Krugman gets it wrong on the Austrian School. His objection to the Austrians’ theory of “mal investment” is that if a crisis is caused by the transfer of resources to fixed capital, the it should occur while that transfer is happening, not after. He forgets that the transfer takes place through “credit” facilitated by easy monetary policies, not by subtracting investment in consumer industries.
In other words, the Austrians look to the effect malinvestment, the diversion of investment to capital goods production, has on the equilibrium of the economy. By contrast, Keynes objected that “in the long run we’re all dead” and that fiscal measures have to be taken now to avoid mis allocations arising from nominal wage rigidity (which Krugman is quite right to discuss).
But Keynes insisted on “fiscal”, NOT MONETARY, expansion (he said lowering interest rates was just “pushing on a string”). So, Krugman is wrong on two counts: the arguments and theory of the Austrians, and the Fed’s policies, which are not “Keynesian” because the Fed is not the Treasury (it does monetary, not fiscal, policy). By keeping the tap open, the Fed is drowning capitalism… in the long run. - Which is where I think Schumpeter and Hayek are right.
Just generally, there can be no doubt whatsoever that theoretically the Austrians were far more profound and more learned people than the Cambridge lot, from Keynes to the Robinsons and Kahn and Kaldor and so forth.
Krugman indirectly adverts to the time difference in the Austrian and Keynesian frameworks:
“Hayek and Schumpeter were adamantly against any attempt to fight the Great Depression with monetary and fiscal stimulus. Hayek decried the use of “artificial stimulants,” insisting that we should instead “leave it to time to effect a permanent cure by the slow process of adapting the structure of production.” Schumpeter warned that “any revival which is merely due to artificial stimulus leaves part of the work of depressions undone.”
Note here that Schumpeter is more pragmatic and less categorical than Hayek (who was quite doctrinaire in that early period). Again, Schumpeter especially would be far more concerned with interventionist monetary policy, whereas Hayek was even more adamantly opposed to fiscal policy: for him, the State (and Marxism) was the equivalent of Satan, whereas Schumpeter was far more ecumenical and indeed sought to emulate and improve on Marx in his own work.
Further to the distinction between the objectionable “affirmative” or “Darwinist”interpretation of “the survival of the fittest”, and the more negative empirical “Darwinian” sense of “adaptation”, this is what I wrote on the subject some time ago:
The notion of progress indeed contains within itself by implication the linearity of the changing forces of production in both a quantitative and a qualitative sense – a growing perfection of these forces (a defecto ad perfectionem). And in turn, this linear perfectibility of the forces of production implies the univocal ability of human beings to adapt to their environment and to transform it in a suitable manner. Yet, this Marxian “scientific” belief in the progress of the forces of production – a belief in what he considered a scientific discovery of Darwinian proportions - is precisely what Weil calls into question, and with justifiable reason! For not only does the human transformation of the environment inevitably raise the possibility of its irreparable degradation, but also, and consequentially, this degradation calls into question the linearity of human adaptation both in terms of conscious human agency and in terms of perfectibility in the sense that this adaptation cannot be determined, judged or least of all measured ex ante, but can only be determined, if at all, ex post facto! This is why Weil insists on disabusing Marx about the “Darwinian” basis of his social theory: as Weil rightly points out, Marx’s social theory is in truth “Lamarckian” in that it relies on the principle that “the function shapes the organ”. But Lamarck’s functionalist, or better, interventionist theory of evolution runs directly counter to, where it does not contradict, Darwin’s genetic theory of evolution! For Lamarck, just as for Marx, it is the positive activity of a species that leads to the physiological development of organs that are most fitted to its surviving the existing environment. This interventionist or functionalist theory is founded on the twin premises that (a) a species pursues actively a function to which it is pre-disposed, and (b) this active pursuit then brings about the organs or instruments that will lead to the function’s fulfilment. Quite to the contrary, for Darwin, “the survival of the fittest” occurs not through active physiological adaptation by a species, but rather through its genetic pre-disposition to adapt to a changing environment!
The difference between the two theories could not be starker. Whereas for Lamarck’s theory, the survival of a species is due – in line with what Marx theorized for the human species - to a process of active and, in the human case even conscious, adaptation, for Darwin instead this process is entirely passive in the sense that survival of a species or of some of its members is due entirely (a) to changes in the environment, and (b) to reproductive competition between its members! In neither case, however, can a species change its genetic make-up actively to ensure its eventual survival – because both conditions are constraints external to the collective activity of the species. In other words, for Darwin, and contrary to Marx’s thesis, no species can ensure its survival ex ante: for Darwin, and again contrary to Marx, “survival of the fittest” is an attribute that can be assigned only ex post facto – after the event, not beforehand!
The epistemological and, above all, deontological and therefore practico-political repercussions of this fundamental reversal of our understanding of our relation to our natural environment are quite earth-shattering because, forcefully put, they invert the order of our understanding of how human action affects the natural environment and, consequently, also our understanding of how human beings should conduct themselves with regard to that environment. The universal attitude or orientation of humans toward the environment is that it is a passive “tool” or inert “recipient” of human activity. But seen from this novel perspective, it turns out that “nature”, far from being a passive or inert receptacle and quarry for human activities, is in fact a very active or at the very least “reactive” agent in our complex interaction with the world.
When I first came to Taiwan, if I saw someone with a smartphone or other screen, they were... studying. NOW, whenever I see someone staring at a screen - child, teenager or adult - ... THEY ARE PLAYING GAMES!
Progress for you... brought by "Big Tech"...
There has been a literal explosion in the sexualization of teen behavior here. 20 years ago, it was absolutely impossible to see teens (forget about children or adults) even holding hands in public. Now, what has saved the day is... THE CHINESE VIRUS! Because of restrictions and masks, people are normal again. You may well imagine with the impossible crowds here (never! catch public transport on a Friday evening - it is strictly taxi or nothing!), you had to change carriages, albeit only occasionally.
It's a case of "the boiling frog": behaviors change slowly and people don't notice and can't trace the causes... But degradation is absolute. It stays. Alas, it gets gradually worse. - Which is why one has to be extremely discerning choosing places to visit, let alone where to live!
I like Katie Martin at the FT: this is her latest.
Europe’s markets regulators are worried. About everything
Excess of risk-taking in markets is not obviously healthy behaviour
A businessman checks stock market data on a mobile phone
Esma said: ‘Concerns about the sustainability of current market valuations remain’ © Getty Images/iStockphoto
September 3, 2021 9:51 am by Katie Martin
Before the summertime tans had even faded on the continent, the cheerful souls of the European Securities and Markets Authority dropped a 110-page report, dedicated in part to outlining risks to investors based on observations from the opening half of this year.
Most bears have already thrown in the towel, chucked away their prognoses of doom and learnt to love, or at least accept, a rally in risky assets that seems impervious to grim news, patchy data and elevated valuations. Esma seems less willing to gloss over the cracks.
“We expect to continue to see a prolonged period of risk to institutional and retail investors of further — possibly significant — market corrections and see very high risks across the whole of the Esma remit,” it said.
Most market predictions come from people with skin in the game: investors wittingly or otherwise talking up their book, analysts at banks wedded to house views from which it is awkward to diverge, and so on. So it is useful to entertain analysis from a body disinterested in the direction of stocks, bonds or whatever, as long as market participants play by the rules and the financial system functions properly. With that in mind, here goes.
Esma of course has noted the obvious. The first half of this year brought a stunning continuation of the recovery in risky assets that started after the initial Covid shock in 2020. The global economy has bounced back, pumping up commodities prices.
Valuations for stocks in the EU have pushed above the levels that prevailed before the pandemic hit, and even riskier “high-yield” corporate bonds are flying high, despite a rise in borrowing by companies. Such bonds arguably need a new name given their average yield of 2.4 per cent in Europe, according to an index run by Ice Data Services covering debt with a duration just over three years.
But threading this all together is the ascent of not-obviously-healthy risk-taking behaviour, most evident in episodes like the GameStop retail share-trading frenzy in the US at the start of this year and the ups and downs of the cryptocurrency market.
Given the naked pursuit by market neophytes of upward-sloping important-looking charts, it is hard to believe that either meme stock trading or fizzing crypto excitement can end well. But Esma name-checks victims of excess in the wholesale market too: supply-chain finance firm Greensill, which filed for administration in March, and private investment house Archegos, which imploded in the same month.
Taken together, these episodes “raise questions about increased risk-taking behaviour and possible market exuberance”, Esma said. “Hence, concerns about the sustainability of current market valuations remain, and current trends need to show resilience over an extended period of time for a more positive assessment.”
The issue here is that Esma has answered its own question. These trends have indeed shown themselves to be resilient all year. Fund managers can easily find red flags around every corner, and it is a worthwhile endeavour for regulators to keep an eye on them, but none of them matter — yet — as long as markets just keep motoring higher.
It is not alone in these warnings, naturally. Also this week, Richard Bernstein, chief executive of Richard Bernstein Advisors described the current market environment as “maybe the biggest bubble of my career”.
“So when is the bubble going to burst? The answer is nobody knows. Our portfolios remain focused on the conservative side . . . energy, materials, financials, industrials, and smaller capitalisation cyclicals. The entire market doesn’t necessarily seem at risk, but momentum strategies focused on the market’s bubble leadership seem very risky to us,” he said.
Despite an inflation scare at the start of this year, slowing growth, the Delta variant of coronavirus, a disruptive clampdown on foreign-listed stocks by Beijing and a rewrite of US foreign policy, the S&P 500 benchmark index of US stocks has dropped by more than 2 per cent in a day a grand total of three times this year, and not at all in the past four months.
Central banks, led by the Federal Reserve, have made it clear they are alert to the risks of inflation rushing above target levels and staying there, but they are in no hurry to withdraw monetary support unless they are convinced the economic data demand it.
Some investors are growing a little more nervous. The use of borrowed money to juice up returns from bets in the US has declined for the first time since the pandemic shock last year. Exchange traded funds designed to do well in tougher economic or market environments have drawn in unusually robust demand. Now institutional money managers are also increasingly writing options on their own holdings or portfolios, allowing others to bet that stocks can keep marching higher. Essentially, this is a method for fund managers to say they do not want to sell, but they also think the quick gains are in the rear view mirror.
But this is mostly tinkering around the edges. The more cautious voices are shouting in to the void.