Saturday, November 13, 2010

Assault of Thoughts - 11/13/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

- The Wall Street Journal describes Robert Shimer's suggestion that sticky wages are a major contributor to the current depression. Shimer, of the University of Chicago, is one of the major figures in the worker flows/job flows literature that I'd like to work in in graduate school. He may very well be right that sticky wages are a factor here. How much, I don't know. It seems pretty hard to deny that this is a balance sheet recession, and I'm not sure what would lead me personally to put any undue weight on wages. But I'm sure it's part of the story. So what's the best way out of that, and what can we expect from more flexible wages in the current environment? For the answer to that question, I'd advise going to the nineteenth chapter of the General Theory.

- Brad DeLong shares an anecdote about Keynes from Skidelsky: "when Keynes lectured at Cambridge about monetary theory, he would begin by reading an article from the FT (or occasionally the Economist), and then ask: "What is the theory that lies behind this argument? Is it coherent? Could it be correct? How can we find out?" And that is how he would teach monetary theory at Cambridge."

- Brad DeLong also comments on how a macroeconomics course should be taught now. No explicit mention of capital-based macro, although I think he's thinking of that sort of thing with his second bullet point ("The theory that high unemployment today is the unavoidable consequence of past overinvestment"). This probably isn't entirely satisfying to Austrians (no detailed mention of roundaboutness, etc.), but should it really be entirely unsatisfying either? I've never gotten a straight answer on this "malinvestment vs. overinvestment" point. When I emphasized the malinvestment facet that Hayek emphasizes in a blog post several months ago, I got a sharp reply from Jonathan insisting I knew nothing about Austrian economics. But whenever you call it an overinvestment theory they get bent out of shape too. If you act like it's a sectoral readjustment model, you're wrong - if you act like it's an overinvestment model with some sectoral features, you're wrong - if you act like it's a general overinvestment model, you're wrong. It's a moving target. Rothbard claims that it is "overinvestment in higher stages" only, Skousen here suggests it is undifferentiated overinvestment. Mises here seems to argue that malinvestment in earlier production stages is the point (much like Rothbard). Sechrest presents a combination of malinvestment and overinvestment here. Garrison (pg. 81, Time and Money) also notes that the Austrian school is both a malinvestment and overinvestment theory (and that malinvestments alone would be inadequate), while Anderson calls perspectives like Garrison's a "willful distortion" of Austrian economics (here, of course, Anderson is critiquing Krugman specifically, not Garrison). Jonathan presents a view much like Sechrest's here and here. Jonathan says "So, for those who continue to claim this overinvestment nonsense as an interpretation of what I write, it is only due to your lack of understanding of Austrian business cycle theory," while Garrison writes "over-investment is a critical enabling aspect of the theory. Without the over-investment, the malinvestment would be as short-lived as Hicks's critical remarks suggest". For Jonathan, overinvestment is "nonsense", while for Garrison it is "critical". How are non-Austrians supposed to navigate this? How can Austrians navigate this? Is it perhaps time to consider the prospect that, non-Austrians are not the ones that have understood you wrong, but that it is Austrians who have explained it inconsistently and in an extremely confusing way? I initially just wanted to share the DeLong link and ask what Austrians thought of his second bullet point. Then I figured I had to qualify it or else I'd be confused of distorting things. I generally approach the issue how Garrison does - that's how I think of ABCT. But please, share thoughts -and do it without accusing others of being ignorant.

7 comments:

  1. I've never gotten a straight answer on this "malinvestment vs. overinvestment" point.

    You and I spent quite a deal of time on this point if I recall correctly.

    My understanding on the matter is that the story is a purely malinvestment story. To the extent Garrison (and Rothbard) make claims about over-investment, they can mean two things:

    1) They are talking about over-investment in sloppy terms. Like, if you had a year's supply of pudding and you ate it all in two weeks. You "over-invested" during that period of time; you didn't over-invest in an absolute sense of the term. This type of over-investment is really just malinvestment - because you took resources that were going to be used (you were going to eat the pudding during the year anyway) and destroyed value by investing too early or in wrong stages. It's a relative over-investment, not absolute.

    2) Or they could be talking about the absolute theory of over-investment, where there is investment over and above the amount dictated by time preference (and therefore savings). This explanation drives a wedge between savings and investment, and claims that there is malinvestment as well as over-investment in the general sense of the word. This not only implies that there was a capital mismatch problem, but there was an increase in investment, and this causes capital to be mismatched.

    I'm not sure which they're talking about (I'd have to find the exact passage you're referring) so I can't comment on their interpretation.

    Personally, I subscribe to the first explanation. Insofar as Austrians say there was over-investment in "higher order capital goods," that simply means that far too much of the the existing capital stock was put in a certain place - NOT that the credit expansion necessarily "increased investment" in the macro conception. I think there is no difference between savings and investment (a topic Jonathan and I disagree on), and so I can rightfully claim that while there is this malinvestment, there is also capital consumption. If it were a malinvestment and over-investment story, there could be no capital consumption (because presumably an abundance of capital was made for there to be over-investment).

    Long story short, capital was put in places it shouldn't have been, but no new additional investment was created on net.

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  2. The reason why so much emphasis is put on "malinvestment" is to differentiate the theory from the bevy of alternative "overinvestment" theories of the trade cycle. Austrian business cycle theory shares nothing in common with these, except for the fact that it focuses on investment, or demand for capital-goods.

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  3. Mattheus -
    Your first point doesn't seem to be overinvestment at all - it seems to be something like capital consumption. The second is how I've always understood Austrian overinvestment theory and you can see an excellent example of it on page 69 of Time and Money. I find it absurd that there is so much disagreement among Austrians on this and yet they accuse others of misunderstanding them.

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  4. Your first point doesn't seem to be overinvestment at all - it seems to be something like capital consumption.

    All types of malinvestment are capital consumption.

    The second is how I've always understood Austrian overinvestment theory and you can see an excellent example of it on page 69 of Time and Money.

    Garrison belongs to the group of monetary disequilibrium theorists (aka free bankers) and so he has a bit of a different view on it than I do (given our differences on what constitutes savings).

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  5. I don't think Garrison being a free banker has anything to do with it. He is a Hayekian capital theorist, as well. I bought Garrison's book, but it's still on its way. I will take a look at it when it arrives (maybe read it after I finish Selgin's book... which hopefully I should within the coming days).

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  6. I remember Garrison and Hulsmann being at odds on malinvestment theory when I was at MU. Could be a coincidence, I guess.

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  7. The Mises Institute's book description, by the way, gives some insight,

    " Professor Roger Garrison is a leader in the field of Austrian macroeconomics, and has had a burning passion for his whole career to present Austrian business cycle theory in terms that mainstream economists can understand and identify. This book represents the culmination of his efforts in that regard."

    The mainstream understands overinvestment better than malinvestment.

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