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Hayek vs. Keynes: Epic Rap Battle

by Magnifico Tue Jan 26th, 2010 at 01:31:56 AM EST

About the video:

Econstories.tv is a place to learn about the economic way of thinking through the eyes of creative director John Papola and creative economist Russ Roberts.

In Fear the Boom and Bust, John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis. Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there's a "boom and bust" cycle in modern economies and good reason to fear it.

Lyrics and a mp3 are available at the website of EconStories and in case it wasn't obvious from the video and lyrics about whose side the video skews toward, Papola and Roberts position becomes clear when they were interviewed by NPR about the economists' rap battle.

Papola's growing interest in the influential but little-known economist eventually led him to discover libertarian economist Russell Roberts, co-author of the popular blog Cafe Hayek and host of the EconTalk podcast.

Papola was an executive producer at Spike TV and "in 2009, he cold-called Roberts and left a 'long, ranting message' about how he was interested in the business cycle and monetary policy." Papola and Roberts oppose governments using economic stimulus as a means to revive an economy that has collapsed into a recession.

As Hayek fans, this didn't make Papola and Roberts too happy. They wanted to find a way to critique Keynes' theories and give Hayek the attention they thought he deserved... The resulting 6 1/2-minute music video tells the story of Keynes and Hayek going out for a night on the town. While drinking and rolling with their homies, they lay out the basics of their theories.

Just when Keynes was starting to regain some ground lost to the Chicago School in the last half-century, the free marketeers lay down some catchy, heavy rhymes. I admit that the video does "dive into economics using visuals and entertainment value" and I'm left with the impression that Keynes can't hold his liquor.

But, from my own non-economist perspective, it seems that Papola and Roberts twisted some of the recent economic happenings and dumped them undeservedly in Keynes' lap. Having the financial "markets set free", what Hayek proposes, a large part of the cause of the recent bubble that led to the global financial collapse.

In December, PBS News Hour talked with Roberts and Keynes' biographer, Robert Skidelsky, and looked at the late economists' hip-hop legacy. Here's Roberts:

Well, my claim is that, in our attempts to engineer our economy from the top down, we have actually made, in many -- many cases, the world less secure, workers less secure, and lowered our prosperity, and hurt people...

What markets do is, they punish you if you systematically make the same mistakes over and over again. When you destroy the punishment system that markets naturally perform, you're going to see more myopia, more hubris, more overconfidence.

Skidelsky responded:

Yes, but it's interesting, the word you; they punish you.

If it was just that you made a mistake and the markets punished you, because you were out of a job, that's fine. But they actually punish millions of people for the mistakes of a quite a few people. And no government, no democratic government, is going to allow that degree of punishment...

Unemployment and the bankruptcy of lots of companies who are not making mistakes. They're just affected by the people that have made the mistakes.

Then Roberts complains that economic stimulus that Keynes proposes gives "solace to politicians who want to spend money wastefully on special interests, rather than on things that would help us." Which is what I think Alan Greenspan, former chair of the U.S. Federal Reserve, brought the United States in the 2000s with his cheap money, bubble-inflating, low interest rates policies.

It seems like "markets set free" and misguided stimulus on things that do not help us, the economically lethal combination that Greenspan's low interest rates and George W. Bush's tax cuts for the wealthy, takes the worst of both Hayek and Keynes. Greenspan, a market libertarian, ignored that "business is driven by the animal spirits" in that people are greedy and do not always make the best decision.

"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms," Greenspan said in October 2008 during U.S. Congressional testimony.

Bush, of course, was doing the job his people sent him to do: make the wealthy even richer.

My own view is when Keynesian stimulus is provided directly to private individuals or corporations, rather than by direct governmental spending on improving infrastructure or creating public service jobs such those funded by the New Deal-era Works Progress Administration, especially in a deregulated, lawless business environment as currently exists in the United States and much of the west, then Hayek is correct that the stimulus will just make things worse, create a bigger crash in the future. Public stimulus into private, free markets is a catalyst for catastrophe as was witnessed by the collapse between 2007-2008.

Is this a fair assessment? How would Keynes and, for that matter, Hayek respond?

instant classic! :D

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Jan 26th, 2010 at 08:11:26 AM EST
At least the video presents some very simplified versions of the two economists, though it leaves the impression that Keynes condoned mal-investment and was in favor of the animal spirits. They show Keynes getting drunk. If he did he could hold his liquor. He made out rather well through the Depression and was a canny investor. I do not know how involved Hayek was as an investor or how he fared.

Keynes did provide understandable explanations of the aggregate functioning of the markets for the general public. The Great Slump of 1930 is an excellent introduction. Using simple arguments with ratios of first, the cost of production going into consumer goods vs. capital goods, and second, the amount of total wages spent on consumption vs. savings, he shows how booms and busts can be created.

First the conditions for a boom:

  • the total amount spent on production constitutes the national income.
  • let 80% of national income be spent on consumption and 20% on capital goods.
  • let 90% of total wages be spent on consumption and 10% on savings.
  • since the wages for both the producers of consumer goods and capital goods go into consumption, 90% of total national income would be spent on consumer goods produced by 70% of total production capability. Lots of spending chasing not so many goods gives rise to high prices and profits to producers. Lenders will be happy to provide capital for new production, as it will be seen as profitable. Good times! Everyone is confident.

The conditions for a bust:

  • Bad news! The bankers used our money on bad bets and lost it all. Banks are failing. Your bank could be next.
  • People pull their money out of banks and bury it in coffee cans in the back yard.
  • People stop spending on all but bare essentials. (Sounds familiar.)
  • Lenders are no longer willing to lend. Producers are no longer willing to borrow.
  • The ratios change. There is zero capital investment so 100% of production is for consumption. But people are now afraid and are saving 20% of their earnings.
  • Now there is a glut of goods and a dearth of buyers. Prices fall. Producers lose money and lay off workers. Consumption drops further. Everyone becomes more afraid. The economy is in a death spiral.

Keynes noted that the government could, in these circumstances, increase spending. But he did not recommend that the government give people money to visit the casino. The government needed to spend on capital goods. It was simply obvious during the Depression that the spending should be on things that would benefit society and result in future increases in productivity, such as roads, schools, parks courthouses, energy sources, etc.

Military spending counted as well, although in a different way. The spending produced military power that helped insure the nation retained control of its own destiny but it also produced goods that the domestic consumer could not buy. In that regard it produced the same effect as producing capital goods. Now only a fraction of the national production was being expended on consumer goods and more people were employed, so there was again upward pressure on prices.

From my point of view, Keynes' explanation worked AND made sense. I will leave an exposition of Hayek to others, perhaps ManFromMiddelton. My impression is that Hayek's explanation also worked, but to a different end. While Keynes provided a model that enabled the economy as a whole to function for all, Hayek provided a model that diverted a larger portion of the total production of that economy to those who had the surplus capital and did the lending. When a small group of people end up with all the money and assets and become afraid to use the money because of the mess they made things are going to go very badly indeed. As they are.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 26th, 2010 at 10:24:01 PM EST
It seems to me that there is something of a logical broad leap between asserting that a bust is caused by "malinvestment" - which is of course true - and the assertion that government stimulus will make things worse - which seems predicated on the wholly arbitrary assessment that government malinvests more than private investors.

In fact, purely from the point of view of a prudent manager of the public purse, it would be downright negligent not to attempt to make major public investments take place during recessions. There being less other economic activity with which to compete, public projects will, ceteris paribus, be cheaper to perform during a recession.

So underlying this is the unstated assumption that there are either no economically sound government projects or that the government is incapable of identifying and executing them.

Hoover Dam would beg to differ.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 27th, 2010 at 05:38:05 AM EST
Hayek, I gather, was repelled by the totalitarian governments of Hitler and, especially, Stalin and viewed socialism as a "gateway drug" to totalitarianism, but I have never been inspired to hold my nose long enough to get beyond reviews. It seems a monstrous irony that his views have turned out to have been "The Road to Serfdom" and his backers and patrons the masters of the former nominally democratic serfs who he has helped deliver into their reduced circumstances.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 27th, 2010 at 10:18:35 AM EST
[ Parent ]
Friedrich Hayek - Wikiquote
It is possible for a dictator to govern in a liberal way. And it is also possible for a democracy to govern with a total lack of liberalism. Personally I prefer a liberal dictator to democratic government lacking liberalism.
  • Interview in El Mercurio (1981)
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jan 27th, 2010 at 11:28:06 AM EST
[ Parent ]
I wonder if Pinochet and the Shah qualified as "liberal."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 27th, 2010 at 12:34:46 PM EST
[ Parent ]
Who did you say published that quote, and in what year?

Wikipedia: national newspapers of Chile

El Mercurio de Santiago - The paper of record in Chile; founded in 1900
El Mercurio is a conservative Chilean newspaper with editions in Valparaíso and Santiago. Its Santiago edition is considered the country's paper-of-record and its Valparaíso edition is the oldest daily in the Spanish language currently in circulation.
You can stop wondering.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Carrie (migeru at eurotrib dot com) on Wed Jan 27th, 2010 at 01:14:30 PM EST
[ Parent ]
Ah. I see.

Murdering labour union members: Acceptable expression of liberal policy.

Nationalising copper mines: The penultimate checkpoint on the path to a totalitarian nightmare.

The wonders of the far-right mind...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 27th, 2010 at 02:40:55 PM EST
[ Parent ]
Not to mention keeping copper mines nationalised being an acceptable expression of liberal policy,
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Jan 27th, 2010 at 03:12:15 PM EST
[ Parent ]
Murdering labour union members: Acceptable expression of liberal policy.

That was only the overture. They rounded up all who had supported Allende in the National Stadium and I believe most of them were killed. We have family friends who just avoided being included. The husband was a TV news man and the wife was an artist. They had been Allende supporters and fortunately had been in Venezuela for one of the wife's exhibitions when the coup occurred.

Pinochet basically blew out the brains of all he could find who had a social conscience. I had known about Kissenger and Friedman. Guess Hayek makes it an unholy trinity. Makes one wish there were a Hell in which they could rot. Instead, all three get Nobel Prizes, Kissenger the Peace Prize. No evil deed goes unrewarded.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 27th, 2010 at 06:31:10 PM EST
[ Parent ]
I've spent the last year or so thinking about follow-ups to the Economics for Dummies diary.

It might not be obvious, but there's an anthropological model where this kind of thing makes perfect sense. It's not moral sense, and it's not left-wing moral sense, but it is completely self-consistent.

It's also why the right is so dangerous. If you take away democracy - in the ragged sense of popular influence on power - and replace it with liberalism in the sense that people like Hayek meant it, you cannot help but get fascism and violence.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 28th, 2010 at 02:53:03 PM EST
[ Parent ]
i used to mosey over to the mises institute website to try and learn how economies get so screwed up, back in 2004.

especially clear in the comments, they were very like republicans. uncaring people.

keynes had a much better sense of humour. viz. J's sig.

f* addled adolph for inoculating the public against the word 'socialism', and robbing it of positive significance.

that might have been as great an inhumanity as any of his other, better known fails.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Jan 27th, 2010 at 01:59:50 PM EST
[ Parent ]

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