Transcript A Stocktaking - Auburn University

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KEYNESIANISM
LABOR-BASED
MACROECONOMICS
MONETARISM
MONEY-BASED
MACROECONOMICS
AUSTRIANISM
CAPITAL-BASED
MACROECONOMICS
Which schools see
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KEYNESIANISM (John Maynard Keynes):
Markets don’t work
--especially the loanable-funds market.
MONETARISM (Milton Friedman):
Markets do work.
Never mind the loanable-funds market.
AUSTRIANISM (Friedrich A. Hayek):
Markets work
--even the loanable-funds market.
KEYNESIANISM (John Maynard Keynes):
Markets don’t work
--especially the loanable-funds market.
Saving is based upon habit (and income).
Investment is based upon “animal spirits.”
Income-expenditure analysis, which takes a
depressed economy to be the “general case,”
shows how a bad situation gets worse
or how a good situation gets better.
MONETARISM (Milton Friedman):
Markets do work.
Never mind the loanable-funds market.
Just add Investment (I) to Consumption ( C)
to get Output (Q).
Now write: MV = PQ.
Both output (Q) and prices (P) began falling in
1929 because the Federal Reserve, behaving
ineptly, allowed the money supply to collapse.
AUSTRIANISM (Friedrich A. Hayek):
Markets work
--even the loanable-funds market.
Saving (S) and Investment (I) are brought into
equality (and, more broadly, intertemporal
equilibrium is maintained) by adjustments in the
rate of interest.
Pumping new money through credit markets
drives a wedge between saving and investment,
triggers and artificial boom, and sets the stage
for an inevitable downturn.
KEYNESIANISM (John Maynard Keynes):
Markets don’t work
--especially the loanable-funds market.
MONETARISM (Milton Friedman):
Markets do work.
Never mind the loanable-funds market.
AUSTRIANISM (Friedrich A. Hayek):
Markets work
--even the loanable-funds market.
A Brief and Selective Survey on the Issue of Macroeconomic Aggregation
Monetarism: Output reckoned as Q.
The all inclusive Q puts the issue of the allocation between C and I into eclipse.
The interest rate is out of play---but is affected when the Fed changes M.
Keynesianism: Output reckoned as I and C.
The distinction flags a basic problem, but fails even to hint at a market solution.
The interest rate is out of play---or plays a role that is distinctly perverse.
Austrianism: Output reckoned as I LONG, I SHORT and C.
The disaggregation identifies a basic problem and a market solution.
The interest rate is fully in play---affecting I LONG and I SHORT differently.
A STOCKTAKING: THREE SCHOOLS
On Relative Movements of C and I
KEYNESIANISM:
Named for its founder, John Maynard Keynes.
Builds into its theoretical framework a key
perversity, namely that C and I move up and
down together — such that there can be no
trade-off between these two magnitudes. The
PPF serves only to mark the boundary between
unemployment and inflation.
A STOCKTAKING: THREE SCHOOLS
On Relative Movements of C and I
MONETARISM:
Named for its focus on money. Combines C
and I into the larger, all-inclusive Q. Assumes
that markets somehow work to give us the
right combination of C and I. Shifts attention
to the relationship between M and P.
Friedman’s money-growth rule (2-3%) is
intended to minimize the harm done by the
Federal Reserve.
A STOCKTAKING: THREE SCHOOLS
On Relative Movements of C and I
AUSTRIANISM:
Named for its country of origin. Identifies a
market process that adjusts C and I to match
actual saving propensities. Shows how that
process can be distorted by economically
unsound—but politically expedient—monetary
policy. Fed-led booms are inevitably followed
by busts.
A STOCKTAKING: THREE SCHOOLS
KEYNESIANISM
Founder: John Maynard Keynes (1883-1946)
School of Origin: Cambridge University (England)
Focus: Employment of labor
Dates: 1936 to present, variously reformulated.
John Maynard Keynes’s General Theory of Employment,
Interest, and Money (1936) presents the basic principles of
“labor-based macroeconomics.”
A STOCKTAKING: THREE SCHOOLS
MONETARISM
Founder: Milton Friedman (1912-
)
School of Origin: University of Chicago
Focus: Money and Inflation
Dates: 1956 to present, variously reformulated.
Milton Friedman’s Optimum Quantity of Money and Other
Essays (1969), which includes his “Quantity Theory of Money:
A Restatement” (1956), presents the principles of “moneybased macroeconomics.”
A STOCKTAKING: THREE SCHOOLS
AUSTRIANISM
Founder: Carl Menger (1840-1926)
Premiere Macrotheorist: F. A. Hayek (1899-1992)
School of Origin: University of Vienna (Austria)
Focus: Capital and interest
Dates: 1931 to present, variously reformulated.
Friedrich A. Hayek’s Prices and Production (1931) presents the
principles of “capital-based macroeconomics.”
A STOCKTAKING: THREE SCHOOLS
On the Cause of Cyclical Downturns
KEYNESIANISM:
A waning of “animal spirits” causes investment
to decline, bringing all else (Y, C, and S) down
with it. The market economy is depression prone
and requires pro-active fiscal and monetary
policies for achieving prosperity and stability.
A STOCKTAKING: THREE SCHOOLS
On the Cause of Cyclical Downturns
MONETARISM:
Central-bank bungling causes a collapse of the
money supply, which puts downward pressure
on prices. Since prices cannot adjust instantly,
output falls. Policy formulation should focus on
avoidance rather than on remediation.
Monetarists often argue that the bungling
occurred as the economy was experiencing an
“ordinary recession.”
A STOCKTAKING: THREE SCHOOLS
On the Cause of Cyclical Downturns
AUSTRIANISM:
Ill-conceived pro-growth policies of the central
bank set the economy off on an unsustainable
growth path. Eventual market corrections
precipitate a downturn. An artificial boom
inevitably ends in a bust.
CAPITAL-BASED MACROECONOMICS
Q: What determines the economy’s growth rate?
A: Your willingness to save.
Q: What happens when people save more?
A: The economy grows faster.
Q: How can you get higher growth without saving?
A: You can’t.
CAPITAL-BASED MACROECONOMICS
Q: Is the verb “to grow,” as applied to the economy a
transitive verb or an intransitive verb?
Consider alternative usages:
Save and the economy will grow.
Elect a president who will grow the economy.
Consider alternative propositions:
Save more and the economy will grow faster.
Be confident of the economy and consume. Let the Federal
Reserve grow the economy.