My Mises Presentation

There is a video doing the rounds at the moment under the name, the “Keynes-Hayek Rap”, although more formally titled, “Fear the Boom and Bust”. It has had a million hits and if nothing else it has brought economics into households that would never normally pay the slightest attention to issues in the history of economic thought.

Keynes is, of course, the author of the twentieth century’s most influential book on economics – although it might be noted that the economist who has been most influential on the economies of the twentieth century is more likely to have been Karl Marx. But Marx wrote in the century before. In the twentieth century, the laurel goes to Keynes.

Hayek was the counterfoil to Keynes in the economics world of the 1930s (although he lived on into the 1990s while Keynes died in 1946). During the 1930s Hayek spent a good deal of his time demonstrating that Keynes’ ideas were unsound, but strangely, and much to his own regret, he never properly dealt with the General Theory when it first appeared in 1936. The economics of Hayek is described as “Austrian”, a school of thought that originated in the 1870s. The Austrian School is the single largest segment of pre-Keynesian economic thought that remains alive today.

On a related matter, I have now returned from presenting the Ludwig von Mises lecture at the Mises Institute in Auburn, Alabama. The Keynes-Hayek Rap provides a contrast of the theories and associated policies of Keynes and Hayek and in its own way delves into the history of economics. My presentation also dealt with the history of economics, but for me the relevant history was how Keynes ended up falsely accusing his classical predecessors of having no explanation for involuntary unemployment. Keynes then used this accusation as a vehicle to undermine the classical theory of the cycle with a theory of his own, a theory which pre-Keynesian economists were virtually unanimous in recognising as fallacious.

If you are interested in this little known story in the history of ideas, which also discusses the pre-Keynesian theory of the cycle, this is my presentation:

The grip of Keynesian theory on governments, which gives them the authority to spend our money copiously, stupidly and in any way they please, is going to be hard to break. But the two presentations, as different as they may be in style and content, are attempts to explain why this most urgently needs to be done.

Cross posted from IEA Blog

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18 Responses to My Mises Presentation

  1. A very good summary of the book – and a good demolition of the Keynesian pretensions to both a factual basis and any originality. Thanks.

  2. sdfc

    The 1930s proved those pre-Keynesians wrong. Letting an economy in deep financial crisis sink is the road to hell.

  3. JC

    The 1930s proved those pre-Keynesians wrong. Letting an economy in deep financial crisis sink is the road to hell.

    Really? Kates argues differently to you. He persuasively argues that the first countries that came out of the depression were the UK and Australia because they followed classical economics.

    He makes the point of saying that the Labor government at the time acted through the premiers plan to cut unnecessary waste and balance the budget while the US continued on with its recession due to the statist (and later on) Keynesian policies of the FDR administration causing them to stay in depression until 1941.

    Is Kates wrong and you’re right, SDFC?

  4. sdfc

    The UK and Australia left gold early. The US on the other hand did not devalue until 1933. The US was also in deep financial crisis. Growth did not resume until the government intervened.

    The US came out of recession in 1933, only to fall back into deep recession in 1937 and 38 when fiscal and monetary policy were tighened.

  5. JC

    SDFC, Australia and the UK were basically out of Depression by 1931/32.

    The US stayed in depression for just over a decade. Please, you’re now blaming the gold exchange standard as the reason the US was in a decade long depression and we weren’t.

    …….The Gold exchange standard that the three got out of in a period of around 2 years, but that 2 year span created the difference between a 2 year depression and a decade long one. LOL

    It really is like clubbing baby seals.

    Tell me, has Homer been getting to you. Is he offering your the same dumb pills he’s taking?

    Just say no.

  6. JC

    I’m a little busy now.. see ya in about 2 hours if you’re around.

    Tell me would you buy Goldman’s here. I bought some two days ago and some more last night as it went higher. I really like them as I think the panic merchants dumped.

    I think there a 30 buck play here back to $190 from $156- 160 ish.

    Let me test your predictive powers SDFC.

  7. sdfc

    Come on JC devaluation is stimulatory, much of the UK’s problems were due to an overvalued exchange rate.

    Australia did not exit the depression until the second half of 1932. Wages were cut, the currency was devalued, interest rates were fallen and the terms of trade began to recover. Ausralia and the UK did not experience a banking collapse.

    US GDP grew strongly between 1933 and 1937, that is until policy was tightened. That US GDP remained below its 1929 level for the best part of a decade should be no surprise considering it fell 50% early in the decade.

    As for forecasting equity prices, I’ll leave that to you. Given the support the banks are getting from the Fed and the huge amount of money being thrown at the US economy prices may have a little while to run yet. Once this stimulus is withdrawn things could get a little hairy however.

    We’re moving house this weekend so my chances of coming back before next Friday are pretty slim.

    I hate moving.

  8. JC

    Gd luck moving. Seeya soon.

    Fme. There’s a potential criminal investigation possibly and Goldies hit the sack. Never a dull day. Shulda got out.

  9. ken n

    Where’s Homer?
    I thought he had an alarm over his bed that woke him up whenever anyone said “Keynes”.

  10. WFC

    As a non economist may I ask when a recession hits are there then no methods that can be used to stimulate the economy to come out of recession quicker without causing further harm? Must we simply ride it out after taking steps which may in the short term increase the severity of a recession eg by increasing unemployment?

  11. sdfc

    Hi JC, I’m done packing for today. The big move is tomorrow. My missus is packing up her office but that’s her problem so I thought I’d jump on.

    I understand that this whole episode, especially the Senate subcommittee hearing probably hasn’t done their reputation any good but can’t see how any charges would stick.

    What judge is going to understand synthetic CDO’s anyway.

    I’m not on top of the ins and outs, all I really know is what I’ve ready on Reuters, but someone at work was saying Golman’s sold the stuff to banks. If that’s the case then stiff shit. Anyone with half a brain should have known the US housing market was headed for trouble.

  12. jc

    The thing that gets me about this charge against Goldsack is that the other side of the bet knew the securities were sythetics which by defintion means someone has to be short on the other side.

    These idiots kinew ecactly what this crap was, what were the componets and now they’re complaining?
    WTF?

  13. Sinclair Davidson

    Graeme Bird is trying to post a comment. Graeme is permanently banned from catallaxy, but here is the comment nonetheless.

    Great comments by some people here, but this is a very important youtube. Everyone should watch it many times and make sure they resolve all outstanding issues. Don’t just go on faith. There is very few more important issues around. Note how the lecture contains a great bibliography. Even the supportive comments tend to be made by people who only understand this subject about 40% of the way through.

    “The 1930s proved those pre-Keynesians wrong. Letting an economy in deep financial crisis sink is the road to hell.”

    You cannot get more ahistorical then this. With a fiat currency there is never any reason to let the money supply collapse in any case.

    The main reason that Keynesianism took hold when it did is simply that the size of government had grown to a certain critical size after World War I. Also the idealistic socialists had just become disillusioned with fascism because the Germans were such a distasteful bunch. They had earlier become disillusioned with communism but that turned out to be a temporary thing.

    Though Kates doesn’t say this, there is some problem with letting the money supply collapse, but this is more to do with the compounding effect it tends to have on already overpowering debt levels than anything else. This is often neglected even by sound economists, who tend to think that the only problem is downward stickiness in prices and wages.

    Of course bankruptcy is the quickest way to clear these debts.

    Great comments by some people here, but this is a very important youtube. Everyone should watch it many times and make sure they resolve all outstanding issues. Don’t just go on faith. There is very few more important issues around. Note how the lecture contains a great bibliography. Even the supportive comments tend to be made by people who only understand this subject about 40% of the way through.

    “The 1930s proved those pre-Keynesians wrong. Letting an economy in deep financial crisis sink is the road to hell.”

    You cannot get more ahistorical then this. With a fiat currency there is never any reason to let the money supply collapse in any case.

    The main reason that Keynesianism took hold when it did is simply that the size of government had grown to a certain critical size after World War I. Also the idealistic socialists had just become disillusioned with fascism because the Germans were such a distasteful bunch. They had earlier become disillusioned with communism but that turned out to be a temporary thing.

    Though Kates doesn’t say this, there is some problem with letting the money supply collapse, but this is more to do with the compounding effect it tends to have on already overpowering debt levels than anything else. This is often neglected even by sound economists, who tend to think that the only problem is downward stickiness in prices and wages.

    Of course bankruptcy is the quickest way to clear these debts.

  14. Habler

    You’ve posted 1 comment twice rather than both comments.

  15. Habler

    “As a non economist may I ask when a recession hits are there then no methods that can be used to stimulate the economy to come out of recession quicker without causing further harm? Must we simply ride it out after taking steps which may in the short term increase the severity of a recession eg by increasing unemployment?”

    There are very many things you can do. But you better ask for the economist by name or he’ll evade the question. We have an economy in disrepair. With some areas facing overinvestment and others underinvestment. Supposing we were a nation of small businesses, just to make this clearer. People will have invested in all sorts of things that are not justified by the real capital resources available and the market demand.

    Beehives, chicken coups, Kiwifruit orchids. Some of these will have to be sold and more investments made to bring them to positive cash flow in much their current form. Other investments of this sort will need to be transformed to more viable FORMS of business.

    So the failed Kiwifruit place gets bought by the neighbouring winery, but it takes more resources to transform a failed investment unto a winning project.

    The goal would be to make all investments cash flow positive. But to bring forth the resources for this transformation you need government spending cuts, and mass-sackings as well in the overblown financial sector.

    Sound monetary policy involves more cash and less ponzi-money. Should overall monetary expansion be too high you will justify bad investments. Should it be too low you will wipe out the good investments along with the bad. But the resources to fix matters up have to come from massive spending cuts and some well-chosen tax cuts.

    You will see that there is no rightful way to avoid pain. You can avoid monetary implosion but not pain, Since it must be understood that the damage was done by the prior policy, and not by the onset of the recession. But if the pain is borne by the taxeaters and the bankers, and some proportion of businesses, then the rest of us can be back to work quick-smart. Particularly if we could all be persuaded to take an 18 month pay cut, or something of this nature.

    People think that this is contentious stuff. But its not. Those that don’t understand this are ignorant or lying.

  16. TerjeP (say tay-a)

    A great presentation by Steve Kates. Thanks for sharing it.

    Australia had a currency tied to the british pound. In 1925 the british pound returned to the gold standard having left it in WWI. The gold price at which they returned was at the pre war level, much below the prevailing rate. This was highly deflationary. Australia leaving adjusting the fix price to the british pound was a reaction to this deflation. And it was a quite rational response. I don’t discount the merits of cutting public spending but I think Australias monetary adjustment was also necessary.

  17. WFC,
    I am not an economist either, but I think I can help. The classical theory of recessions essentially states that recessions are not due to demand deficiencies, but because supply has become disconnected from demand – in other words what is being supplied is different (but no greater than) what is being demanded.
    Under this theory, all that demand stimulus does is to both perpetuate the disconnection between the demand and supply (i.e. store up trouble for later) and to crowd out genuine supply changes. In simple terms it messes up the pricing signals that direct both demand and supply.
    Perhaps an omniscient government could redirect the pricing signals more quickly and efficiently than the market could through demand management if it were able to know exactly how to move it (both in terms of direction and amount), do it early enough and strictly limit it to the correct amounts.
    In practice, though, the government is the same as any other market participant – logically precluded from having this information (like JC with GS above) and so cannot act in that way. Hayek showed that (IMHO) in a conclusive way. All that is likely to happen is that the government will act in a politically expedient way to try to pick winners – and borrow to do so. This will just make the recession worse and longer lasting than it would otherwise have been.
    If any of the economists here feel like correcting me I would be interested in hearing it.

  18. TerjeP (say Taya)

    If recessions are caused by too much production in one area relative to another then it stands to reason that those producers suffering the most pain are going to be very open to the idea that their pain is caused by a lack of demand, because in fact it is. However every business has at some time or another suffered this pain and it is part of what keeps producers focused on what people actually want. The most that a government can do is dampen some of the social consequences.

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