Hacker News Reader

Comment by pdeuchler | Hacker News Reader

I think the better question is why are (almost all) economists unaware of basic economic theory?

Not to go off topic, but it's hard to take any "economist" talking head seriously these days. I'm currently re-reading The Road to Serfdom by F.A. Hayek (highly recommend) and it's scary to see that even 60 years ago we understood cycles and events that are still being ignored today.

The sad fact remains that real economic policy is no longer in vogue in Washington or the L.A. TV sets. What is popular these days is hand wavy gestures that seem to please the most amount of people... the science be damned.

Rather scary stuff.

View on HN

I'm not sure why you think that the lessons of The Road to Serfdom are being ignored. Does anybody in the halls of power seriously think that Soviet style central planning is a good idea anymore?

But the real reason that nobody pays too much attention to Hayek is that the way countries recovered from the Great Depression worked entirely counter to Hayek's predictions. Going off the gold standard worked. It worked really well for every country that tried it! The way that the events of the 1970s conclusively disproved paleo-Keynesianism.

So now we have neo-Keyesianism as endorsed by people like Krugman and Monetarism from people like Friedman and they agree about a lot more stuff than Hayek and Keynes did. Now, they use different terms and have different ideas about the transmission mechanism by which monetary and fiscal policy influences aggregate demand, but everybody these days thinks of aggregate demand as the thing that drives fluctuations in the business cycle. That's progress, maybe in another 100 years economics will be a real science.

And please don't take the talking heads that show up on TV seriously. Mainstream reporting of economics is just as bad as it is of every other technical field.

I'm keen on what I loosely refer to John Kay's theory of rent seeking. I like it because it puts the issues with market and state influence into perspective, especially the issues people tend to blame the economic theory they don't favour for. I think a lot of the benefit from coming off the gold standard is that it disrupted an established rent seeking power structure around gold.

Hayek addresses redistribution of wealth as well as central style planning. He even specifically notes that while they may differ at (sometimes important) points, the general cycles have very similar results. So while not many people still believe in central planning, they seem to have grasped the new theory du jour of "spread it around", and in the end that is just as dangerous. Even so, to ignore the lessons in the book simply because of a superficial difference in ideologies probably isn't wise.

I think you're rather over simplifying things. I'm no economist, but I make it my business to be at the least knowledgable about such things, and I feel recovery from the Great Depression was more of a combination of New Deal infrastructure, WWII profiteering and the resultant increase of wealth in US that was then transferred to Europe to aid in the rebuilding. But then again, that's probably one of the most complex economic time periods in modern history so I don't pretend to know everything.

To address the gold standard, there are indicators that removing the gold standard may have benefitted in the short term, but will hurt us in the long term.

You're equating progressive taxes to centrally planned economies and he's over simplifying?

You have very strang opinions. One the one hand you speak well of hayke on the other point you use the exact opposit of what hayek belived to explain the recovery from the great depression.

I dont want to go into the hold Great Depression discussion, I just wanted to point out that hayek would have made the argument that the New Deal made the GD much longer, same with the WW2. The idea that a war can help the economy would made hayek cry.

Watch this modern Rap-Video of Hayek vs. Keynes and listen closly when the talk about the war.

https://www.youtube.com/watch?v=GTQnarzmTOc

> But the real reason that nobody pays too much attention to Hayek is that the way countries recovered from the Great Depression worked entirely counter to Hayek's predictions. Going off the gold standard worked. It worked really well for every country that tried it!

I would reconsider your argument here. (1) Hayek was not a huge gold fan as it is, he changed his views on money changed over the years

(2) The gold standard that exist at the time is something very diffrent then that gold standard, gold advocates actually wanted

(3) The third and I think most importend one is that if you inflate on a gold standard, deflating back to that standard is like driving over somebody and then backing up over that person. The right solution would have been to stop prudction of money and see the new price of gold and then fix the doller to that standard again.

(4) Hayek is actually still very relevant and even mainstream. What we have to understand here it is perfectly possible to reject hayeks macro but not his micro, or the other way around. Hayek is infact very respected for his devlopment of information economics in particular.

> So now we have neo-Keyesianism as endorsed by people like Krugman and Monetarism from people like Friedman and they agree about a lot more stuff than Hayek and Keynes did.

Here you are assuming that austrians did not change since the the 50s.

Modern austrians macro in fact are really close to modern monetarist. There is infact wide agreement between Market Monetarist and Austrian Free Bankers. I would even clame that the are much closer together then neo-keynsians are.

I would also argue that mainstream economics now is much closer to austrian economics then it was 50 years ago. Things like Public Choice Theory, Law&Economics, New Institutional Econoimcs are all much closer to austrian economics then the are to standard neoclassical economimcs.

Austrians have been talking about the role of the entrepreneur for a long time, modern development economics only in the last decade started agree that it is importend, movment like micro finance are all things that spring from this.

I think the better question is why are (almost all) economists unaware of basic economic theory?

Economists are largely unaware of what you describe as "basic economic theory" because you've defined "basic economic theory" in an unconventional way that's incompatible with how most economists describe economic theory.

There are a couple of econ departments that subscribe to "Austrian economics," and they view Hayek as basic economic theory. But they are viewed ideological hacks by the larger community.

You're right, but I was more using Hayek as an example.

A better example would be the proposed increase on capital gains/investment tax. Almost all economists, regardless of ideology, would agree that this will certainly be detrimental. And yet we continue to see "Professors" and "Analysts" explain how sticking it to the rich will solve everyones problems... through science!

Detrimental to what?

...no. Most economists not in the Chicago school would probably say that capital is cheap enough. Instead, we should be giving a skeptical eye to the corporate income tax.

I don't think there is much doubt that increasing the capital gains tax has serious disadvantages/costs. Ideally, we'd like capital gains taxes to be as low as possible.

Similarly, reducing government spending will have serious disadvantages/costs. We'd like not to cut government programs.

When economists advocate either of these, it isn't because they love higher taxes (or less spending on government programs). It is because we will need to close the gap between government revenue and expenditures. Doing so will require actions that we'd prefer we didn't have to take.

As an analogy, consider our collective decision that we'll all have a vote, and decide whether each of us has to cut off a finger or each of us has to cut off a toe. If we don't decide soon, we'll have to cut off two fingers (and two toes) later on.

Some of us would go on TV and declare "We want to cut off our toes." That's not because we'd prefer to have 4 toes. We're just voicing our preference given a choice we'd prefer we didn't have to make.

The same can be said of economists advocating for higher capital gains taxes.* They'd prefer low capital gains taxes if we didn't face hard choices. But we'll have to make choices we don't like in order to reduce the deficit.

* You could probably find pundits out there who hate wealthy people as a matter of ideology. I'm not including them when I talk about "economists," and those pundits are generally laughed at by the research economics community.

I think you underestimate the influence of Hayek, Friedman et al, whose moralistic market fetish has become the dominant ideology of Washington, London et al.

For a more evidence-based approach, I'll go with Keynes' General Theory, which works, but has few adherents among the major parties in the West.

Provide evidence that Hayek and Friedman are the dominant ideology in Washington.

If we wanted to try and accurately describe the economic policy by the government in Washington, you'd have to describe the monetary and fiscal policies. Both of these since 2007 have been Keynesian far more than the other two schools (Monetarist and Austrian).

This hasn't always been the case (Friedman was much more in vogue from the late 70s to approximately late 90s as measured by policies put in place).

Keynes General Theory could theoretically work as he describes in his book, but is unrealistic in practice because of the political dynamics in government.

The idea that markets usually produce a optimal outcome is certainly austrian ( examples for this is the washington consensus). On the other hand, there are serveral proposals from 2008 - 09 on the size of the stimulus, eg [1], which argue that a stimulus should be something like twice the size of the actual stimulus. ( And additionally bailing out car companies is not exactly Keynesian, since aggregate demand is not about one specific industry.)

[1]http://krugman.blogs.nytimes.com/2009/10/05/the-story-of-the...

> The idea that markets usually produce a optimal outcome is certainly austrian

Im sorry this is not right. It is in fact dead wrong!

The austrian have from the VERY, VERY start objected to models that discribed market as perfect, or people as perfectly rational. Go into the internet and look up what austrians actually say about markets, google 'Market Process Theory'. It is actually the case that most of austrian theory trys to figure out how a groupe of ignorent humans like we are with our imperfection can creat such a complex structure of production or what Hayek called 'The extended order'

Why do people that have a bar half knowlage of economics, clame such wild things about a 120 year old tradition of economic thought.

The thing that most austrians clame, is that the market produces better results then a goverment influencing the market can that is because goverment does not have the knowlage (nor the insentive but that more public choice theory) to imporve the market outcome.

I am not claiming that austrians think markets are perfect. I did say, that austrians believe that markets produce optimal outcomes, compared to other possible organization structures. ( So quite exactly what you say in your last paragraph.)

Ok, Im sorry then.

The problem is that with optimal we usally mean theoreticly optimal in such debates. In terms of practical solution we speak of comperative advantage (in comperative institutional analysis).

It is impossible to prove that there is any consistent dominant ideology. But to show that there are those advocating "Austrian" principals - look no further than the Republican think-tank AEI:

http://www.aei-ideas.org/2012/08/explaining-paul-ryans-austr...

The clame the the democrats or the republicans are anyway free market oriented is crazy. Both partys like to spend money, and the like to spend money on there friends.

Sure Bush talked about Free Markets but not even closly did anything about it, what he did was start a war, make a lot of debt, regulation increased in that time too.

Goverment only ever gets bigger, with very few expetion. From a free market perspective the republicans are not any diffrent then the democrats.

I btw am not from america, I have no idiolocial views in american politics, I just obeserve that both partys are not free market at all.

It was actually a democrat who was the only one that at least ran on a balanced buget (clinton).

Maybe you cannot describe those policies as Monetarist or Austrian. But given that everybody's policies there are driven by some desire to cut the budget deficit at a time of a very weak economy - with the only disagreement being over how the cuts should look - it just seems very bizarre to call that Keynesian.

Talking about something and doint something are very diffrent things.

First of all neither stimules nor saving companys is anything to do with free markets.

Both party want to spend more money, I would not belive for a second that republicans are more free market then democrats. The like to talk about it more but they infact are just ass bad. The real diffrence is what friends they have.

Both partys like to spend money on there friends.

Lets talk about free markets again when the actually DID cut the buged and I think nobody denys that the stimuls is keynesian.

Empiricism and Kahneman et al. are going to tear down the house that Friedman built.

Could you talk about what you think the contradictions between Friedman's and Kahneman's work are? As someone who respects both of them I don't really see many except for the Permanent Income Hypothesis which, though, Friedman was very proud of it nobody else seems to think of when they talk about him. His work on the role of money in the economy which he got his Nobel for was all very empirical, and when events showed he was wrong about the stability of velocity he was quick to change his views.

I'm (lazily) using Friedman as a proxy for the whole Chicago School. I think once behavioral economics forces you to abandon the rational actor model, you really have to go back and reevaluate all the places where you (explicitly and sometimes implicitly) assume that economic actors are rationally wealth-maximizing. With Friedman specifically, this is particularly relevant in all the situations where he wanders away from empiricism (e.g. in his role as economic advisor to Reagan).

I very much agree that the ration acter model is BS. Even befor behavioral economics it was BS, I think it should have been common sence.

What has to be considerd is that goverment actors are just as dumb ass market acters, with the importend diffrance that there own ass is not on the line.

I think the biggest error in 20 century economics has been to think that the general equillibrium model has any relevane to the real world.

> I think the biggest error in 20 century economics has been to think that the general equillibrium model has any relevane to the real world.

We can agree on this part, and I'll further add that it's also a tremendous error to ignore that the equillibrium is dynamic and to ignore or downplay what happens in the intermediate periods during which the system is in disequillibrium.

The study of disequillibrium is the only thing importend in the real world.

To explain how the market reaches equillibrium (mostly only in theory) or how it at least sometimes moves towards equillibrium (mostly in the real world) is what economic analysis must provide. Just like Darwin explained what make evolution work.

The Theory behind this is called Market Process Theory, it is mostly created by people from the Austrian School of Economics but also from a lot of swedish economist.

Try Steve Keen for an economist who predicted the credit crunch. http://www.debtdeflation.com/blogs/

His book basically declares war on most other economists too: http://www.amazon.co.uk/Debunking-Economics-Revised-Expanded...

I'm very impressed but I'm always looking for counter arguments to my current understanding so if you know of any good critiques of his stuff I would be very interested.

Steve Keen is a heterodox economist(Circuit-ist I think) with close ties to MMT Modern Monetary Theory (born and raised on blogs). MMT intellectuals predicted the great recession, the European Crisis, and the Recession of 2001. I've become a believer. They are basically hyper-keynesians. The basic Tennats are 1) As a point of logic Government must spend dollars into existence(or loan out) before they can tax them back. 2) Therefore Fed Government funding is independent of taxation. 2) Taxation creates demand for currency and unemployment in the currency of record by definition. 3) Government is not funded by borrowing either. 4) Because of 1) 2) 3) Policy should be to proactively spend counter-cyclicly until economy reaches full capacity. 5) Banks create money ex-nihilio 6) Banks are effectively agents of government because of deposit insurance and membership in the Federal Reserve System.

Its pretty fascination stuff b/c MMT says that the mainstream has everything backwards.

http://moslereconomics.com http://neweconomicperspectives.org http://www.amazon.com/Currency-Economics-Modern-Monetary-ebo...

I think Keen would link himself to Keynes (the person and what he actually wrote) but disassociate himself from Keynesianism (the twisted version that is commonly discussed). He is a greater follower of Minsky though and trying to put a mathematical basis under his theories.

I don't recognise items (1), (2) or (3) or even (4) as such in his writing although I'm not sure they contradict it. (5) is very important and I think that he might say that (6) is the wrong way round and that the government is the agent of the banks at the moment!

His key issue is that debt (public and private) matters and that the rate of change in total debt is the main source of the booms and busts that we see.

His prescription for the current crisis is printing money but then to give it to the people not the banks or government (both of which we are doing now). People with debts would then be required to pay down the debts with the printed money and people without debts could keep and spend the printed money.

He also has some proposals for limitations on limitations on borrowing for property purchases (PILL) and one intended in preventing share speculation getting out of control too although I have my doubts about that one really as it seems impractical, abusable and has some potential negative effects too (Jubilee Shares). http://www.debtdeflation.com/blogs/manifesto/

Absolutely Agreed. One of the MMT founders ( Randal Wray) was a student of Minsky who himself was very anti-finance. My understanding is Steve Keen has changed some of his views based upon MMT literature. In these Video's you've got Steve Keen and MMT professors in the same room presenting to each other.

On point 6) the government has statutory control of the banks. Its just that the banks have captured the government. War-hawk generals getting control of our foreign policy would be the analog.

edit: video of steve keen with MMT profs http://www.youtube.com/results?search_query=steve+keen+scott...

Reply on news.ycombinator.com