Hi Guys,
I’m perplexed.
I’m perplexed and a little befuddled over the ambivalence demonstrated by Forum member replies to my posting that solicited a stance for either Keynesian or Austrian economic schools.
There was a healthy number of thoughtful and well crafted responses. But only one courageous participant definitely took the Keynesian side of the controversy; I took the Austrian position. The others who volunteered an opinion elected to choose Both sides of the debate for their standard. I introduced the Both option in my original submittal, but summarily dismissed it because of perceived major irresolvable differences between these two pragmatic alternatives.
Regardless, most participants elected to go with the Both compromise approach. I wrongly anticipated more “Neither” than “Both” replies. The most cited reasons for the Both position was that singular economic circumstances demand idiosyncratic solutions, and, although the competing formal schools have a few distinctive features, they are fundamentally similar in many overall aspects. These arguments are true in a few instances and under selective situations. The arguments carry less water when considering issues and solutions that are complex, interconnected, and have national scale implications.
When the US Federal government embarks on a program, its scale is immense and its commitment is focused. Just like a huge oceangoing oil tanker, changing its direction is a major undertaking that takes considerable anticipation, power, and time. Compounding the need for constant refinement is that it is almost a given that government programs have a history of permanency. Government programs seemingly do not have a pilot or a wheelhouse that permits course modifications nor a route plan that defines a destination port. The journey goes on forever. When considering US economic matters, small differences not only matter, they matter greatly.
I’m particularly bemused by the similarities proposal that the two competing schools are more alike than they are distinctive.
To expand that viewpoint to an unrealistic extreme, just to illustrate a point, apes and men, women and men, and buses and cars have more similarities than dissimilarities. Yet recognizing the differences and acting accordingly makes a consequential difference in satisfaction and end results. Viva La Difference.
I just finished reading a book by Daniel Carlat titled “Unhinged”. The book describes current Psychiatry issues and concludes that the profession has a trust, honesty, and credibility crisis.
One evolving problem is that, for the most part, practicing psychiatrists have become only medication prescription writers, and do little psychotherapy (listen, empathize, and question patients over time). The book identifies the scientific shortfalls and the ethical malpractice that presently challenges its clinicians. The book identifies issues such as drug manufacturer influence and the buying of medical Hired Guns to promote drugs with dubious test data..
The two branches of psychiatric treatment are now basically staffed by two differently educated professionals: Psychiatrist do the medication thing and are trained in the field of psychopharmacology, whereas psychologists do the questioning thing and are specialists in the psychotherapy discipline. Now that’s specialization.
Carlat claims that both methods have similar outcome success rates. This is an example of a distinction in methodology without a measurable difference in positive outcomes. The Both supporter advocates are vindicated, at least in this small world case.
Lets use a baseball analogy to illustrate the other side of the coin. I live in the Los Angeles area, and have followed the Dodgers since their Brooklyn roots. The current Dodger centerfielder is Matt Kemp, a National Leagues Most Valuable Player (MVP) candidate. His talented substitute is Tony Gwynn Jr., son of the retired batting champion and Hall of Famer. Kemp and Gwynn-the-younger share many fine baseball assets, but Gwynn does not hit as often or with the home run power of Kemp. They exhibit many similarities, but also have displayed some striking differences. With the ball game in doubt, who would you send to the plate?
In this baseball analogy, we have an either/or situation. You choose either Matt Kemp or Tony Gwynn Jr. to salvage the game. You do not get to use Both talents together; there is not enough room at home plate for two hitters, although it presents a fascinating picture.
In a small world scenario, selecting an active or a passive fund management is no big deal. Historical data shows small, transient, and controversial advantages for either choice. The choices are easily reversible. That’s not the case with economic-political decisions. These are longer lasting events and have far reaching impacts. Reversals are more difficult to achieve in both time and costs.
It is true that Keynesian and Austrian economics share some common attributes. It is also true that Keynes himself changed his viewpoint over time (he often did that in many matters). But that’s not relevant. As understood and practiced in the United States today, there remains a significant and meaningful disparity between these warring economic philosophies. In the end, the manager must decide who to send to the home plate batting box.
Just like hitters, economic models often fail. So choices must be made with considerable outcome uncertainty. Like equity investing, all we can do is tilt the odds a little by selecting from those options that have a higher likelihood of success or a bigger payoff schedule.
I suggest that the Austrian school is the more attractive option, especially given the magnitude and perverseness of the problem. I mistrust the centralized federal government and trust the ultimate efficiency of the marketplace. I prefer numerous bumbling capitalists making a few small errors rather than the federal government making a single huge, and mostly irreversible, mistake. Fifty State experiments are more attractive than one Federal experiment.
In the end, it is a matter of efficiency. How many times has government efficiency been challenged and corruption exposed?
Indeed, I was disappointed by the many Both votes registered by Forum participants. You might not be prepared or want to choose, but choose you must. How we resolve our current economic symptoms will have a dominant impact on our GDP per person growth rate ( a good statistical measure of our economic wellbeing) and on our personal portfolios over the long haul.
The K-A debate is unresolved since the economics remains unsettled. However, some potential answers are out there. Where is there? Try the Laffer Curve to guide your thinking. It was not invented by Art Laffer, but he popularized it. The curve demonstrates the potential for an expanding economy as a function of tax incentives. Here is a Link that explains the Curve in excruciating detail by Laffer himself:
http://www.heritage.org/research/reports/2004/06/the-laffer-curve-past-present-and-futureRecently, I published comments on the “muda trap”. The muda trap is a Japanese idiom that translates into a waste of energy and time. Many Forum members invest considerable time and energy (and worry) seeking solid portfolio rewards. Nothing wrong with that commitment. They search for incremental excess returns by balancing equity-fixed income asset allocations, active-passive management alternatives, large-small equity holding trade offs, established international-emerging market options, and cost containment decisions.
All these are important factors. But they operate at the margins. Over time, even the most successful private practitioner only realizes a modest increment in market rewards with perhaps a small reduction in risk from each of his small world decisions. That’s okay, but it is incremental in scope. By way of contrast, the application of either Keynesian or Austrian economics has far larger and longer potential impacts.
I realize that you folks have full menus. Still I recommend that you reserve a little time to learn the differences between the two candidate economic schools. These differences are meaningful. In the long run, your retirement portfolio will reflect which theory our government adopts. Economics and politics are tied together in a Gordian Knot. Please prepare yourself to make an informed decision in this arena.
I’m momentarily suspending posts while my wife and I do a grand Fall auto tour in the New England states followed by a cruise down the St. Lawrence River and ending in Florida. Repositioning cruise ships offer a great cost savings opportunity.
I’ll be exchanging barbs with you guys once again in early November. From the haunting music of Bruce Springsteen, I’ll see you guys, “Further on Up the Road”.
Best Regards.
Comments
Face it MJG, economics is a pseudoscience of zero academic value. Players in this game use mathematical gymnastics to arrive at their personally predetermined political endpoints.
I'm basically an Austrian, but xorion is spot on about economics being a pseudoscience. I disagree that it has zero academic value, but it is a social science that really, really wants to be considered a hard science. They try, particularly the econometricians, but feh, they're trying to Quantify common sense and that's a tough task. It is why I majored in econ - because it tries to explain the common sense of our everyday interactions. However, at best they can Qualifiy some of these concepts.
As for the macro approach, I really don't see any difference between the budget at the national level and that of the individual. You need to save and invest and corporate amerika (and the gov't) want everyone to borrow and consume. I've read that our economy is based some 75% on consumption. If that's really the case, we're screwed.
We're screwed because other than Tiffany and Gucci, and other highend goods, consumer durables are in the tank and with real unemployment over 20%, they're being flushed down the drain. In addition, folks are starting to realize that they really don't need that new thinner bigger tv or that other new and improved consumer good that everyone really must have. Folks are starting to say, No. I really don't need that.
And, this is one of the major reasons why I see the depression lasting another 10 years or so . . . it will take that long to reinvent our economies to a more sustainable form of capitalism. And, we'll either reinvent them gentle or hard and I'm hoping and praying for the former, while preparing for the latter.
peace,
rono
Thank you all for reading my post. One further word before I leave for a month.
I too, like Rono, mostly chase the Austrian campfire. And like Rono (heavens, this is sounding like an unlikely love fest), I consider Economics a worthwhile and a sensible profession that contributes to our overall prosperity. The sensibility is embodied in many of the commonsense principles and core concepts that comprise the standard economist’s tool kit. For example, a prime principle is that incentives matter; a core concept is that rational decisions are coupled to marginal utility analysis.
All this is goodness, but it does not raise the discipline to the stature of a fundamental natural science like the study of physics. In this sense, economics is a soft science more in the tradition of sociology. Neither sociology or economics have been satisfied with that status, and have labored diligently to more fully incorporate the scientific culture and methodology into their work ethic. Statistical data collection, analyses, and interpretation are now integrated into mainstream economics.
Such was not the common case when Keynes and the Austrians established their bona fides. If memory serves me well, Paul Samuelson is usually credited with introducing complex mathematical constructions into the economics community. And that’s a relatively recent event. Progress has been made, but it will never reach the precision and invariance of immutable natural laws. Economics models intractable human interactions that are forever changing.
It’s funny that Professor Samuelson was an early leader in the scientific evolution of economics. One of his most famous quotes is that “Economics has never been a science – and it is even less now than a few years ago”. Talk about being perplexed and befuddled, this must be near the top of the scale in that regard. Consistency has never been any man’s strong suit.
While on the subject, here’s another Samuelson story: “A physicist, a chemist, and an economist are stranded on an island with noting to eat. A can of soup washes ashore. The physicist says, ‘Let’s smash the can open with a rock.’ The chemist says, ‘Let’s build a fire and heat the can first.’ The economist says, ‘Let’s assume that we have a can opener.’ “
While we’re enjoying a little relaxation time, here’s one from Jeff Thredgold’s “The Economist’s Joke Book. “Three economists went out hunting and came across a large deer. The first economist fired, but missed be a yard to the left. The second economist fired, but also missed by a yard to the right. The third economist didn’t fire, but shouted in triumph, ‘We got it! We got it!’ ”
Economists take a beating from every quarter. Economists often make a distinction between the short term and the long term. Lord Acton observed that “The long term versus the short term argument is one used by losers”.
George Bernard Shaw’s witty comment was that “If all economists were laid end to end, they would not reach a conclusion.”
Winston Churchill couldn’t resist temptation, and succinctly remarked that “ If you put two economist in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.”
The meanest barb about Lord Keynes comes from the sharp pen of American Austrian school economist Murray Rothbard. He said: “There is one good thing about Marx; he was not a Keynesian.” Never mind about the historical impossibility of that polemic.
Indeed, economics is not a settled science. It is ambitious and targets high aspirations and even higher goals. It is surely imperfect. But even in its current state, it can yield useful rules and procedures to guide us further down the road.
I’ll be sharing information with you guys “Further on Up the Road”.
Best Wishes.