Special Topic - On Keynesian Economics

A brief overview of how I see Keynesian Economics... As always, feel free to comment and ask questions.

Category:

Education

Tags:

• Keynes
• Keynesian
• Austrian
• economics
• policy
• monetary
• money
• liquidity
• trap

[kuzzlenuzzle]

@ProfEngelhardt What we know is that relatively prosperous economies *are* more free, after having engaged in prolonged periods of protectionism. Free trade is the end, but not the means. Youtube is rubbish for conversations like this, so I'll point you at a couple of books I read: 1. Globalisation and its discontents by J.Stiglitz, and 2. 'Bad Samaritans' by Ha-Joon Chang. Both contradict everything I've been taught in economics class (the stuff you're saying), and they're both interesting. :)

[ProfEngelhardt]

@ProfEngelhardt But, for your theory, the correlation goes the wrong way. If protection => development, then we wouldn't expect the least free economies to be the least developed - but they are.

Re: the perfection of markets - I make no claims that markets are "perfect". (Though I'd like a definition of perfect to be sure...) But, that standard isn't an appropriate one. The question is whether it's actually possible to improve on real market outcomes. Information problems make that hard.

[ProfEngelhardt]

@kuzzlenuzzle No problem. Based on the example, I think we have a problem. Every country - developed or not - has done the types of things you describe. (If there's an exception, I don't know it.) So, the empirics here don't prove much apart from the pervasiveness of intervention. What we do know, though, is that relatively free, open economies tend to be more prosperous than relatively protectionist ones. (Though there's a correlation/causation problem here.)

[kuzzlenuzzle]

@ProfEngelhardt Sorry this took so long. Exams. Example: Every currently developed country got rich via some form of protectionism. Those who did not use obvious tariffs, subsidies, or war used more subtle methods such as refusal to acknowledge patents and copyrights from abroad.

Yeah, centralised planning doesn't work, but that's not what I'm talking about. I suppose what I'm really trying to say is that markets are not and can't be perfect.

[ProfEngelhardt]

@slurpeeday The problem: we're talking about two different kinds of capital: financial and physical. Stock markets can shift financial capital around quickly, yes. But, McDonald's shares rising while GM's falls doesn't convert GM's physical machinery into physical deep fryers - and it is physical capital - not financial - that actually produces goods.

[ProfEngelhardt]

@kuzzlenuzzle Give me a precise definition of "big government intervention", and I'll give you an example. And I'm not claiming that individual incentives never add up to group failures (one topic I teach is game theory). At the same time, Hayek's information problem is fundamental to any attempt at centralized planning. Collective action problems, however, can be - and often are - overcome by appropriate (and voluntary) institutional arrangements.

[kuzzlenuzzle]

@ProfEngelhardt: In theory individuals are in better position to solve economic problems, but as a professor of economics (I assume) you should be well-versed enough to know that individual incentives can add up to group failures and often do.

Everyone always points to the great depression. I say this: Yes, governments fail in their economic policy quite often (usually for political reasons); tell me though, how many countries have grown *without* big government intervention?

[slurpeeday]

@slurpeeday Some capital especially in the stock market is very liquid.

I think his explanation of animal spirits has much more depth than you give it credit for. Day-to-day on the stock market, prices vary mostly on the demand so predicting the movements of the mass of investors can be more profitable than long term investments. Many players have enough capital to shift whole markets, remember Soros and the Pound. The market is plenty able to shift markets without low interest rates.

[slurpeeday]

@ProfEngelhardt In ch. 12 of the general theory, he gives a more lengthy discussion about how the stock market changed the nature of investing. In short, he saw stocks as giving investors liquidity that the actual business didn't have. Let's take your example of GM shutting down a plant. Let's say this scares share holders who think this indicative of greater problems. Their share holders can sell their shares and buy McDonalds shares. Allowing McDonalds to buy more deep friers.

[ProfEngelhardt]

@slurpeeday To me, Keynesian animal spirits are a nonexplanation - they're the equivalent of saying fluctuations happen "because they do". Now, I think it is plausible that a bubble mentality can make things worse, I don't think it can get things started - but excessively low interest rates can.

The point on me ignoring the private/public investment mentalities is fair (though I don't know that I'd call this "capital theory") - though I think Keynes is in error.