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Austrian groundhog decade

by Cyrille Mon Nov 24th, 2014 at 05:22:27 AM EST

Via Paul Krugman, I see that Peter Schiff had this to say:

"The truth is that high levels of unemployment are historically correlated with higher inflation and low levels of unemployment with lower inflation. That is because an economy that more fully utilizes labor resources is more productive. More production brings down prices."

What??? Leave aside that pretty much everything in the Austrian worldview has been thoroughly refuted by evidence over the past 7 years -actually they will force you to leave it aside as they claim that Austrian economics is pure logic that is not refutable by evidence (handy, isn't it). Just look at the statement and... what???

For every task, you will find people willing to perform it for a lower compensation than others. In an economy that fully uses labour resources, you cannot target the cheaper population. How is that going to bring prices down I'm not too sure.

Further, with high unemployment the alreday frugal chap is well aware that, should he lose his job he would struggle mightily to find another one, whereas people are already queuing up to try and get HIS job, so you can bet that he will not be in a great position to demand a strong pay rise, while doing his best to appear very productive so as not to be replaced by someone by now willing to do it for even less. Contrast with a full employment economy where companies are bidding up to snatch anyone appearing on the job market.

And a high unemployment economy will find it very hard to sell the products that are already there (hey, if there was too much demand for the existing supply it would not STAY a high-unemployment economy), so companies will be in no position to bring up their prices, an effect that would go ever stronger as unemployment takes hold (people losing benefits would have even less purchasing power, further reducing demand), and of course a miserable outlook is going to reduce investments as well, just as we have seen over the past few years.

And yet Austrian true believers like Schaff will have you believe that the Philips curve points upwards: high unemployment triggers high inflation.

OK, we have exactly one case of a strong correlation in that direction, and what causality (it was mostly simultaneity) there was plainly went the other way: the oil shocks of the 70s triggered a strong inflation at a time of high unemployment. But clearly, when the price of your main input quadruples, you are going to struggle to stay competitive (thus unemployment), while it also has a direct effect on inflation, which was entrenched by the fact that, back then, most salaries were indexed to inflation -ie they HAD to rise by at least the inflation. So since inflation was boosted by an external event, wages could not adjust, making the problem worse. That is a clearly unique case that could not be replicated today as wages are no longer indexed.

Do Austrians really loved ABBA so much that they want to pretend we are always in the 70s?

Stagflation is a very scary thing - it is what killed Keynesian Economics and, later, ushered in the New Classicals, don't you know?

Peter Schiff pedals fear. A current example, courtesy of Tyler Durden:

Doug, welcome to The Peter Schiff Show.

Doug Casey: Thanks, Peter. It's my pleasure.

Peter: So in particular about your movie, which I thought was well done, the story that was most compelling to me was the interview with the gentlemen from Zimbabwe who had lived there most of his life.

Read no further. All you need to know is that we are all going to turn into Zimbabweans any day now.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Nov 23rd, 2014 at 09:57:28 AM EST
Never knew that the West was so close to a collapse in the seventies. How did the Soviets miss that?


by das monde on Sun Nov 23rd, 2014 at 08:26:56 PM EST
[ Parent ]
Marxist economics, obviously.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Nov 23rd, 2014 at 08:49:16 PM EST
[ Parent ]
(Obvious to any Neo-Classical Economist at least.)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Nov 23rd, 2014 at 08:50:45 PM EST
[ Parent ]
Possibly related, from Wolfgang Münchau:

The wacky economics of Germany's parallel universe - FT.com

The Germans have a name for their unique economic framework: ordoliberalism. Its origins are perfectly legitimate - a response of Germany's liberal elites to the breakdown of liberal democracy in 1933. It was born out of the observation that unfettered liberal systems are inherently unstable, and require rules and government intervention to sustain themselves. The job of the government was not to correct market failures but to set and enforce rules.

After 1945, ordoliberalism became the dominant economic doctrine of the centre-right. In the 1990s, the Social Democrats started to embrace it, culminating in Gerhard Schröder's labour and welfare reforms in 2003. Today the government is ordoliberal. The opposition is ordoliberal. The universities teach ordoliberal economics. In the meantime, macroeconomics in Germany and elsewhere are tantamount to parallel universes.

Also this, from Friday's newsroom.

by Bernard (bernard) on Sun Nov 23rd, 2014 at 12:47:20 PM EST
Truly a great article.
by rz on Thu Nov 27th, 2014 at 10:56:35 AM EST
[ Parent ]
High inflation (i.e., living costs) plus high unemployment is a recipe for downsizing the economically relevant population. If that downsizes reproduction as well...

The Austrians are quite into extra-academical forces already:

Forget Orwell and Rand, we've gone to full on Plato | First Rebuttal

Plato provides the arguments for the philosopher kings. He also describes various levels of reality, arguing that each societal demographic must live within the reality level delegated to them. He argues each demographic has a limited intellectual capacity and thus can only handle the reality level provided to them. With the philosopher kings being the only societal demographic with the right to and capacity for absolute truth. Likewise, the philosophers kings in the world we find ourselves today control each and every aspect of life including our subsequent perception of the world. There is no such thing as happenstance. The market moves a certain direction not because of unexplained market forces but because the philosopher kings have made it so [...]

The facts are we will never know the facts. We will know but a shadow of truth as ascribed to us by the philosopher kings as described by Plato's Cave Parable. This is how a handful of men and women control billions of people, the same way 20 cowboys control 30K head of cattle. We are provided food, shelter, safety and fear and in return we are provided a certain reality from which we must live. So long as we remain within our respective realities we will be granted comfort.  

by das monde on Sun Nov 23rd, 2014 at 08:51:44 PM EST

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