Ditto, and downvoting b1shop’s response since the quote did not mention any particular economic theory.
I wouldn’t recommend downvoting b1shop’s response (I didn’t), because they are correct that the basic reading of the quote relies on particular economic assumptions. There are economic theories that put the fault in the bust- if things were intelligently managed, you could keep the bubble inflated at just the right amount to prevent it from popping or inflating further, and never have to deal with the bust.
For example, look at this graph that Krugman posted in 2010. The “projected real GDP” is from Mark Thoma, another economist, but where you choose to draw that line says a lot about your assumptions. The Austrian would basically draw it from trough to trough, claiming that all the reported GDP above that line was activity that could be recorded but didn’t actually generate lasting wealth. In that view, the bubbles are clearly harmful; in Krugman’s view, the busts are harmful. It’s the difference between a trillion dollars that we can never get back, and a trillion dollars that was never there.
if things were intelligently managed, you could keep the bubble inflated at just the right amount to prevent it from popping or inflating further, and never have to deal with the bust.
Two things. First, a bubble that never deflates or pops is not a bubble, it’s sustainable growth.
Second, there is a LOT of empirical evidence that “intelligent management” of economy—which has been practiced since the first half of the XX century to various degrees in many countries—vastly underperforms its promises.
It does assume that asset bubbles are made up of bad investments which are costly to undo. While this insight may have been originally Austrian, I didn’t think it was at all contentious. The dot-com bubble is a clearer example, as the housing bubble was both an asset bubble and banking failure (and many of the dot-com investments were just off-the-wall crazy).
As Vernon Smith showed, asset bubbles happen even with derivatives who’s value is objective (and without central banks). Its hard for me to see the bust as the problem in those cases.
Would a Keynesian say that any economic downturn can be averted in the face of any and all bad investments?
Would a Keynesian say that any economic downturn can be averted in the face of any and all bad investments?
Doubtful. (I should make clear that I’m not a professional economist, and I couldn’t talk math with a Keynesian without doing serious reading first.) To go off the same graph, it does identify the tech bubble in ~2000 as being above the projected line.
My impression of the difference is that in the terms of a crude analogy, the Austrian prefers to rip the band-aid off, and the Keynesian prefers to slowly peel it back.
I wouldn’t recommend downvoting b1shop’s response (I didn’t), because they are correct that the basic reading of the quote relies on particular economic assumptions. There are economic theories that put the fault in the bust- if things were intelligently managed, you could keep the bubble inflated at just the right amount to prevent it from popping or inflating further, and never have to deal with the bust.
For example, look at this graph that Krugman posted in 2010. The “projected real GDP” is from Mark Thoma, another economist, but where you choose to draw that line says a lot about your assumptions. The Austrian would basically draw it from trough to trough, claiming that all the reported GDP above that line was activity that could be recorded but didn’t actually generate lasting wealth. In that view, the bubbles are clearly harmful; in Krugman’s view, the busts are harmful. It’s the difference between a trillion dollars that we can never get back, and a trillion dollars that was never there.
Two things. First, a bubble that never deflates or pops is not a bubble, it’s sustainable growth.
Second, there is a LOT of empirical evidence that “intelligent management” of economy—which has been practiced since the first half of the XX century to various degrees in many countries—vastly underperforms its promises.
Agreed on both points. I’m not endorsing that theory, or related steelmanned versions.
It does assume that asset bubbles are made up of bad investments which are costly to undo. While this insight may have been originally Austrian, I didn’t think it was at all contentious. The dot-com bubble is a clearer example, as the housing bubble was both an asset bubble and banking failure (and many of the dot-com investments were just off-the-wall crazy).
As Vernon Smith showed, asset bubbles happen even with derivatives who’s value is objective (and without central banks). Its hard for me to see the bust as the problem in those cases.
Would a Keynesian say that any economic downturn can be averted in the face of any and all bad investments?
Doubtful. (I should make clear that I’m not a professional economist, and I couldn’t talk math with a Keynesian without doing serious reading first.) To go off the same graph, it does identify the tech bubble in ~2000 as being above the projected line.
My impression of the difference is that in the terms of a crude analogy, the Austrian prefers to rip the band-aid off, and the Keynesian prefers to slowly peel it back.