that simply is not borne out by post-WWII recessions, which have been far less severe (even the current one) than those of the past when the "take your medicine of pain and suffering" approach was viewed as the correct one to take.

I occasionally go out into the wilderness and survive for a week or so with just a few technological artifacts to keep me company -- a tent, a sleeping bag, a backpack, rudimentary cooking gear and simple dried foods that require no refrigeration. I always come back to civilization with a better appreciation of modern technological civilization -- a modern technological civilization that exists because of science, not because of faith. Given this clear superiority of utility for science when it comes to assuring myself a comfortable life, why should I suddenly reject science as a method of modeling economies, just because someone else has faith that science is not capable of doing so? And how does the Austrian rejection of the methodology of all modern scientific economics with its emphasis upon measurement and mathematical modeling differ from the religious Creationist rejection of all modern biological science with its emphasis upon species evolution and natural selection, or the Christian Scientist rejection of modern medicine as harmful and unnecessary?

Shorter James Rothfield to me: "Your science is false because the Bible says it's false." Uhm... okay. Eppur si muove.
This comment has been removed by a blog administrator.
Bad Tux, before discussing what Austrian economics is or isn't, not to mention its weaknesses, it would be good to read a book or two written by actual Austrian economists rather than spouting of the kind of laughable platitudes you have picked up from reading Krugman's opeds in the NYT. Good think you are using a fake name, it prevents your real name from being the subject of open ridicule. Now go and do your assigned readings, boy.
Hey, Tuxy boy - I just saw your little blog and realized that in an incredible moment of self-irony, you must have decided to declare Mencken as your hero. Mencken! A little Keynesian who likes Mencken. Mencken! Isn't that just mind-boggling funny!
Oh, the humanity. Thanks for the laugh. You truly are a sad case of willful ignorance.
Ad Hoc phrases such as cult and faith are as damaging to the core debate as words like laughable and ignorant, and they are coming from all sides of the isle. they are only meant to add an emotional punch to an otherwise rational discussion, so I'm jumping ship.

I apologize for derailing the topic.

A 1999 study in The Journal of Economic Perspectives by Christina Romer (now head of the Council of Economic Advisers) found that "real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras, and recessions have become only slightly less severe." Ms. Romer also noted that "recessions have not become noticeably shorter" in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer—11.3 months. The longest recession from 1887 to 1929 lasted 16 months. But there have been three recessions since 1973 that lasted at least that long.


Given the speed at which modern economy can move information, people, goods and money, would you expect a little better?
"Libertarian", do you seriously state that any post-war recession has had a nominal GDP drop of almost 17% the way the depression of 1920-1921 did? Or that any post-WW2 recession has had 16%+ unemployment? I can't find any reading of post-war data that supports such an assertion, but I will check out Romer's actual paper to see if it actually made such an assertion and what data she used to make such an assertion.

Michael, when assertions are made upon the basis of faith, rather than because there is actual economic data to support them, it is what it is. I am sorry that you are insulted by reality.

James: Your faith is strong. It reminds me of the creationists whose faith that the Bible is correct and those eeeevil biologists are wrong is equally strong, and who advise me to read the Bible to learn The Truth when I point out that currently all scientific evidence supports the notion that all current organisms on Earth evolved from prior organisms. I support the scientific method and its results because I can see its results right in front of my face. I am going to require more than reading your Sacred Scriptures to cause me to discard the methods of science as the appropriate mechanism for looking at things like economic activity.
Bad Tux asks.." do you seriously state that any post-war recession has had a nominal GDP drop of almost 17% the way the depression of 1920-1921 did? "

Didn't you just say that "religious" beliefs don't matter, however seriously stated. Don't facts matter? Shouldn't you keep an open mind to facts, instead of showing your religious biases ( implied in that question).
What, really, is so difficult about that? No religious biases are necessary there, just a statement of what currently-collected data says, and the willingness to reassess conclusions based upon new data if the new data conclusively contradicts the older data and can be independently validated (note the "independently validated" part -- things aren't true just because someone *says* they are true, they must be independently verifiable or else you're talking about religion, not science).

I haven't had a chance to track down Romer's paper yet so I would not presume to comment upon it yet, but I will definitely go dig it up when I get a chance. It will be interesting to see what data she is using to come to her conclusion, and a) whether that data actually supports her conclusion, and b) whether that data is independently verifiable. If both are true, then I will reassess my own models so that they match the observed reality. That's what science does, in the end.
Bad Tux, you really are something. Do you really believe that you gain any credibility by admitting not to have read Austrian economists in a discussion with Austrian economists? Because it is obvious that you have not read them. See, most of us here have read Keynes, and hence know that he makes no sense. We have also read Bastiat, and von Mises, and Rothbard. Have you? You intellectual hero is Mencken, eh? Well, maybe you should then follow Mencken’s lead and read some Hazlitt – of whom Mencken was immensely fond.
See, I am a pretty radical atheist – can’t be more radical than I, really, and I own about a dozen different bibles, at least one book of Mormon, and a translation of the Koran. I also have a big compendium of Taoism. It’s called being cultured. It’s called being informed.
Don’t attack things you don’t understand, it easily shows. And it makes you look silly.
Uhm, you do recall that I actually quoted some of Mises earlier in this discussion? I've read some Austrian economics, and in fact in some limited problem sets found that the Austrian model appears to accurately model the economic activity occurring. For example, I point out in yesterday's post on my own blog that the Austrian notion of investment inflation and malinvestment causing a recession appears to have actually occurred during the runup to the current recession, although not for the reasons that the Austrians would agree with (since Austrians don't believe in the Keynesian-originated demand theory of employment, it's against their religion apparently).

The problem is that the process I followed -- testing the model against actual data to see whether it accurately describes the data -- is explicitly rejected by Mises who rejects applying scientific methods to economics to the point where he doesn't have a single mathematical formula in any of his later works. Hayek does not go to that extreme but still, as with Mises, insists that if the data contradicts his model, it is the data that is wrong, not his model, even if his model holds something ridiculous like 25% German unemployment in 1932 being caused by lazy Germans deciding to take a "Great Vacation". No amount of reading the holy texts of Austrian economics gets around those inherent rejections of the scientific method as applied to economics. Austrian insistence that the fact that their model works for certain problem areas means it is the one and only true model of how economics work are hard to take seriously when some of what they say appears to directly contradict actual economic data in the post-WW2 period. The same has happened to the Keynesians and monetarists, of course, such as the resource shocks of the 1970's that sent the economy tumbling into recession not once, but twice (resource shocks for which none of the major schools of economics had models that would properly describe the resulting stagflation), but the difference there is that the Keynesians and monetarists went off and started trying to fix their models to describe the actual data, rather than simply insisting up and down that their model was correct because, well, it was, and that if the data disagreed with their model then the data, not their model was wrong. That, in my opinion, is the difference between a serious school of economic thought and a religious cult -- whether it is willing to accept new data and adopt new models to fit the data, rather than vice-versa.
Bad Tux sez: "Uhm, you do recall that I actually quoted some of Mises earlier in this discussion?"

Please be so kind and point me to the quotation, not some wild paraphrasing.

Regarding 'scientific method' - mathematics is NOT a necessary element of the scientific method. One can reject the use of mathematics in areas where mathematics does not hold. Evolutionary theory, for example, can be done just fine without mathematics. One can do it with mathematics, but that actually creates a bunch of problems from time to time.
There is not a single mathematical formula in the Origin Of Species - I guess we have to throw out evolutionary theory now.
Most historians do just fine without mathematics. Not much of a science then, eh?
You really have no clue what you are talking about. You don't believe in science, you are a victim of scientism.
The purchasing power of a monetary unit cannot be in two places at the same time. The purchasing power of a monetary unit CANNOT be operative in more than one transaction at the same time.

So fractional reserve banking does not and cannot exist? The velocity of money must be >1?

Am I wrong? Help em out, here.

James says..."Evolutionary theory, for example, can be done just fine without mathematics."

That's a good example. But you are missing a very important point. You can't statisticall test theory of evolution. Evolutionary theory has no predictive power. We have no idea what biological evolution will lead us to in 10000000 years. In other words evolutionary theory will has not only done well without math, but it has done so precisely because it doesn't use no math.

I’ve been at someone else’s house in a small town without internet connection since Friday.
I generally don’t back away from substanceless insults, especially patent nonsense such as yours.

1. You’ve totally ignored the FACT that money dilution MUST result in the theft of someone’s purchasing power. It might be possible to measure and guesstimate how much theft has occurred and who won and how lost, but determining whether or not it is theft is not measurable with statistics. Keynesians are maniacal in denying and repressing this essential aspect of their program. Since they have no argument, they will always subsist upon insults and ad hominem attacks (Austrian newbies should note this). How could an intelligent person actually believe that money dilution induces the creation of real wealth? I’d be inclined to call that a religion except that religions generally have much more sophistication and coherence than that.

2. You’ve totally ignored the FACT that money dilution must distort all economic calculation and such distortion is even more insidious in calculating the prices of factors in higher levels of the capital structure.

3. Since “doing something” economically means government action which is the unleashing of SWAT teams, I would think that you have the burden of proof of proving that your silly theories both make sense and will not cause harm. You cannot do that so you don’t, but you still demand the unleashing of the SWAT teams nevertheless.

4. Keynes’ dishonest and destructive arguments were around long before he brilliantly tied them together in one large package of propagandist BS. Those arguments were refuted by Mises long before the publication of “The General Theory”. If Keynes was so sure of himself, why did he completely ignore Mises and talk right past him? I suppose for the same reason you ignore the essential Austrian arguments (see below).

5. Where is your detailed critique of Roger Garrison’s charts, smart guy?

6. Learn some history here.

7. Listen to Hayek here.

8. You have proved the point that I have been making for 37 years and two months: Austrian school critics are congenitally unable to EVER make a fair and complete presentation of the Austrian argument. There are two main reasons for this: a) They worry that if they ever bothered to wrap their tiny brains around the complete argument, they might finally understand the truth and would be shunned by their fellow anti-intellectuals; and b) They suffer from extreme levels of cowardice, frightful intellectual conformity and high levels of intellectual laziness.
Bob: SAYING something is a "fact" is not science, it is religion. If you cannot measure it, observe it, determine its dimensions, and do so in a reproducible manner wherein every observer, regardless of preconception, can reproduce your observation, it is not a fact, it is an opinion. You keep insisting that your opinions are facts, when you do none of what qualifies a fact to be a fact in scientific terms. I especially find it hilarious that you accuse *critics* of Austrian economics of being intellectually incurious, when it is the Austrians, not the critics, who are unwilling to put their economics to the test of seeing whether they properly model the available data. Hypocrisy, much?

James: You are correct that it is possible to develop a scientific theory that is expressed in something other than mathematics, though not in the context of economics, where numbers are inherently attached to the majority of our facts in a capitalist economy. But that theory must still be regularly tested against facts and must be based upon actual observations of reality, not upon arbitrary assumptions of "fact". You mention the "Origin of Species". Note that mainstream biologists do not consider "Origin of Species" as being a science text, rather, they view it as observations interspersed with conjecture. The observations of species change in the fossil record shows that species evolve over time. That is a fact. Darwin's theory that species change was caused by natural selection is a theory, a model. Insofar as it corresponds with actual observations of species change in action, it can be considered an accurate model. Where it does not so correspond, it is an inaccurate model. No biologist would be so presumptuous as to state that natural selection is the one and only mechanism via which species evolution occurs, evolution itself is an observed fact, natural selection/sexual selection/etc. are models created to explain the observed fact.

Where the Austrians mess up is that they confuse observation with model, and claim that their model is "the" truth, rather than being one model amongst many that explains some, but not all, economic facts, and that if economic facts disagree with their model it is the facts, not the model, that are incorrect. That simply isn't helpful for any useful purpose because a model which does not correspond to facts in this universe may be applicable to some other universe where unicorns are real and cotton candy grows on trees, but is not going to be of much use in this one.
Bad Tux: regarding your claim that one cannot do economics without mathematics: well, I beg to differ. One can do economics quite nicely without resorting to mathematics. You confuse economics with accounting. A common mistake among those who have fallen into the trap of scientism. The basis of economics is human behavior, not numbers.
No biologist would be so presumptuous as to state that natural selection is the one and only mechanism via which species evolution occurs, evolution itself is an observed fact, natural selection/sexual selection/etc. are models created to explain the observed fact.

And? Where do we need mathematics for any of this?
Uhm, in a capitalist society, we attach numbers to economic transactions (we call these things like "costs" and "wages"). Something which presumes to explain the operations of economic transactions in a capitalist system yet insists that capturing these numbers that we assign to economic transactions in a capitalist society is not necessary in order to have a complete picture of the reality of a capitalist economy is hard to take seriously. But hey, continue hangin' with the Marxists, they, too, object to the fact that capitalism attaches numbers to economic transactions ;).
Bad Tux says..."Something which presumes to explain the operations of economic transactions in a capitalist system yet insists that capturing these numbers that we assign to economic transactions in a capitalist society is not necessary in order to have a complete picture of the reality of a capitalist economy is hard to take seriously."

Wonderful job of slaying a strawman. * Applause *
Anon, your complaint is with Rothfeld, who held that mathematics is not necessary in the context of economics and derided collection of numerical economic data as "accounting." If you have a complaint that his man is made of straw, take it up with him :-).
a) nobody has demanded a complete picture of anything. Nothing provides us a complete picture of anything.
b) summing up numerical values of all transactions in an economy provides us nothing more than the numerical value of all transactions in an economy. Cute, interesting, but ultimately unenlightening. I don't see any Austrian economist having an objection to this exercise in grand accounting. Nor would any Austrian economist consider this to be particularly useful.
Accounting is very useful to individuals who need to balance income with expenditure and come up with a profit. Why an economist would care for that is beyond me. Do you want to measure the profit of, say, the USA?

c) you still have not addressed the conundrum that while you believe that science requires math, how can you claim that evolutionary biology is a science, as it requires no mathematics?

d) you still have not addressed how a self-declared Menckenite would think nothing of Hazlitt...

e) You are quickly losing your entertainment value. Your objections to Austrian economics so far merely expose your ignorance of Austrian economics. I wish you actually knew something about the issue, it would make debating with you so much more fruitful.
You also seem to have a rather insufficient understanding of Marxist economic theory, by the way. Sad, really. Why don't you stick to topics you understand? Like, I don't know, music.
BadTux hasn't demonstrated the slightest familiarity with any of the most basic Austrian School concepts. That is the case 99.999% of the time when one deals with Austrian School "critics". It's a waste of valuable time to attempting to debate someone so ignorant and so firmly committed to such ignorance.
A schematic view of the BadTux theory of economics.

It's so sophisticated and so obviously over our heads.
Post a Comment

Subscribe to Post Comments [Atom]

<< Home

This page is powered by Blogger. Isn't yours?

Subscribe to Posts [Atom]