Do economic crises reflect crises in economics?
Dan here…Worth reading the whole 12 pages. (Hat tip New Deal democrat)
Do economic crises reflect crises in economics?
Keynote address, ‘Rethinking Economics’ conference, Stiftverband für die Deutsche Wissenschaft/Handelsblatt, Frankfurt am Main, 23 January 2012.
Diane Coyle, Enlightenment Economics and Institute of Political and Economic Governance, University of Manchester
The ‘series of unfortunate events’ in the global economy since 2008 make it natural to ask where the economists have been.1 If you have a leaky boiler, you expect the plumber to mend it; a dentist should cure your toothache; so why haven’t the economists been able to fix the economy?
When economists meet privately these days, we will most often whisper to each other, isn’t it all so interesting? These are fascinating times. Every day brings something new to think about. It isn’t only economists who want to understand what’s going on. There has been an increase in the number of students choosing economics at university, and there seems to be a strong appetite for popular books and lectures.
…
So I would like to present a paradox. Economics is both in crisis and experiencing an extraordinarily fruitful renaissance. There is already a new approach emerging from the pre-crisis framework, like a butterfly hatching out of its chrysalis. It’s much less tied to a particular theoretical approach, more pragmatic, more empirical. It is rooted in a lot of existing work that has been more or less hidden from public view but is what most economists actually do.
Dan:
We Austrians have been right since the beginning of these crises. Artificial credit creation and interest rate manipulation creates distortions in the market and malinvestment. The cure: let this malinvestment unwind and liquidate, let artificially high returns to equity/capital drop, let labor wages drop and reset at a sustainable rate and then let the economy grow from a foundation predicated on real prices. In other words, take your pain before you can move forward unfettered by fictional economic activity. :)
No crisis in our school of thought! All has proceeded as we have foreseen and government efforts to reinflate new asset bubbles and keep the fiction going continue to fall short or, at best, simply create a new malinvestment (and uninteneded consequences, e.g., more inequailty, the rich get richer, etc) that will have to be liquidated later…thus kicking the can down the road. 🙂
K
Artificial credit creation and interest rate manipulation were always and everywhere present, but crises are not. Austrians are always predicting crisis. But note – they are implying that capitalism is extremely fragile (that it cannot cope with Central Banks managing a part of the economy even though they tell you what they are doing). Why should we even WANT to trust our lives to such a fragile system?
(Besides Austrian economics is incoherent – but that is a much longer story.)
You state, ‘Artificial credit creation and interest rate manipulation were always and everywhere present, but crises are not. Austrians are always predicting crisis.’
Disagree with you but, even so, even more reason why ABCT holds.
You go on, ‘But note – they are implying that capitalism is extremely fragile (that it cannot cope with Central Banks managing a part of the economy even though they tell you what they are doing). Why should we even WANT to trust our lives to such a fragile system?’
Who is ‘they’?
Quite the opposite, the Central Bank is no match for market forces which keep overpowering its efforts to goose the economy, thus resulting in market-force driven corrections which result in uynemployment, falling demand, etc as the market equilibrates back at a lower sustainable level…all as the Austrians have foreseen.
Legislative and Central Bank law is no match for economic fundamental laws…you cant create fictitious economic activity without paying for it at some time. Exactly what is happening now.
You conclude, ‘(Besides Austrian economics is incoherent – but that is a much longer story.)’
Meaning you cant challenge it so you will just slink away with am unsupported attack.
Your surrender is noted. Thanks.
K
See even you are proving that Austrian economics is incoherent. Now you are arguing that it is market forces that are resulting in unemployment, falling demand etc – and arguing that is a good thing ????
” keep overpowering its efforts to goose the” well actually the central banks are quite often successfully trying to dampen the economy. Why Austrians assume it always goes one way, seems to me to me to be a result of their strange aversion to actually looking at reality.
Reason:
You state, ‘Now you are arguing that it is market forces that are resulting in unemployment, falling demand etc – and arguing that is a good thing ????’
Nice straw man you are constructing.
Nope! I am arguing that government intervention (Fed, legislature, etc) in the markets created perverse incentives and a misallocation of resources (capital, labor, other inputs) into industries (IT, Finance, Housing, etc), that resulted in bubbles and other market distortions. This happened and it is as ABCT foresaw.
We also foresaw that the government is no match for market forces over the long-term and when, ultimately, the market forces a correction such misallocations and malinvestment spurred on by government intervention will result unemployment and recessions and economic-growth-stunting liquidations of bad assets. It is unavoidable in the wake of fake economic activity that distorts prices and incentives.
Hope that clarifies. Government, not free market forces, created the conditions that led to unemployment and a misallocation of resources and malinvestment. And it continues to happen now.
Market forces stopping the run up in financial engineering, housing ABS nonsense, derivative carry trades, sky-high valuations of IT and internet companies that have no revenue (Donuts.com, Twitter, etc), is a good thing. Or perhaps you prefer that bankers make the killing that they make off all that free credit that allows them to reap huge rewards with no/little risk?
K
Reason,
You state, ‘well actually the central banks are quite often successfully trying to dampen the economy.’
Sure they do. Austrians would never claim otherwise. Sometimes they do and then they go back to goosing the market. For a time it looks like it is working. What we point out is that such artificial economic activity creates distortions , misallocation, and malinvestments that cost later. It may look Greenspan was a financial wonder with all the cheap credit that he pumped into the tech boom of the 90’s and the housing boom of the 00’s…but those booms had a cost. You didn’t notice that cost over the last 5-6 years?
Sure, Benanke and Hagan appear to be putting the economy in order. The stock market is doing well. My portfolio (I am a banker) is up nicely. Thank you. But they are adding distortions to the market and the stock market and bond markets should not be this overvalued given the anemic earnings, poor economic growth, weak wage growth, low capital investment, etc. of the last few years, right? Yet they are higher than they have ever been. Why? So much cheap and easy credit chasing too few assets creates a search for yield, assets get bid up beyond what they are worth. This is a misallocation of capital and a malinvestment.
You conclude, ‘Why Austrians assume it always goes one way, seems to me to me to be a result of their strange aversion to actually looking at reality.’
What is your version of reality? What color is your unicorn?
K