The General Economics Thread

But how will you know unless you try it? Back in the late 19th century, a lot of people had ideas about how to make a flying machine, but until someone built them and tried them out, there was no way to know if any of those designs actually worked.

Austrians have it easy, I suppose: their entire philosophy is based on finding elaborate justifications to do nothing at all — to let the markets have their way. So if something bad happens, and nobody does anything, then congratulations, you're an Austrian!

edited 15th Apr '14 9:44:00 AM by Fighteer

Constructivism is really a theory about the nature of knowledge, it doesn't really reject the use of empirical evidence to test hypotheses, it merely proposes that our conclusions are at least partially socially constructed.

...I do? I revisit my epistemology regularly to determine its continued veracity by comparing it to other ones.

Look, I'm not going to defend the Austrians, but the sins of Austrians shouldn't be applied more generally to everyone who doesn't hold empiricist epistemological views.

@De Marquis: You need to be able to engage in pure theory to formulate new ideas, to be sure. I also don't deny that all knowledge is fundamentally derived from our interpretations of reality, not from reality itself (the ontological viewpoint). None of that changes the fact that pure theory is only ultimately useful if it accurately describes or predicts real things.

@deathpigeon: You still aren't testing your ideas against reality, just against other ideas. That's no guarantee that you're going to end up with anything that's in the ballpark when push comes to shove. If you want to do the pure theory thing, well and good, but if you somehow get in a position of real power, and have to apply your ideas, what then?

If we aren't talking about Austrian ideas, then what are we talking about? You are about as far away ideologically from the Austrian school as I imagine that it's possible to be.

edited 15th Apr '14 9:51:19 AM by Fighteer

Double Post: After some Googling, I found a very interesting paper examining Austrian vs. Keynesian approaches to stimulus in an economic crisis. It's from an Austrian perspective, and I find rather amusing the way that it presents the Austrian methodology as entirely hypothetical versus the Keynesian one as a given fact, when if anything we had close to the opposite situation occur.

More later as I have to go eat, but it makes a very good starting point to analyze the respective schools of thought.

I don't reject evidence. I just don't think we can get knowledge from evidence without an application of an analysis of how those ideas are governed by the social constructions that govern reality. Evidence is useful. It just isn't a path to knowledge.

I've been objecting to how you went from critiquing Austrians to applying that same critique to all anti-empiricists. What you did was like applying critiques of social darwinists to all scientists, especially since Austrians have a similar relation to non-empiricist epistemologists that social darwinists have to scientists.

Didn't read past here.

Oh, and while I agree that the paper I linked is complete garbage (I found it through mises.org), it's very useful for examining the thought processes involved. Bonsai Forest asked for a real thought experiment to analyze and I found one.

edited 15th Apr '14 10:11:01 AM by Fighteer

Thanks, Fighteer. From the article:

"...To have a recovery, either of one of two or both things must happen: the aggregate amount of money cost of production will have to fall or the aggregate volume of money sales revenues will have to rise. Ideally, in an environment of a severe financial contraction, such as we have now, unrestricted freedom of competition in labor and product markets will bring down money cost of production quite rapidly by means of swift and deep cuts in nominal wages and capital goods’ prices. Thus, the most efficient path to recovery is through reductions in nominal wages and prices."

That is not a bad summary of the conservative position. It's also wrong. Anyone want to guess why? (hint: employees are also consumers)

edited 15th Apr '14 10:13:57 AM by demarquis

And you'll have tentative ideas that are probably true within the framework of the social constructs you and those around you have accepted as true within your subjective reality, not any actual knowledge.

Oh, I know. I just try not to read explicitly ideological papers trying to present themselves as Truth™ unless I have time ts do a critique.

As wages are cut and the rate of exploitation rises, people will be less able to buy, thus leading to a fall in the rate of profit.

edited 15th Apr '14 10:17:40 AM by deathpigeon

You win the prize.

You're working with a very odd definition of knowledge, one that is seemingly tailored to the argument you wish to advance. Let me just say that I strongly disagree with you. All knowledge, however practical or abstract, is at best an approximation of an unreachable truth, but that does not mean that all knowledge is equally useful or equally accurate as an approximation.

Debt overhangs play a major role, too. If the consumer is paid less, but prices are lower, his net purchasing power hasn't changed, unless he is a net debtor, in which case his ability to repay his debts has also decreased, putting him in a worse financial position.

edited 15th Apr '14 10:28:28 AM by Fighteer

Yay! What's my prize? The collapse of the capitalist system as a result of long-term falling rate of profit, I hope!

What part of my use of knowledge was wrong?

edited 15th Apr '14 10:24:58 AM by deathpigeon

And dont forget that by and large, the producers are net debtors, too. Most of them borrow the capital they use to expand production in boom times. That "Austrian Stimulus" is going to drive a lot of businesses into bankruptcy, and net shrink the economy, not expand it.

@Deathpigeon: You get my undying esteem...

edited 15th Apr '14 10:26:15 AM by demarquis

But...But...the short term profits!

Awesome! This will surely enhance my @-rep or my r-rep!

edited 15th Apr '14 10:43:43 AM by deathpigeon

Deflation also hurts holders of fixed assets. In fact, the only people it helps are holders of capital. Guess who's most in favor of Austrian (or, more broadly, neoclassical) approaches to depressions?

Edit: Krugman's latest, discussing that the cutoff of unemployment benefits at the start of the year did not, as predicted by conservatives, increase employment through the "desperation factor".

More people seeing work does not make more jobs magically appear for them to do.

Edit 2: More from that paper I linked earlier:

This is Austrian thought in a nutshell: the idea that removing intervention will cause the marketplace to magically establish a state of perfect equilibrium. It's also blatantly false to empirically observed facts.

The claim about interventionism causing the previous crisis is only partially true. Yes, there was intervention in markets, but it was pro-cyclical, not counter-cyclical: easy money policies in an environment where savings were already too high compared to investment opportunity. The disequilibrium that preceded the 2008 crash was started by the relaxing of regulatory controls on the financial industry and the slow dismantling of progressive taxation that allowed capital to accrue to households with a lower marginal propensity to consume and abetted by stimulatory fiscal policy during a boom, all of which is exactly the opposite of what Keynes said you should do.

However biased that paper may be, it does a very good job of explaining Keynesian principles. The error it makes is the basic Austrian one of not having its conclusion follow from any evidence presented. In other words, it specifies no actual mechanism whereby the desired correction will take place.

edited 15th Apr '14 11:22:10 AM by Fighteer

Who's most in favor of said positions?

Are you referring to the "do nothing and let the market sort it out" position? Well, if you want an answer, how about a former European central banker?

Jürgen Stark makes the rather astonishing claim that people shouldn't be talking about deflation because it might create a self-fulfilling expectation — that is, deflation will happen because of magical thinking, not economic reality. Clap Your Hands If You Believe, marketplace style.

As Krugman points out:

edited 15th Apr '14 1:56:43 PM by Fighteer

While the market mechanisms do allow for such a thing to happen, it'd require either a) the markets being operated by a large number of morons or b) some kind of mass psychosis.

Well, if they're operated by folks like Stark, then I'm going to have to go with "A". Either that or his apparent belief in the Tinkerbell school of economics is a show for the unwashed masses.

Edit: That's going to become my new forum sig.

Edit 2: Oddly, according to Austrian theory, everyone is perfectly informed and makes perfectly rational decisions all the time, so there ought to be no mechanism by which "expectations of deflation" would create deflation, because nobody would believe it if it weren't true.

If the system is so vulnerable to imperfect information that mere rumors of a thing can cause it to happen, then it is not rational, and so their microfoundations model breaks down.

edited 15th Apr '14 2:27:01 PM by Fighteer

<antenna sit up> Oh, yes... The good, old Logical Fallacy that is Rational Actor. <spits>

Rational Choice Theory. <double spits>

Irksome and pervasive ideas, these. Bunk if you know how multi-factored and unconscious our thought processes actually are as individuals. Let alone as groups. Besides which: "wanting" ain't always the rational response, but very much the purview of the black box of our brains. <_< Yet, hello: they deal with it as if it is the conscious, reasoned part of thought, in the main. And, always, somehow, in our best interests in some way, shape or form: not always so — what is good for the individual on the surface is often suicide for the group — which in turn means belated suicide for the individual. Or visa versa, when the group kills itself off by running out of individuals by doing something dumb that looked like a great idea at the time that met "wants". Bugs me.

And, heaven help you if you try to get them to read the cognitive science that puts a hole through it all. <_<

edited 15th Apr '14 11:19:33 PM by Euodiachloris

Quite. I doubt economists like Krugman would want to work with neurologists, physiologists and sociologists^note  And possibly even historians and geographers? on a new Economic Theory.

edited 15th Apr '14 3:01:58 PM by Greenmantle

Krugman talks about cognitive dissonance and association bias quite frequently in his blog, to explain the irrational decisions of folks in positions of authority.

And interestingly, Krugman has even contributed to the The Oxford Handbook of Economic Geography.

And it's not just individual irrationalism that classical theory misses, it's collective decision making. Putting the needs of an in-group before your own is a very pervasive pattern among humans, yet it isnt included in the theory.