Rap throwdown of the century: John Maynard Keynes vs. Friedrich August Hayek

Great Debates
1

I’m sure you knew these guys had badass macro skillz, but now we see that their mad rhyming is dope. I’m not sure who got pwn’d here, but these raps be ill!

Round I (From ~3 years ago)
Round II (From a few weeks ago) – this one is especially very well done.
These are awesome! I am not sure what forum they should go into. I was tempted to put them in Great Debates so we could argue about them, but I settled for here. If a mod feels they belong in Cafe society, I understand, but I would prefer GD…

2

That’s fantastic, and make me more sympathetic toward conservative economists than I’ve ever been before.

3

Yeah, I agree. I think that is indicative of their bias. Personally I think they are both right, during a downturn Keynesian stimulus has a definite positive effect, but when the economy is healthy, the government should get the hell out of the way. In good times, attempts at stimulus just screw things up and lead to corruption. Ymmv.

4

I’d like to talk about the Hayek’s arguments from both songs. The full lyrics can be found at the econstories.tv website here. The first song lyrics on on this page, while the second song lyrics are on this page.

Anyway, from Hayek’s main thrust in the first song:

[QUOTE=Friedrich August Hayek persona]

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.
[/QUOTE]

OK, so the federal reserve lowers interest rates by buying up government bonds and thus by injecting money into the system. See this Wiki entry for a clarification. Question 1: Is this real money or is this just inflation?

Anyway, second verse. What savings are they talking about? Of course consumption is going to rise, money is cheap. That is the whole point in the fed lowering interest rates is to make money cheaper and boost spending (and thus consumption). Regarding the resources, I suppose they are talking about the housing market here. Yes, rampant consumption of a limited resource will rapidly raise prices and reveal just how scarce it is.

Third verse. How does devalued capital take up the slack? Looking back over the last few years, is was deflation that was the main danger. It wasn’t that money was devalued, it was everything else. Wages stagnated or even dropped, devaluing labor. Housing prices crashed. Fuel prices dropped. Goods were deeply discounted as companies tried to shed inventory. If anything, money was more valuable. Or am I mistaking what they are talking about with capital?

I think that his argument regarding the liquidity trap just being broke banks is interesting… hmmm.

5

Moved CS --> GD at request of OP.

6

So, “they’re both right” means “Keynes is right and so is Keynes”? Keynesian economics doesn’t mean all stimulus, all the time.

7

Exactly so, which is why 98% of the politicians who invoke him are full of shit – they have absolutely no intention of running a Keynesian surplus during good times. Their goal is to spend a lot at all times and places; Keynes is just an excuse.

8

The videos are great fun but not a good guide to the current state of economics. We have discussed the problems with Austrian economics in detail on other threads so let me just note that Austrian business cycle theory is almost dead within the economics profession.Most free-market economists don’t believe in ABCT; they usually invoke monetarism or real business cycle theory which are very different. Even free-market economists like Tyler Cowen and Arnold Kling who are sympathetic to Hayek and the Austrians don’t take their business cycle theory very seriously. Cowen wrote a whole book critiquing ABCT.

Bottom line: ABCT is today more a part of libertarian ideology than serious economics.

That video would have made more sense if it had featured Friedman rather than Hayek. Friedman did actually land some blows on Keynesian economics even if few would accept his monetarist policy prescriptions today. He had a lot bigger influence on modern macro than Hayek.

9

In case anyone is interested, here is a threadwhere Austrian economics and its business cycle theory in particular is dissected in a fair amount of detail.

10

Lantern, enlighten me:

What were his monetarist prescriptions? I remember something about helicopter money which I understood to mean printing money and then distributing it until you don’t have a liquidity trap anymore.

Is this part of it? What else is there? Why aren’t those prescriptions accepted today?

11

Well Friedman’s basic policy prescription would probably have been aggressively expansionary monetary policy including what is today referred to as quantitative easing. Most economists would agree with this but the Austrians would not.

However in the 80’s he was also associated with a view of using money supply targeting as the main tool of monetary policy which was widely discredited at the time. Today most central banks operate by targeting interest rates instead of money supply.

It’s kind of hard to do justice to his ideas and to distinguish between the strands of his thinking which have stood the test of time and those which haven’t but fortunately this articleby Brad de Long does exactly that if you are interested.

12

A liquidity trap would mean that monetary policy would cease to be stimulative. Liquidity traps, if they exist at all, are rare as hen’s teeth. Friedman’s monetary prescriptions would be to inject money into the economy by the Fed creating more money instead of just spending money.
The reason why it was not accomplished is that many at the Fed and the GOP are afraid of inflation. The democrats were in power prefer fiscal policy because it lets them play Lady Bountiful to their constituents. It was finally tried with QE2 and the economy has picked up slightly, wheter that is causation or correlation is impossible to say.

13

I would say that most central banks target money supply using interest rates, not the other way around. The biggest way monetarism has changed since Friedman was that he advocated central banking by mathematical formula in that he wanted the central banks to increase money supply be a specific amount every year and have no discretion because historically they were so horrible at it. Modern monetarism takes velocity into account more than just money levels.

14

You all do realize that this video was made by Austrian economists at George Mason Univ. (the home of supply side economics), right? They are porttraying the argument in the light least favorable to Keynes and most favorable to Hayek. It is nothing close to being an impartial presentation.

15

No, major central banks generally target interest rates. For example the Fed targets the fed funds rate using open market operations. You are right that Friedman believed that central banks should be tightly constrained by rules; that is another one of his ideas which has been rejected by most central banks.

16

For those interested, the creators of the videos appeared in a podcast discussing their creation and the thoughts that went into the lyrics and potential biases.