The General Economics Thread

Worse comes to worse, we can ration household supplies. Hell, people might work harder if their houses are too cold to go home to. But Russia has to walk a very fine line when it comes to gas supplies; Europe knows exactly how dangerous Russian gas is, which is why we're investing in renewables and LNG terminals to handle exports from the US fracking boom. If Russia pushes too hard, it will accelerate the momentum of the EU's disengagement from Russian gas.

Rising gas prices seem to be good for the US economy over the middle term- if forces us to become more efficient, and we seem to have responded by developing renewable technology and more efficient appliances, etc. A bit more wouldnt hurt us, I warrant.

It definitely provides an incentive for investment into additional fuel sources, which stimulates demand in the short term and reduces our vulnerability to fuel supply shocks in the long term. This investment helps to offset the economic loss due to the spike in fuel prices.

With all the corruption going on now (just look at the consolidation in the cable internet market in the US, and the kind of "service" it gives us), and the long-running recession, Austrian economics seems to be gaining in popularity. I keep seeing people saying that the Keynesian system is a horrible idea and that it leads to booms and busts, while Austrian and the gold standard is more stable.

I've been told to read mises.org, and while I think they make good points at times, I also feel that some of their ideas are unrealistic.

What are the major differences between Keynesian and Austrian worldviews, and when have they been tried in history? Why would Austrian economics work better, or worse, than the current system?

Oh, boy. You're opening up a great whopping can of worms with that question. I'm probably going to get in trouble again for incorrectly citing the precise beliefs of each "school" of economic thought, and I don't have time for the full Econ 101 discussion at the moment, but I'll try to highlight the basics.

Fundamentally, Austrian thought derives from what is called a "supply-side" model of economics, also known as "classical" for its dominant position in economic doctrine up until the early 20th century. Various other branches of classical thought include "neoclassical", which is basically a revival of the ideas that occurred after the Keynesian era of the mid-20th century, and the "Chicago school", an outgrowth of neoclassical thought that promotes free markets and monetarism. Neoclassical thought is broadly associated with economic conservatism and free-market Libertarianism.

Neoclassical economics is based on the following core concepts:

• Demand is a function of supply, such that there can never be a shortfall in consumption that does not have a basis in our capacity to produce. This rule is often referred to as "Say's Law", named after Jean-Baptiste Say.
• Regulation is, in general, a damper on the efficient operation of markets, which, through the mechanism of competition, will always set prices at a level consistent with full employment.
• The boom/bust cycle is a natural function of the operation of markets and should not be interfered with.
• More technically, neoclassical disclaims macroeconomic (or "aggregate") models, insisting that all economic behavior is founded in the individual actions of "rational actors" which, when added up, form an economy. Any models not based on these "microfoundations" tend to be rejected.

Keynesian economics doesn't have as many branches, but is often referred to in U.S. terms like "saltwater", which reflects certain schools that typically emphasize its principles, and you may hear "neo-Keynesianism" used to talk about Keynesians who adopted micro models in an attempt to reconcile their beliefs with neoclassicists. Keynesian thought is broadly associated with social democrats and progressive economic movements.

Modern Keynesian economics is based on the following core concepts:

• Supply and demand are independent variables with independent constraints, and failures of either should be addressed with appropriate policy.
• Proper regulation is key to curbing the excesses of markets, which will otherwise oscillate out of control.
• The boom/bust cycle can and should be constrained by proper government policy, guaranteeing steady growth rather than wild fluctuations.
• Technical: While individual actors may or may not be rational, their aggregate behavior can be modeled in ways that are independent from the methods used to evaluate microeconomic behavior. In short, the whole is more than the sum of its parts.

I've been yelled at before for misrepresenting the views of Austrians, but I generally think of them as a more extreme, reactionary brand of classicism which reveres the pure form of Say's Law and absolutely rejects the possibility of demand as an independent variable. According to Wikipedia, the core principle of Austrian economics is that "the subjective choices of individuals underlie all economic phenomena." A core tenet of Mises-style Austrian thought is that markets must be completely unfettered.

Another belief of the Austrian school is that inflation is directly linked to the money supply; that is, that increasing the amount of money is the definition of inflation, rather than aggregate prices as in the traditional usage. Krugman has pointed out that the current period is a definitive disproof of this idea, as the money supply in the United States has tripled since 2008 while inflation has only gone up a tiny bit.

Austrian adherents, in response to this, claim that true inflation is being hidden, possibly by a conspiracy, and continue to offer their own interpretations of the data that support their idea.

edited 3rd Mar '14 2:42:26 PM by Fighteer

Regarding the issue of Comcast, my understanding is that's more an issue of intervention vs non-intervention regarding the economy, which has some relationship to Keynesian economics, but tends not to be what Fighteer's discussing.

Basically, the hardcore anti-interventionists (who likely have overlaps with Austrians) think that the reason Comcast is overpowered is because of a regulatory structure that gives them a natural advantage. The alternative is to simply realize that the economics of competition only works if there's low barriers to entry so that when there is a profitable enterprise, new firms can enter into that enterprise; obviously, when the barrier to entry is "you must have a massive infrastructure network of cables," the argument for non-intervention is faulty from the start.

Honest question, Fighteer: If you don't know the actual positions of Austrian economics, and don't care to know the actual positions of Austrian economics, then why do you feel qualified to explain the positions of Austrian economics?

And now, the actual explanation of what happened: Austrian economics and Keynesian economics both started as early 20th century attempts to answer the same problem: the existence of the boom/bust cycle.

The founding Austrian economists, Mises and his student Hayes, concluded that the boom/bust cycle was the result of unchecked government spending (due to causing low interest rates and thus creating a credit bubble), and that reigning that in would solve the problem. (That is one potential cause of a boom/bust cycle, but far from the only one.)

In trying to explain why people uniformly go along and make malinvestments in such situation, they attributed the majority of individual economic decisions to time preference. In order to suss out economic predictions, you'd have to gather information about the time preferences of the individuals involved, something that isn't easily tracked by conventional statistics (and thus requires throwing a lot of them out). This is the main flaw of Austrian economics. However, their studies in this area helped create most of modern microeconomics.

Keynesian economics concluded that malinvestment itself was the problem, instead of a symptom. It realizes (correctly) that human beings as individual actors aren't very good at making long-term economic decisions. To correct for this, a centralized financial institution has to manipulate the spending of money and/or interest rates in order to limit or outright prevent malinvestment.

To help predict this, Keynesian economics relies more on collecting aggregate statistics in order to predict overall economic trends, and know when to step in. Most modern macroeconomics comes from studies in this vein. Unfortunately, it tends to run into problems when dealing with larger corporations and greater amounts of monopoly power, where decision-making power is concentrated in the hands of a few individuals, which limit the ability of its models to predict things. This makes sense, since typically the decision makers are both concerned primarily with their own benefit, and have a huge amount of influence over the economy as a whole. Obviously, they want to prevent such scenarios (hence the hullabaloo over the cable merger bit).

Originally, the two schools did have a lot they agreed on. Both Keynes and Mises were philosophically individualistic, and both sought to find ways to preserve that while allowing people to live long and prosper. However, in the 1970s and 80s, anti-government and pro-business interests (with a few anti-Soviet elements thrown in) hijacked the name of Austrian economics. Using the fact that the Austrian school discouraged unrestrained government spending as a smokescreen, they managed to paint most forms of government spending as unrestrained. This combined movement is referred to commonly as neoclassical economics: a blend of the dominant school of thinking before Austrian and Keynesian economics, with just enough Austrian trappings to confuse people.

Real Austrian economics is almost never practiced these days. The current debate is neoclassical economics versus Keynesian economics.

I looked it up on Wikipedia while writing my post.

And looking at their page on Austrian economics tells me it's leaning more on the modern usage of Austrian economics (aka the hijacked version). One of Wikipedia's larger weaknesses as an information source is definition drift.

Thankfully, they are capable of acknowledging the original definition of inflation, which was simply growth of the money supply. Claiming the Austrian school is trying to subvert the real meaning of that term is completely wrong. It's especially funny since Mises, an Austrian economist, was the one who coined the term. (Of course, his model of how money supply and price increases relate had other problems, due to being supply-sided, which is part of the reason for the definition change.)

Words have meaning by virtue of what they convey. It'd be like me saying that I should be allowed to use the term fag because it refers to a cigarette and people getting offended are the ones distorting the meaning.

In short, that's a ridiculous semantics dodge. I mean, it may be technically true, but all too often people try to make an argument about the dangers of inflation and then, when we point out that inflation (in the new sense) isn't occurring as they said, they say they were talking about inflation in the old sense, despite that that makes the earlier argument make zero sense.

@ Tomu: Government interference *is* certainly the reason Comcast holds so much sway, really. The ability of municipalities to sell themselves to utilities allows cable and phone companies to create monopolies in any given area, provided the cable and phone companies take on all of the costs of running their utilities (so Comcast has to run cable lines, Verizon has to run phone lines, etc). Thus, then, they only have to beat their competitors "once": get the contract for Union Township, and none of the Union residents can get any cable other than Comcast, by law. Same with phone.

Now this ignores that your phone can become your cable, your cable can become your phone, you could say screw it and get something like Clear Wire if you live in an area with excellent wireless coverage, and rural customers can even get decent-speed satellite internet now, so the picture's much more murky than a simple matter of Comcast building monopolies unchecked, since they fight the alternative service forms now in place of fighting rival cable companies, and that competition is more purely market based (since a customer's only limit on switching is the general hassle of switching service and contracts that the companies can impose)

The idea is that if the government were unable to assign such contracts, to get back to the point, then these companies would have to compete with each other, block by block and house by house, which is an idea that has some merit.

I never said I agreed with them on it. I myself just add a qualifier when I'm seriously talking about it, like "wage inflation" or "price inflation", just for clarity's sake.

If the Austrian advocates argued from the standpoint of keeping the terminology consistent for the sake of making older studies remain comprehensible to newer researchers, I would acknowledge the merit of doing so. However, no one makes that argument. Instead, you get both sides insisting the other is distorting the meaning of the term.

To a point. One of the problems with the Canadian telecom companies is that the infrastructure was almost entirely built by Bell, because they were first. They sold a bunch of it to Rogers, and Cogeco set it up in Quebec because Quebec always has to be special. Because the infrastructure was there from the start, since Bell was one of the telecom pioneers, competition works really strangely.

If you're arguing that Comcast has the advantages of acting like a utility firm, without the regulations imposed on one, yes, that's accurate. But a totally free market "the town doesn't have any input into who puts cable where" approach isn't going to solve that.

And a lot of the monopoly power is just based on the fact that a lot of places like apartment complexes have contracts, so there are PRIVATE barriers to competition.

If you think Comcast is facing fierce competition from alternative technologies, you're just empirically wrong. I can't imagine any justification for Comcast and Time Warner Cable routinely ranking on both the most profitable companies AND the companies with the highest customer dissatisfaction, if you think that there's any reasonable amount of competition.

First Mover Advantage.

edited 3rd Mar '14 7:03:27 PM by TheyCallMeTomu

Well, how about saying that a firm like Comcast has responsibility for the infrastructure, but it cannot stop other firms using the network?

The problem with large service providers like Comcast and Time Warner is that they enjoy the benefits of both monopoly and monopsony power. Monopoly means that they typically don't have to compete with other cable providers in their service areas; they are so dominant that they can effectively set prices at whatever they think people will put up with paying. The only serious competition is from satellite, and the offerings there are almost as limited as the cable providers themselves. (Yes, some areas have direct fiber connections that offer additional competition, but those are still fairly small.)

A merger of Comcast and Time Warner will result in even less incentive to innovate, to compete for customers, or to deliver a quality product.

The other problem is monopsony — that is, the ability to use their dominant market power to demand favorable pricing from suppliers. Comcast/Time Warner has much greater power to negotiate a low price with content creators like Fox or NBC, to the point of being able to lock out any potential competitor from those markets. Wal-Mart is an example of a retailer with monopsony power.

Both monopoly and monopsony are anti-competitive in nature. A company that is able to exercise both is an ideal target for antitrust action.

On inflation, claiming that the definition Mises used is the "true" one is missing the point. Anyone claiming that definition today can and should be ignored, because it has come to mean something entirely different. The Misean definition is fairly worthless anyway, as we've already seen ample proof that the money supply lacks a direct relationship to prices.

Austrians and Georgists and such exist today, and they are fairly vocal considering that they are outside the mainstream and have largely corrupted their intellectual foundations.

edited 4th Mar '14 6:48:45 AM by Fighteer

But couldn't monopsony also happen in an incredibly competitive market sector as well, one dominated by a limited number — say four or five — of firms?

edited 4th Mar '14 6:56:32 AM by Greenmantle

Could we please stop talking in hypotheticals? Or at least ground them a bit better?

I'm not an expert on monopsony, but in a market like you describe, you'd see signs of it, such as smaller and start-up competitors being squeezed out by their inability to offer goods and services at similar prices. You could also look at profitability among suppliers to the big companies to see if volume is making up for reduced margins.

edited 4th Mar '14 6:59:12 AM by Fighteer

What do you mean about there being ample proof that the amount of money supply isn't directly related to prices?

The idea, I'd always heard, is that if there's more money, it's easier to get ahold of and therefore each bit isn't worth as much?

@Bonsai: Since the 2008 financial crisis and resultant recession, the U.S. Federal Reserve has, at a rough estimate, tripled the supply of dollars in circulation. Yet we have seen baseline inflation in prices and wages that is as close to zero as matters.

The reason for this is that those dollars are not being spent to generate commerce; they are being hoarded in the cash and stock reserves of large companies and financial institutions.

Ask any person who is not a major executive in those industries and you'll find that they'd contest that money is "easy to come by". In fact, it's still as hard to obtain as ever for the least prosperous 99% of the population.

edited 4th Mar '14 7:04:55 AM by Fighteer

I'm talking about the major British supermarkets, which have been doing that to the farmers which are their suppliers, although they have been recently under attack from "discount" retailers like Aldi and Poundland.

edited 4th Mar '14 7:06:47 AM by Greenmantle

So the money's not being spread around (and jobs not being created), so therefore they're just richer. Cute.

@greenmantle: A lot of the same things that happen in a monopoly can certainly happen in the case you describe (sounds like an oligopoly), especially if the companies are colluding.

@Greenmantle: The food industry has been criticized in many countries for exercising a form of monopsony power, although I believe the correct term in this case would be "oligopsony", a situation in which a small number of powerful buyers control a market populated by numerous smaller suppliers.

Monopsony is not inherently bad; many nationalized industries use the principle to reduce costs. A primary example is nationalized healthcare. In fact, any state-run or state-sponsored monopoly in a particular good or service is also a de facto monopsony. The health of the market is then observed in the competition between suppliers to that monopoly.

@Bonsai: Correct. If the government had distributed that cash to consumers, even via a method as simple as mailing every U.S. citizen a large check, it would have massively boosted the economy, possibly enough to break out of the recession, although the effects would have been temporary and quite likely inflationary in the short term.

edited 4th Mar '14 7:25:05 AM by Fighteer

Now I got a question. What do you think of those who say that the US government is broke, or at least in massive debt? We've seen austerity used in Europe to try to tame their debts, and the people suffered horribly. What do you think will happen here?