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Robert Higgs, a
Senior Fellow at the Independent Institute and editor of The Independent
Review, describes (Pdf) six major
errors of the current economic orthodoxy, which he says began with "the
first edition of Paul Samuelson’s Economics (1948), the
best-selling economics textbook of all time and the one from which a
plurality of several generations of college students acquired whatever they
knew about economic analysis. Long ago, this view seeped into educated
discourse, writing in the news media, and politics, and established itself as
an orthodoxy."
Higgs calls this phenomenon "vulgar Keynesianism," which he further
refines this way:
I use "vulgar
Keynesianism" to denote a loosely articulated belief system about
economic booms and busts to which journalists, politicians, and a wide
segment of the general public have subscribed since the 1950s. It is not
necessarily the same thing as Keynes's own ideas or the models developed and
refined by so-called new Keynesian economists, some of whom are much more
sophisticated about the issues (not to say that I agree with them, but only
to recognize that some of them are well informed, well educated, and serious
thinkers conscious of what they are doing).
The six major
errors consist of the following:
1. Aggregates, that is, "[thinking] of the economy in terms of a handful
of economy-wide aggregates: total income or output, total consumption
spending, total investment spending, and total net exports." Whatever
complex relationships exist within the aggregates are ignored because they're
irrelevant. To the vulgar, the economy produces an "output," not an
endless variety of products.
Aggregate output is driven by aggregate demand, to which aggregate supply
more or less responds automatically.
In truth, "producers are connected in an intricate pattern of relations
. . . [C]ritical consequences turn on what in particular gets produced, when,
where, and how." Economic action refers to the choices of millions of
participants in selecting the actions to take and the alternatives to forgo.
The orthodox model "actually excludes the very possibility of genuine
economic action, substituting for it a simple, mechanical
conception—the intellectual equivalent of a baby toy."
2. Relative Prices - The orthodox view ignores relative prices and their
changes. There is only one price, "the price level," which is a
weighted average of all the prices for which the economy's goods are sold.
Seeing aggregates only, the orthodox view does not see why a sudden increase
in demand in one area could be problematic. We can never have too many houses
and apartments, as long as the economy has unemployed resources.
If there are unemployed skilled silver miners in Idaho, building more condos
in Palm Beach is still a good thing. Aggregate output is a simple increasing
function of the aggregate labor employed. Mathematically,
Q = f(L); where
dQ/dL > 0
Aggregate production has only one input, aggregate labor. Do workers work
without the aid of capital? It would seem so, though if questioned vulgar
Keynesians will admit laborers do use capital, but it's a "given"
and fixed in the short run.
And the short run is all that matters.
3. Rate of Interest - A crucial relative price, the rate of interest is the
price of goods available now relative to goods available in the future. The
rate of interest affects the choice between current consumption and saving.
The orthodox view ignores relative prices. Interest rates are simply the
rental rate for borrowed money. The lower the rate of interest, the more
people will borrow and spend. As long as at least one person is unemployed,
this is always good for the economy. Since unemployment always exists, the
interest rate is never low enough for the orthodox view. Some have even
proposed a negative rate of interest.
4. Capital and its structure - Capital to the vulgar is an inheritance from
the past; it is given, it exists already. It is "essentially an
undifferentiated glob of monetary value, any part of which may be substituted
perfectly for any other part of equal monetary value."
"It matters not whether firms invest in new telephones or new
hydroelectric dams: capital is capital is capital."
In contrast to the orthodox, Austrian economics presents "a theory of
malinvestment, which is to say a theory of how an artificially reduced rate
of interest leads business firms to invest in the wrong kinds of capital, in
particular the longest-lived capital goods, such as residential and
industrial buildings, as opposed to inventories, equipment, and software with
a relatively short life."
The boom spurred by low interest rates culminates in a bust. But the vulgar
Keynesians see no need for a correction, that is, for "the bankruptcies
and unemployment that necessarily attend a substantial economic
restructuring." Instead, government should engage in deficit spending to
compensate for lower private investment and consumption spending.
5. Malinvestments and Money Pumping - the vulgar analysts disregard
malinvestments and encourage government spending in excess of its revenues.
The borrowing that's needed to make up the excess of spending over revenue
should be assisted by a central bank policy of "easy credit." Easy
money lowers the cost of financing deficits, but to the vulgar its major
value economically is the consumer spending it induces.
The vulgar ones don't sweat inflation - it can always be countered by price
controls and rationing, which had some efficacy during WW II. Their biggest
fear is deflation.
6. Regime Uncertainty - The vulgar Keynesians are policy hounds. Try
something, and if that doesn't work, try something else. Better yet, try many
things at once. Roosevelt did it, Johnson did it, and Obama is attempting to
be the most trying of all. They fail to understand that extreme policy
activism creates what Higgs calls "regime uncertainty." Regime
uncertainty is "a pervasive uncertainty about the very nature of the
impending economic order, especially about how the government will treat
private-property rights in the future. This kind of uncertainty especially
discourages investors from putting money into long-term projects."
Long-term investing virtually disappeared from 1929 to 1946.
The "bailouts, capital infusions, emergency loans, take-overs, stimulus
packages, and other extraordinary measures crammed into a period of less than
a year," have created a great deal of regime uncertainty. It can only hurt.
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