Quotulatiousness

August 18, 2019

The Austrian School on the causes and cures of economic recessions

Filed under: Economics — Tags: , — Nicholas @ 05:00

Tim Worstall responds to a Guardian article on recessions (we’re apparently due for another one, according to the writer) and suggests that the Austrian theories may be helpful to understand what’s going on:

A Mises Institute graphic of some of the key economists in the Austrian tradition (Carl Menger, Ludwig von Mises, Friedrich Hayek, Murray Rothbard, and Hans-Hermann Hoppe.
Mises Institute via Wikimedia Commons.

As a pencil sketch – all you can do in a single article – that’s rather good. So, fine, let’s run with that. We’ve not had a normal recession for ages, one will come along soon enough and we’ve forgotten how to deal with it.

However, we can take this idea a little further too. Off into the wild spaces of Austrian theory. There a recession happens because of the built up malinvestment across the economy. Essentially, when it’s too easy to finance stuff then too much bad stuff gets financed. We need the regular recession to flick off the froth and get back to a more sensible allocation of capital.

My own view is that there is no one correct macroeconomic theory but that all of them contain elements of the truth. The trick is to work out which theory to apply to which happenstance. Reorganising the Soviet economy wasn’t going to be done by a bit of Keynesian demand management, there was a century of misallocation to chew through. Getting out of 2008 was different because it was the financial system that had fallen over, we didn’t just have that cyclical decline in business investment. Etc. Austrians can – perish the thought, eh? – be a little too fervent in the insistence that all recessions are about misallocation that must be purged.

But note the underlying thing we can pick up from Davies here. We’ve been staving off that normal recession for decades through that management. Perhaps it’s not all that good an idea to continually do that? He really does say that the Crash stemmed from those attempts to stave off after all. Thus, in a sense, we could argue that we’re going to get the recessionary horrors come what may. Even Keynesian demand management might not be the correct solution if it just gives us once in a generation collapses rather than more regular downturns?

That is, perhaps the Austrians are at least in part right? We need the regular purges for fear of something worse?

August 1, 2019

What Is Money?

Filed under: Economics, Government, USA — Tags: , , , — Nicholas @ 02:00

Marginal Revolution University
Published on 18 Jul 2017

That may seem like a really simple question, but it’s actually kind of complicated. Paper bills and coins, or currency, is obviously money. But it doesn’t end there.

Technically, “money” is anything that is a widely accepted means of payment. This has changed throughout history. Once upon a time, cattle could be considered money. Or cowry shells. Today, cryptocurrencies like Bitcoin are being added to the mix.

Given that there’s no set definition for what makes a commodity money, there are a few measurements for the U.S. money supplies. The first, MB (or “monetary base”) measures currency and reserve deposits. This is what the Fed has the most direct control over.

Our next stop will be fractional reserve banking and the money multiplier.

July 25, 2019

Monetary Policy and the Federal Reserve

Filed under: Economics, Government, USA — Tags: , , , — Nicholas @ 02:00

Marginal Revolution University
Published on 11 Jul 2017

Spider-Man fans likely recall Uncle Ben advising his nephew, Peter Parker, that “With great power, comes great responsibility.”

As it turns out, that sage wisdom is also pretty applicable to the U.S. Federal Reserve System (aka the Fed). The Fed Chairperson, currently Janet Yellen, may not shoot webs out of her wrists, but she and the organization she represents have some super powers over our money supply.

The Fed also has quite a few limitations – monetary policy can only do so much. We’ve previously covered the quantity theory of money and long- and short-run economic growth. If you think back to those videos, you’ll remember that an increase in the money supply (which, in the U.S., is controlled by the Fed) only affects growth in the short-run. Even then, it’s often not smooth sailing.

In this video, we’ll give you an introduction to the function of the Fed as well as some of the problems it faces, and raise the question, “What is money?”

May 27, 2019

Game of Theories: The Great Recession

Filed under: Economics — Tags: , — Nicholas @ 02:00

Marginal Revolution University
Published on 5 Dec 2017

Tyler Cowen puts Keynesian, monetarist, real business cycle, and Austrian theories to work to explain a downturn from recent economic history: the Great Recession of 2008.

May 26, 2019

Game of Theories: The Austrians

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Marginal Revolution University
Published on 28 Nov 2017

Austrian business cycle theorists argue that the central bank could be distorting market signals for entrepreneurs. How does this contribute to booms and busts?

May 25, 2019

Game of Theories: Real Business Cycle

Filed under: Economics — Tags: — Nicholas @ 02:00

Marginal Revolution University
Published on 21 Nov 2017

Many economic downturns throughout human history can be explained by real business cycle (RBC) theory. So what makes this theory “real” and what are its drawbacks? We’ll cover both in this five-minute tour of RBC.

May 24, 2019

Game of Theories: The Monetarists

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Marginal Revolution University
Published on 14 Nov 2017

Meet the monetarists! This business cycle theory emphasizes the effect of the money supply and the central bank on the economy. Formulated by Nobel Laureate Milton Friedman, it’s a “goldilocks” theory that argues for a steady rate of fairly low inflation to keep the economy on track.

May 23, 2019

Game of Theories: The Keynesians

Filed under: Economics — Tags: , , , — Nicholas @ 02:00

Marginal Revolution University
Published on 7 Nov 2017

When the economy is going through a recession, what should be done to ease the pain? And why do recessions happen in the first place? We’ll take a look at one of four major economic theories to find possible answers – and show why no theory provides a silver bullet.

March 22, 2019

Understanding the Great Depression

Marginal Revolution University
Published on 23 May 2017

In this video, we examine the causes behind the Great Depression with the help of the aggregate demand-aggregate supply model.

In 1929, the stock market crashed and an air of pessimism swept across America — making bank depositors nervous. What would you do if you thought your money might not be safe with the bank? You’d probably want it back in your own hands. What happened next? A run on the banks.

Along with the Stock Market Crash of 1929, it’s one of the iconic moments of the early days of Great Depression. However, the Great Depression was an incredibly complex downturn in which the economy experienced a series of aggregate demand shocks. By the end of this video, you’ll walk away with a better understanding of the many factors behind the Great Depression and how to apply the AD-AS model to a real-world scenario.

March 16, 2019

MMT – Magic Money Theory

Filed under: Economics, Government, Politics — Tags: , , , , , , , — Nicholas @ 05:00

Antony Davies and James R. Harrigan explain just why so many progressives are so excited about MMT:

Modern Monetary Theory, or MMT, is all the rage in the halls of Congress lately.

To hear the Progressive left tell it, MMT is not unlike a goose that keeps laying golden eggs. All we have to do is pick up all the free money. This is music to politicians’ ears, but Fed Chairman Jerome Powell is singing a decidedly different tune. Said Powell recently on MMT, “The idea that deficits don’t matter for countries that can borrow in their own currency … is just wrong.”

MMT advocates see this as outdated thinking. We can, they claim, spend as much as we want on whatever we want, unencumbered by trivialities like how much we have. But MMT is a bait-and-switch wrapped in a sleight-of-hand. It focuses on debt and dollars rather than resources and products. Debt and dollars are merely tools we use to transfer ownership of resources and products. It’s the resources and products that matter. Shuffling debt and dollars merely changes the ownership of resources and products. It doesn’t create more.

[…]

So here’s the sleight of hand. MMT advocates say that we won’t experience inflation because the U.S. dollar is a reserve currency — foreigners hold lots of U.S. dollars. First, increasing the money supply, other things constant, does create inflation. But when a reserve currency inflates, the pain gets spread around the world instead of being concentrated within one country. In short, MMT advocates believe our government should print money and let foreigners bear some of the inflation pain. Second, there’s no law that says that the U.S. dollar must be a reserve currency. The British Pound was one, but as its value declined, foreigners stopped holding it. Foreigners will stop holding U.S. dollars too as their value declines.

And here’s the bait-and-switch. MMTers say that if inflation does become a problem, the government can simply raise tax rates to soak up excess dollars. In short, the government would print money with one hand, buying whatever it wants and causing inflation. It would then tax with the other, thereby removing dollars from the economy and counteracting the inflation. In the end, all that’s happened is that the government has replaced goods and services that people want with goods and services politicians want.

After a bout of MMT, we might have the same GDP and zero inflation, but what constitutes that GDP would have changed dramatically. Instead of having more cars and houses, we might have more tanks and border walls.

March 5, 2019

Changes in Velocity

Filed under: Economics — Tags: , , , — Nicholas @ 02:00

Marginal Revolution University
Published on 16 May 2017

What happens when aggregate demand shifts because of a change in the velocity of money? You’ll recall from earlier videos that an increase or decrease in velocity means that money is changing hands at a faster or slower rate.

Changes in velocity are temporary, but they can still cause business fluctuations. For instance, say that consumption growth slows as consumers become pessimistic about the economy.

In fact, we saw this play out in 2008, when workers and consumers became afraid that they might lose their jobs during the Great Recession. This fear drove them to cut back on their spending in the short run. But, since changes in velocity are temporary, this fear receded as time passed and the economy began to recover.

Dive into this video to learn more about what causes shifts in the aggregate demand curve.

January 20, 2019

The Short-Run Aggregate Supply Curve

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Marginal Revolution University
Published on 9 May 2017

In this video, we explore how rapid shocks to the aggregate demand curve can cause business fluctuations.

As the government increases the money supply, aggregate demand also increases. A baker, for example, may see greater demand for her baked goods, resulting in her hiring more workers. In this sense, real output increases along with money supply.

But what happens when the baker and her workers begin to spend this extra money? Prices begin to rise. The baker will also increase the price of her baked goods to match the price increases elsewhere in the economy. As prices increase, workers demand higher wages to be able to afford goods at a higher price.

In this example, the increase in money supply initially increased nominal and real wages for the baker and her employees, but as prices begin to rise, real wages begin to fall, and workers can afford less. Overtime, the demand for the baker’s goods will fall to pre-spending levels.

The takeaway? An increase in spending can increase output and growth in the short run, but not in the long run. To model this scenario, this video will show you how to draw a short-run aggregate supply curve. Let’s get started!

January 9, 2019

Sticky Wages

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Marginal Revolution University
Published on 2 May 2017

Imagine you’re an employer during a recession, and you desperately need to cut labor costs to keep your firm afloat. Are you more likely to cut wages across the board for all employees, or institute layoffs for only some?

While it may seem that wage cuts are the “better” choice, they aren’t as common as you might think. Why is that?

To answer that question, this video explores a phenomenon known as “sticky wages.”

In other words, wages have a tendency to get “stuck” and not adjust downwards. This occurs even during a recession, when falling wages would help end the recession more quickly.

However, that’s not to say that wages cannot adjust downward for an individual during a recession. This can happen, but likely only after an employee has been fired from their initial job, and eventually rehired by a different firm at a lower wage rate.

Back to our original question — why are employers unlikely to cut wages? A big reason has to do with the effect on morale. Employees may become disgruntled and angry when they experience a nominal wage cut, and become less productive.

An important note here — notice that we said nominal wage cut, meaning, not adjusted for inflation. If an employee receives a 3% raise in nominal wages, they may remain happy in their current position. But what if inflation is 5%? What does this mean for their real wage? (Hint: For an in depth answer to this question check out our earlier Macroeconomics video on “money illusion.”)

Next week we’ll return to our discussion on the AD/AS model for a look at how factors such as “sticky wages” affect the economy in the short run.

December 30, 2018

The Long-Run Aggregate Supply Curve

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Marginal Revolution University
Published on 25 Apr 2017

The long-run aggregate supply curve is actually pretty simple: it’s a vertical line showing an economy’s potential growth rates. Combining the long-run aggregate supply curve with the aggregate demand curve can help us understand business fluctuations.

For example, while the U.S. economy grows at about 3% per year on average, it does tend to fluctuate quite a bit. What causes these fluctuations? One cause is “real shocks” that affect the fundamental factors of production. Droughts, changes to the oil supply, hurricanes, wars, technological changes, etc. can all have big and potentially far-reaching consequences.

Next week, we’ll dig into why wages are considered “sticky,” or slow to change.

November 23, 2018

The Aggregate Demand Curve

Filed under: Economics — Tags: , , , — Nicholas @ 02:00

Marginal Revolution University
Published on 18 Apr 2017

This wk: Put your quantity theory of money knowledge to use in understanding the aggregate demand curve.

Next wk: Use your knowledge of the AD curve to dig into the long-run aggregate supply curve.

The aggregate demand-aggregate supply model, or AD-AS model, can help us understand business fluctuations. In this video, we’ll focus on the aggregate demand curve.

The aggregate demand curve shows us all of the possible combinations of inflation and real growth that are consistent with a specified rate of spending growth. The dynamic quantity theory of money (M + v = P + Y), which we covered in a previous video, can help us understand this concept.

We’ll walk you through an example by plotting inflation on the y-axis and real growth on the x-axis — helping us draw an aggregate demand curve!

Next week, we’ll combine our new knowledge on the AD curve with the long-run aggregate supply curve. Stay tuned!

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