The Instigator
LaissezFaire
Pro (for)
Winning
11 Points
The Contender
askbob
Con (against)
Losing
0 Points

The Business Cycle: Mises vs Keynes

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Post Voting Period
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after 2 votes the winner is...
LaissezFaire
Voting Style: Open Point System: 7 Point
Started: 5/14/2011 Category: Economics
Updated: 6 years ago Status: Post Voting Period
Viewed: 3,694 times Debate No: 16521
Debate Rounds (3)
Comments (18)
Votes (2)

 

LaissezFaire

Pro

Resolution: Austrian economics has a better explanation of the business cycle than Keynesian economics. My burden of proof is to show that my explanation is better than my opponent’s, and Con’s is to show that his explanation is better than mine.

This round will only be for me and Con to give an exposition for our own theories—we will address each other’s theories in the next 2 rounds.

Theory:
The Austrian theory of the business cycle starts with the expansion of the money supply. This generally happens when a central bank, such as the Federal Reserve, prints money out of thin air and gives it to banks. This expansion is then compounded by fractional-reserve banking, which is when banks are only required to keep a fraction of the reserves they’d need to redeem all of their deposits (so, if you put $100 in a bank account, they can loan out $90, even though they already promised to give you your $100 back whenever you want it. Then that $90 can end up in another bank account, and the process repeats itself, making a $100 increase in the money supply much greater than $100). Of course, the banks don’t just do nothing with this money—they invest it and loan it out. This is where the problem starts.

But first, let’s see how money and loaning work without any artificial increases in the money supply. Loans are, necessarily, backed up by savings—people choosing to consume less now so that they can consume more later. Businesses respond to this by borrowing money from these savings to invest in consumer goods for the future. They may build “producer’s goods,” like machines and factories, and then use those to make consumer goods. An increase in savings lowers the interest rate for loans, sending a signal to the market—a signal saying that people are consuming less now so that they can consume more later. Businesses respond to this signal by borrowing more money and using it to build producers goods to make the consumer goods for the future. Resources are directed away from direct production of consumer goods (because people are consuming less now, so that they can save money), and toward the production of consumer goods in the future (because people are going to spend their savings in the future on goods). Everything works out great.

An artificial increase in the money supply distorts this signaling and allocating process. Central bank money printing has the same effects on interest rates that a true increase in savings has—it lowers them. It sends the same signal to the market that an increase in savings would—it signals that businesses should invest in consumer goods for later. So, businesses do just that—investing in building much more housing, for example, than would normally be built. The problem is that no actual increase in savings has occurred—people aren’t delaying consumption now so that they can consume more later. So the signal is wrong, and resources are allocated to the wrong place, creating the “boom” phase of the business cycle. The investment in future consumer goods would have paid off if it had been the result of actual savings—because people actually had savings to spend on those goods in the future. But if the investment was because of a fake signal, an artificially lower interest rate, then the investment was wasted—building a bunch of houses that it turns out people didn’t want to buy, for example. The “boom” created by the money printing turns out to be a waste of labor and resources creating goods that people didn’t want. Once this becomes apparent, which it eventually must, the cycle enters the “bust” phase. People that invested in the future of the boom industry, whether it’s housing, dot-com, or whatever, lose much of their money. People working in the boom industry and industries relying on that industry lose their jobs, as the market tries to correct for the overinvestment in that industry by stopping using resources on it.

Evidence:
One indication that the Austrian theory is the correct one is that Austrians can, and have, used it to correctly predict bubbles and busts. Austrian economists, such as Peter Schiff, have said throughout the entire housing bubble that the growth was illusionary and that it would end in a severe recession—the mainstream Keynesian economists just laughed at them. [1] Austrians have known that Fannie and Freddie were distorting the housing market and unsustainable for years. [2] [3] They've warned about the housing bubble for years, while mainstream economists, including the ones that are supposed to be stabilizing the economy through the Federal Reserve, denied it. [4] [5] Austrians warned that Greenspan's money printing after the 2001 crash would inflate a housing bubble and create an even worse crash further down the road—while everyone else ignored them. [6] [7]

Sources:
[1] http://tinyurl.com...
[2] http://mises.org...
[3] http://mises.org...
[4] http://mises.org...
[5] http://tinyurl.com...
[6] http://mises.org...
[7] http://mises.org...
askbob

Con

Resolution:

I accept LaissezFaire's resolution and look forward to an interesting debate

Theory:

The Keynesian theory of economics primarily follow a classic equation of GDP. GDP = private consumption + gross investment + government spending + (exports − imports). People produce goods or services and are recompensed or their labor by money. They then have two choices. They can consume something that theoretically gives them more utility, or they can choose to put off consumption until the future(savings).

Before financial intermediaries came into existance, savings typically did not translate into investment. As financial intermediaries became more popular, more people began depositing their savings into banks. Banks would then take those funds and either loan them out to individuals or invest them in companies. The increase in loanable funds would lower the yield curve making borrowing more attractive for individuals and cheapening credit. Additionally, the money invested into companies would allow the companies to invest more money into machines for increased future production.

However as the interest rate falls, it should decrease savings and increase consumption due to incentives. However, due to the income effect (people spend money when they have more money), people due not change their savings habits despite the incentive. The increased investment planned for a higher future consumption fails due to people continuing their increased savings. This decreases investment to match the lower consumption. Workers are fired due to sticky wages and a recessionary period is entered.

What happens then is just what is not needed and that is more savings rather than consumption. When people are losing their jobs or are afraid of losing their jobs, they tend to save more and don't take out loans despite the interest rate being low. This increased savings means decreased consumption which only furthers the problem of a glut of savings when consumption is most needed.

With future demand uncertain and jobs uncertain people become very hesitant to take out loans even with interest rates falling to near zero.

Evidence for increased savings in recessionary periods despite low interest rates:

Only when the economy has seen high inflation have the savings rates been lower in recessionary periods.

Current Recession
http://static.seekingalpha.com...

.Com Recession
http://www.finfacts.ie...


Action is needed to stop the downward spiral of the economy. Government must step in and stop the cycle through active monetary and fiscal policy (if needed).

Evidence:
Savings evidence above, as well as the evidence of moderate inflation with shorter recessionary periods since the theory has been in practice. The explanation of sticky wages and the recognization of the importance of slightly higher inflation during periods of stagflation cement the theory as the cornerstone of modern economics. As with any theory that is actually being used, the theory has been adjusted in serveral instances to reflect the data with advents like the New Keynesian Phillips curve which accurately incorporate sticky wages and the true relationship between inflation and long term unemployment. To find the merits of this theory, one need only compare the great depression with the great recession of today and observe the time period of each. The time for do-nothing economics has long since passed as economics has involved to use real data and math rather than theories that are merely based off of verbal logic without any real substinance.


Sources:
http://mitpress.mit.edu...
http://web.uconn.edu...

The next round will be for refutations and critiques of the theories as stated in LaissezFaires's R1. I look forward to his critiques and submitting my own. Thanks for a great debate.
Debate Round No. 1
LaissezFaire

Pro

Theory:
Con tries to use an increased savings rate during recessions as evidence for his theory. But, as Austrian theory would also expect this, it doesn't work. During the boom, people are fine with their low savings rate, because the stock/housing boom makes them think they have more wealth than they really have. But once the bubble starts popping, once their houses and stocks are worth less, they start to save more to compensate.
And the data, comparing the stock market and the savings rate, is just what Austrians would expect. http://www.debate.org... (Note: The link is to my photo album, but the source isn't me, it's the government's own statistics)

Furthermore, Con's theory fails to explain why the business cycle happens. It describes how it happens—the decreased consumption causes unemployment, because wages are sticky and don't lower to compensate for the decreased demand. But it fails to explain why any of this happens—why does this decrease happen, why is the boom and bust generally concentrated in one specific sector, like housing?

Evidence:
First, I'll discuss how well our competing theories explain the current recession's employment data. The Austrian theory emphasizes the different stages of production—higher order production of capital goods vs. lower order production of consumer goods. Austrian theory argues that the recession happens because the production structure is distorted—production is artificially shifted to higher order goods, like construction. Then, the bust happens because this distortion is unsustainable—so the artificial boom in the higher order industry collapses, and the ‘recession' phase is the reallocation from the boom sector to the natural way the economy would organize. So, the Austrian theory would expect more of a recession in the higher order sectors than in the lower order sectors. The Keynesian theory, on the other hand, would expect a general problem, due to general decrease in demand, and would expect no such disparity. So let's look at the data, comparing employment in 3 areas of the economy—1) Construction, 2) Durable goods manufacturing, and 3) Non-durable goods manufacturing. Austrians would expect construction to be the worst-hit, as it is the highest order good here (because it is very capital intensive, and buildings are used over a long time period once built), then durable goods manufacturing would be the next hardest hit, then non-durable goods (generally consumer goods) manufacturing would be the least hardest hit.
http://www.debate.org... (Same as above note)

"Savings evidence above, as well as the evidence of moderate inflation with shorter recessionary periods since the theory has been in practice."
Presumably, Con is referring to the claim that recessions have been shorter and less severe since the creation of the Fed/after the Great Depression (I've heard both claims, so I'm not sure which he's referring to), than they were before the Fed. He fails to cite this claim, probably because it's clearly false. Only studies that skewed the data by counting deflationary periods as worse than inflationary ones, regardless of whether the actual recession was worse, had this conclusion—it is simply a trick of statistics, as even Keynesian Christina Romer, former advisor to the Obama administration, admits, saying that the post-war period wasn't actually more stable than the pre-Fed period. [1] [2] An example of this is the so-called Long Depression of the 1870s. Mainstream economists assumed that falling prices must mean a depression, and since prices fell an average of 3.8% annually during this decade, it must have been one of poor growth—the National Bureau of Economic Research estimated that the depression lasted from 1873 to 1879. [3] While there was a depression during this period, the average real growth for the decade was 6.8% per year, with a per-capita real growth of 4.5% per year. [4]

"To find the merits of this theory, one need only compare the great depression with the great recession of today and observe the time period of each."
I agree completely with this statement. First, let's look at the beginning of the Great Depression, when Hoover was in office. While Keynes' General Theory had not been published yet, that didn't stop Hoover from applying what would later become Keynesian economics. He increased spending, and the Fed cut interest rates. Even FDR, during his 1932 presidential campaign, criticized Hoover for out of control federal spending. [5]

Charts of Hoover's spending/Fed interest rates:
http://www.debate.org...
http://www.debate.org...
http://www.debate.org...

Of course, one could argue that Hoover didn't do ‘enough' to stop the depression, but it's certainly not a case of him ‘doing nothing.' Furthermore, the idea that the Great Depression was as bad as it was because Hoover didn't do enough is discredited by the fact that his moderate dose of Keynesian economics seemed to do worse than all of the times the federal government actually did nothing in response to an economic crash.

Now let's look at the current recession. Whatever the results are, they can't be the result of do-nothing economics—bailouts, cutting the interest rate down to 0%, and massive stimulus spending are clearly Keynesian prescriptions for a recession. And, again, we can evaluate the effectiveness of Keynesian theory by the fruits it bears. So let's look at employment. Looking just at the U3 figure, it would seem that this recession isn't so bad. But this figure is misleading—it doesn't count short and long term discouraged workers (people that have been out of work so long that they've stopped looking for work). Obviously, if the U3 rate decreases, but the rate including discouraged workers increases, there's no real improvement—it isn't decreasing because people are getting jobs, the rate is decreasing because unemployed people have stopped looking for work.

http://www.debate.org... (The U6 rate includes short-term discouraged workers, and the SGS alternate includes both short-term and long-term discouraged workers. Using the SGS alternate rate, unemployment has gone down from a high of 22.5% to 22.1%--hardly significant improvement).

Sources:
[1] Christina D. Romer, "Is the Stabilization of the Postwar Economy a Figment of the Data?" American Economics Review 76 (June 1986): 314-34.
[2] Christina D. Romer, "Remeasuring the Business Cycles," Journal of Economic History 54 (September 1994): 573-609.
[3] "Business Cycle Expansions and Contractions" National Bureau of Economic Research. http://www.nber.org...
[4] Milton Friedman, Anna Jacobson Schwartz. A monetary history of the United States, 1867-1960. Princeton University Press, 1971. p. 37
[5] Samuel I. Rosenman, ed., The Public Papers and Addresses of Franklin D. Roosevelt (New York: Random House, 1938), I, 648.
askbob

Con

askbob forfeited this round.
Debate Round No. 2
LaissezFaire

Pro

We're going to continue this in another debate, the link for which will be posted in askbob's last round. But for now, you can watch a debate on the same subject in the form of two rap battles.
askbob

Con

askbob forfeited this round.
Debate Round No. 3
18 comments have been posted on this debate. Showing 1 through 10 records.
Posted by BennyW 5 years ago
BennyW
I see someone already posted the video.
Posted by LaissezFaire 5 years ago
LaissezFaire
That's probably because I posted that video in the debate.
Posted by BennyW 5 years ago
BennyW
This reminds me of this
Posted by LaissezFaire 6 years ago
LaissezFaire
Put http://www.debate.org... for your last round, and post your argument in that debate.
Posted by LaissezFaire 6 years ago
LaissezFaire
Also, welcome to Chicago (I live around here too, go to school in Alabama, but am home for summer break).
Posted by LaissezFaire 6 years ago
LaissezFaire
No, that's fine, we can just start a new debate for the final rounds, and continue the debate there.
Posted by LaissezFaire 6 years ago
LaissezFaire
: At 3/22/2011 9:23:01 PM, askbob wrote:
: : At 3/22/2011 9:20:54 PM, socialpinko wrote:
: : I'm actually about to debate askbob. If I forfeit will he really throw rocks at me? And sorry about the forfeits, I can be a real pu**y sometimes, after all I'm a queer.
:
: if you forfeit i won't throw rocks, instead i'll find out where you live and harass you endlessly
Posted by askbob 6 years ago
askbob
I might have to forfeit around in chicago for internship flew in today and have to iron clothes for tommorow. When I get off work I'll do the round but if this runs out by then i'm probably gonna be screwed. We'll see how it goes.
Posted by Ore_Ele 6 years ago
Ore_Ele
Looks to be a damn good debate.
Posted by CiRrK 6 years ago
CiRrK
Ah good. Ive been waiting for this debate. : )
2 votes have been placed for this debate. Showing 1 through 2 records.
Vote Placed by ExNihilo 5 years ago
ExNihilo
LaissezFaireaskbobTied
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Total points awarded:70 
Reasons for voting decision: Obvious....plus, points for the video. Hayek>
Vote Placed by Cliff.Stamp 5 years ago
Cliff.Stamp
LaissezFaireaskbobTied
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Total points awarded:40 
Reasons for voting decision: Could have been interesting, forfeit.