Wednesday, September 7, 2011

This picture pretty much resolves the Keynes vs. Austrian debate



Hat tip to Ralph Musgrave for this chart. He had it on his blog, but I cleaned it up.

Anyway, my intent was to show some perspective. I think that's always useful. We hear a lot about how Keynesian economics doesn't work and about how the world was better under the gold standard.

I think the chart below goes a long way toward resolving that debate. It plots annual changes in U.S. real GDP going back to 1860. Take a look at how many deep recessions and depressions the country experienced in the 19th century. Pretty much, every 10 years, a depression! And the swings in GDP were huge!




Compare that to the mid 20th century and especially 1971 forward. What a contrast! Very few recessions and no depressions. And even the recessions have been much milder, current one being an exception.

Remember that the U.S. was on a gold standard until 1933 (domestically) and completely off the gold standard and on a system of floating FX non-convertibility from 1971 on. Rather than get worse, things stabilized immensely.

All the recent troubles can be traced back to Clinton's surpluses, which essentially was the equivalent of putting us on a gold standard. The rebound out of the recent "Lesser Depression" was due to massive deficit spending. Did I hear someone say Keynes??

13 comments:

Clonal said...

Mike there is more to it than just that. See my comments in the threads below

Greek Thread
How will we Pay Thread

John Zelnicker said...

One small edit: "...chart below _should go_ a long way...". :)

Unfortunately, I have become so frustrated and depressed by the idiots running this country into the ground that I don't think it will have much impact. I fear it will take a more severe crisis than any we have had in our lifetimes to get this country back on the right track. Hope I'm wrong about that.

Dan Kervick said...

Great chart!

Mike Norman said...

John:

You're right...IDIOTS! Not just the ones running the country, but the academics, too. And most of the electorate. :(

Mike Norman said...

Clonal:

Great comments, thanks!

Anonymous said...

You caannot argue with those nuts any way, in their opinion GDP doesn't show anything.

Bob Roddis said...

The claim that your chart disproves the Austrians is uninformed and dishonest. The Austrians have always (and in great detail) explained how fractional reserve banking under a state "gold standard" will lead to a boom/bust cycle. As your chart shows, things got even worse after the creation of the Fed by the oligarchic bankers.

The essence of the Austrian School is the impairment of economic calculation by individual human beings due to the artificial creation of money and credit. This must distort the price, investment and capital structure in an unsustainable manner, especially long term. MMTers (like all Keynesians) have no familiarity with these basic truths of human existence and pretend they do not exist.

http://mises.org/resources/2745/Money-Bank-Credit-and-Economic-Cycles

http://mises.org/daily/3687

http://mises.org/daily/4020

All that the creation of the 100% fiat system did in 1971 was to further distort the price, investment and capital structure by impairing the discovery and liquidation of malinvestments in the short run so that more malinvestments pile up over the long run.

Tom Hickey said...

@ Bob

"The essence of the Austrian School is the impairment of economic calculation by individual human beings due to the artificial creation of money and credit. This must distort the price, investment and capital structure in an unsustainable manner, especially long term. MMTers (like all Keynesians) have no familiarity with these basic truths of human existence and pretend they do not exist."

This is actually the area in which AE and MMT are closest to agreeing in principle. Minsky was a student of Schumpeter, who was PHD student at the University of Vienna at the time of the initial Austrian economist. He incorporated some of those ideas and Minsky built on that foundation. Randy Wray, MMT first generation, was a PhD student of Minsky.

Austrian economist Edward Harrison sees parallels for example, although he thinks that MMT doesn't pay enough attention to malinvestment, even though it gets the monetary stuff right operationally.

Kevin Fathi said...

@Bob : What does the Austrian School think about public goods? Does the Austrian School deny that degradation of the environment does occur(increasing ocean acidity,pollution,etc.)?

Alan Avans said...

I share the Austrian concern about mal-investment as do the advocates of MMT.

There is a most sure and certain way of creating the conditions for mal-investment. Arrange for credit issued to return to its source before actual costs of production (the cost of employing capital)are liquidated in absolute exchange. This will force firms to to write down their capital or to carry unsold inventory as overhead to be liquidated in subsequent periods of production, with a rising debt burden to match the incremental rise in overhead. As overheads rise margins decline and investors are convinced to invest in financial assets instead, and likewise banks are convinced to let investors purchase financial assets with borrowed money.

Bob Roddis said...

@Kevin Fathi:

Strict liability for damage and pollution:

http://mises.org/daily/2120

And, of course, no subsidies to promote, induce or "stimulate" sprawl.

Peter said...

Bob Roddis: "This must distort the price, investment and capital structure in an unsustainable manner, especially long term."

No it mustn't.
http://heteconomist.com/?p=1149:
"It is well established in orthodox theory that once we are outside the world of the ‘first best’ (meaning once there are at least some distortions), the orthodox ‘Theory of the Second Best’ shows that additional market distortions (e.g. government interventions) do not necessarily reduce allocative efficiency. Once there are at least some distortions – and no orthodox economist would claim an absence of distortions in the real world – the introduction of additional distortions does not, in general, move the economy further away from allocative efficiency, and in fact may move the economy closer toward allocative efficiency."

knapp said...

With all due respect, I think the chart is useless (in the sense of convincing non-believers) - it conceals all the important institutional-historical methodological detail which is supposed to distance Post Keynesians from the mainstream crowd - Austrians included.

Lots of things happened in the 19th century -2 US central banks came and went, wildcat banking, Slave labor, the Civil War, Greenbacks, Govt-induced deflation via the Resumption Act. It was not a century of laissez faire by-the-book classical gold standard banking by any stretch of the imagination.
To argue otherwise, is just not credible. (Austrians are often guilty of the same type of analysis to support their framework). Alas, history is too contaminated, too complex.

You can't just put up one chart and declare checkmate - if you do you lose credibility - whether you are mmt, Austrian, or Keynesian.