Topic: Can a Keynesian "demand crisis" happen? - page 2. (Read 4157 times)

Tulips in Holland once rose to crazy heights as a speculative good - of course the bubble crashed because it was effing tulips.

Keynesian economics would explain that as a deflationary spiral and Austrian economics as simply a stupid investment of time and energy.

Such a thing as "deflationary spiral crisis" does not exist. It makes no sense.
So:
1. No, a lasting shortage sustained only by hoarding can NOT happen.
2. No, if the shortage comes from speculation purely it will not last and it is not good money.

Good point.  Perhaps I should have said "spontaneous change in consumption behavior."  The idea that a large number of people will be seized by the urge to hold liquid assets rather than spend or invest them.

People who have invested with the expectation that they'd be able to make some money?  You can say that the problem is that they made a bad investment, bit what if consumer preference is inherently unpredictable?  How do you maintain the capital needed to meet that preference if it isn't consistent?  (Just playing devil's advocate here.)

People do hold on to things though, even if according to your principle they shouldn't.

I must admit I'm not as well read on Austrian theory as I'd like to be.  I only understand the philosophical difference on a very basic level.  I will keep your suggestions in mind as I work my way down my reading list, thanks.

Isn't that only the case if the money's lent out?

@shawshankinmate37927- Your basic point seems to be that prices can adjust to a point where markets reach equilibrium.  I believed that for a long time, but I have doubts now.  It's been pointed out to me that in the real world, prices don't change that easily.  It's not just the government that controls them, either.  Individuals are resistant to reductions in their income as well.  It is rational for them to be.

For instance, if I'm an employee, it would be an unwise decision to agree to let my boss lower my salary at will.  There are costs involved in changing jobs if he lowers it below the worth of my labor, so that would allow him to consistently underpay me.  It makes far more sense to lock a certain salary in contractually, even though this means some of the workers need to be laid off when the money available to pay them goes down.


Thanks, guys.  What you're saying makes sense, but so far I haven't experienced that "Aha! That's why it can't happen." moment.

It's not the increase in demand or a decrease in supply (or even a combination of both) that leads to a shortage.  It's an inability or unwillingness to raise prices that causes shortages.  After Hurricane Sandy, if the free market was allowed to function and gas prices had been allowed to rise, suppliers would have found a way to bring more gasoline to the area in order to capitalize on the higher prices.  As the supply increased and more gas was made available to meet the demand, prices would begin to drop.

You just exposed what I regard as a big Austrian irrationality. In your second sentence you said a shortage could only result from increased demand [in a distorted market], and then you gave Hurricane Sandy as an example.

It destroys your claim. The problem was completely due to a drastic decrease in supply. Demand was probably down, given the number of people who had evacuated and/or lost their cars in the storm.

Based on the language in your posts it sure does not seem like you understand the philosophical underpinnings of the Austrian school. Have you even read a single page in Human Action? How about Man, Economy and State?


Well, not completely. Every individual has subjective valuation differences for why they would hold a money good. The price of doing so is expressed as an interest rate which acts as a price signal to the market to regulate production over time.

What's the point of holding such a good? To brag to your friends how much it's worth? Of course not. The point is to eventually consume this wealth so trading can't really stop.

1.  No, not in a free market.  Technically, a shortage is simply a matter of the price not being able to rise to match increased demand.  Disparity between supply and demand occurs when prices are fixed either too high and overvalued, leading to a surplus, or too low and undervalued, leading to a shortage.  When the price of a good is allowed to rise or fall freely, there are no shortages or surpluses, and suppliers will not "decide to stop trading away that good".  For example, in the US after Hurricane Sandy there were reports of gasoline shortages and long lines waiting for hours forming at gas stations.  This happened because it was illegal to raise gas prices to account for the increased demand.

2.  Yes, money is a good/service with supply and demand.

Yes. E.g. when people buy old famous paintings on auctions: the amount of works is limited, demand is huge and the painting is not sold again for unknown amount of time. And when it is being sold again, new price may have no relation to initial price.

Money can be that good if there are 10 units remaining and they have value in the eyes of collectors. But the more identical units you have, the more "liquidity" they will have. That is, the bigger chance you have to buy it for some price simply because more than a handful of persons will be holding these units and some of holders will be more willing to sell at some price point.

After all, even if you end up in a situation where all coins are collectibles and nobody is willing to sell them, who is suffering from that? Obviously, everybody who sold their coins are better of (they got something more valuable for them, e.g. USD, or food or whatever). Those who purchased coins and do not want to sell, are also happy owners of coins. If they don't like them anymore - they can always sell to other crazy collectors.

In other words, there is nothing "bad for society" in a free voluntary trade. On each side of trade everyone gets what they want.

Define "irrational change in comsumption behavior".

If Im understanding it correctly, let me advance you that from an austrian perspective "irrational change in consumption behavior" is not possible because, for austrians, consumers are kings and the objective of an economic system is to produce and supply what the consumer needs and/or wants. So when there is a mismatch between what consumers demand and what the production system is offering the "fault" is always on the production system, that needs to re-organize. What is the point on having a production system that produces stuff people dont need/want?


Any kind of alternative, it depends on each particular change on consumer demand.

If the problem is happening in the currency market, then alternative currencies can be an option, yes.

Surely, the principle that the market is always right must prevail, because it is made up of thousands, or millions, of human minds weighing decisions about investment, consumption or saving. While temporary misalignments will always occur, in the Austrian system these will be smaller in relative size and self-correct faster.

The Keynesian principle that elements of an economy can be controlled (e.g. interest rates) is assuming that a few people (e.g. a central bank committee) can be wiser than the market. Time and again this is proven false, and it is governmental interventions that makes misalignments much larger and longer-lived than they would in a free market. Consider China's centrally planned empty cities as an extreme example.

Thanks.

I understand the differences in philosophy between the two schools, and I understand that they each have their narrative for why recessions happen.

The problem I have is the two narratives do not seem mutually exclusive.  I don't see why the possibility of a malinvestment fueled misalignment of sectors rules out the possibility of a demand shortage brought on by an irrational change in consumption behavior, or vice-versa.  How do we know which one we're facing at any given time?

What "alternatives" do you mean?  Alternate currencies?  Does that really help if the shift in spending is from productive enterprise in general to stores of value in general?

The answer is yes, but in a free market it wont produce a crisis because enterepreneurs will use the oportunity to fill the market with alternatives.

Its only in the regulated market that we live on that inefficiencies are kept around and produce long term harm.

The problem in reality between keynesianism and austrianism is the way each theory looks at an economic system. Austrians see the economy as an ecosystem, a mix of complex and changing parts with complex and changing interactions between them. On the contrary, keynesians have a macroeconomic outlook over the economy, where they see it as a whole, as a car that can only go faster or slower (or even backwards), but dont bother to look inside and how each different part coordinates with the other.

So in the keynesian model talking about coordination, about how different parts of the economy relate to each other, does not even make sense. Its all about total output, without looking about what type of output its being produced. For an austrian thats a completely insane oversimplification that can never capture how an economy works. Thats why it is so hard for a keynesian or basically any macroeconomic trained economist (most of them) to understand what an austrian is saying: what type of product? coordination between sectors? why are you looking at that, just look at total production! Its going down, we need to do something!!

When the austrian replies that the reason is because there is a realignement of sectors and therefore the temporal decrease in production is good because its a sign that in the furute the economy will start producing the type of products people need/want and not the old type of products people did not want (excess housing for example), macroeconomic trained economist dont understand. They just dont: why are you looking at different sectors, we only care about total output! And its going down!

And the discussion cycle goes on forever. Its up to you to decide if you think looking only at macroeconomic indicators is good enough to understand and make predictions about the economy, or if looking about how different parts of the economy interact with each other and the coordination they achieve is needed and will give you a better chance at understanding and predicting the economy.

So how do we tell the difference between a demand crisis and an Austrian-style malinvestment crisis?

If you're trying to say that a demand crisis is not a problem, that's not very convincing.  The decision to change the mainstream currency is pretty much out of the hands of the market, and even without legal barriers it would impose huge costs on businesses.  Letting consumption fall to its minimum level would be a huge step backward in material progress and imply a great deal of human suffering.

Where does the objection to the interventions proposed by monetarists or Keynesians come in if there's no fundamental disagreement about the possibility of a demand crisis?

Yes to both. But ultimately the crisis resolves itself, either by adoption of some other form of money that has better liquidity or reaching a minimum level of consumption.

I tried asking this on another site, but I didn't get a real answer, so I thought I'd try here.

Many of the posters he seem to adhere to the Austrian School of economics.  I'm aware that ABCT provides an alternate explanation for why recessions happen.  However, I haven't come across any reason in Austrian theory why the Keynesian narrative can't also happen.

Say's Law shows that over-supply of one good is balanced out by under-supply of another good.  This does not, however, mean that over-supply doesn't happen, or that it doesn't cause problems when it does.

I suppose the question comes down to:
1.  Can a shortage of a good occur because a large group of people irrationally decide to stop trading away that good?
2.  Can that good be money?

If not, to either of those questions, why not?