Diálogos didácticos

En texto de Arnold kling, una historia de las ideas económicas desde 1945. Traslada las ideas de cada época en diálogos ágiles y claros. En los años dorados 1950-60, esta es al discusión que tendría lugar entre un clásico y un keynesiano. Ameno y divertido. En próximos post, seguiré reproduciendo los de otras época. No olviden que el contexto es EEUU, pero que sus ideas tenían una gran difusión en el mundo. Estos son los cuatro grandes periodos.

Time Period	1960-1969	1970-1985	1986-2007	2008-2013
Nickname	The Forgotten Moderation	The Great Stagflation	The Great Moderation	The Financial Crisis Aftermath
Median Unemployment Rate	4.9 percent	7.2 percent	5.5 percent	8.5 percent
Highest Unemployment Rate	6.7 percent (1961)	9.7 percent (1982)	7.5 percent (1992)	9.6 percent (2010)
Median Inflation Rate	1.5 percent	6.2 percent	2.9 percent	1.9 percent
Highest Inflation Rate	5.4 percent (1969)	13.5 percent (1980)	5.4 percent (1990)	3.8 percent (2008)
Median Misery Index	6.8	13.6	8.3	9.9
Highest Misery Index	8.9 (1969)	20.7 (1980)	11.1 (1991)	12.0 (2011)
Number of Recessions	1	4	2	1
Average recession- months per year	1	3.3	0.8	3.1
Fed Chairmen	William McChesney Martin	Arthur Burns, Paul Volcker*	Alan Greenspan**	Ben Bernanke

Let me introduce two characters to portray the tension between the Classical tendency and theKeynesian tendency. They are Mr. C, representing classical economics, and Mr. K, representingKeynesian economics. Their dialogue will help to set up the conflict that will play out over the fouracts in our drama. Think of the dialogue as taking place around 1950.

K: I am afraid, Mr. C, that you can give no satisfactory account of persistent, widespread involuntaryunemployment, as so many countries experienced during the Great Depression. We Keynesians havean explanation, and moreover, we have a solution.

C: I am afraid, Mr. K, that your explanation raises more questions than it answers. On our side, webelieve that an economy has some equilibrating mechanisms--

K: Which don't work, obviously--

C: But you can't just ignore them or assume them away. I am talking about prices as signals andprofits as incentives. In the market for any good, when there is a shortage, the price of that good rises.The high price acts as a signal leading existing businesses to expand and new businesses to spring up inorder to exploit profit opportunities. Conversely, a surplus causes the price to fall, leading firms toreduce production or exit the industry until balance is restored. In individual markets, we see thesemechanisms for restoring balance in supply and demand working all the time.

The system of prices and profits performs the role of an economic planner, albeit in a decentralizedway. This economic planner hates to waste scarce resources. After all, the economic problem is thatwe have unlimited wants but only limited resources. If resources are not being used efficiently, thenprice signals will show entrepreneurs opportunities to profit by moving resources around, buying cheapand selling dear. If there are resources that are not being used at all, then entrepreneurs will find waysto use them.

K: But reality does not conform to classical theories. Look at that man, sitting over there on the bench.He is involuntarily unemployed.

C: How do you know that? Do you know his reservation wage? That is, do you know the lowestwage that he would accept to go to work? Do you know what his best offer has been?

K: Well, he expects he should get at least $5 and hour, but he cannot find any offer for anything closeto that.

C: So he is not really unemployed. He has withdrawn from the labor force, because he can't find a job that will pay him what he wants.

K: No, according to the Department of Labor, as long as he is looking for work, he is unemployed.Besides, in his last job, he earned $6 an hour and what he produced was worth $7 an hour. But whenthe economy went into a slump, the demand at his firm fell, and he was laid off. His problem is thatthere is a lack of effective demand.

C: I'm not sure what 'effective demand' means. Certainly for one firm, demand can fall, resulting inlayoffs. But it makes no sense for demand to fall for the entire economy. People are not satiated.When they want less of one good, they want more of something else.

K: Not always. Households do not spend all of their incomes. What they do not spend, they save.

C: Of course. But they save in order to consume in the future. And banks put those savings to work bylending to businesses that undertake investment. Saving is not an impediment to economic activity.

On the contrary, in a capitalist economy, saving is one of the keys to industrial development andgrowth.

K: Nonetheless, there are times when businesses do not want to invest as much as people want to save.

C: In that case, the interest rate should fall. The interest rate is the price that balances investment andsaving. When there is an excess of desired investment over desired saving, the interest rate will rise todiscourage investment and encourage saving. Conversely, when there is an excess of desired savingsover desired investment, the interest rate will fall.

You Keynesians have created a sort of folk economics which says that the economy's driver isconsumer spending and that thrift is “bad for the economy.” I emphatically reject this. There cannot bean excess of savings. All that is needed to ensure balance between saving and investment is for theinterest rate to arrive at the correct level.

K: I do not think that mechanism works. Both saving and investment are governed by psychology.People tend to save a regular proportion of their income, regardless of the interest rate. Businessesinvest on the basis of the state of their long-term expectations, regardless of the interest rate.

C: That seems like a peculiar way to think about it. But let us come back to our unemployed fellow.What should he be doing instead of sitting on the bench?

K: He could be digging a ditch for the government.

C: But he'd rather be sitting on the bench. Why should he dig the ditch?

K: The government can pay him to dig the ditch. They can pay him $5 an hour.

C: If his ditch-digging is worth $5 an hour, that's fine. The taxpayers should be happy to pay him todig a ditch if it's a worthwhile use of his time.

K: Actually, the ditch is not worth so much. Let's say his ditch-digging is worth only $2 an hour. Butthis way, he's working instead of sitting on a bench, and as taxpayers we benefit from the ditch.

C: No! As taxpayers, we pay $5 and hour for ditch-digging that is worth only $2 to us. That makes usworse off.


K: Would you rather pay unemployment benefits of $3 an hour and get nothing?

C: No....But if we are going to redistribute income to him, why not encourage him to take the bestavailable offer. If it is $4 an hour, then a $1-an-hour subsidy would get him the $5 you say that heexpects.

K: Hmmm. Not such a bad idea. But the ditch-digging puts more spending into the economy.
C: No it doesn't. You give $5 to this man to spend, but that $5 comes from those of us who pay taxes,

and now we have $5 less to spend. It's just a transfer.
K: But we're not going to raise taxes. We are going to borrow the money to pay him to dig the ditch.

C: In that case, the borrowing is going to use up saving that otherwise would have been used to buildhomes or expand businesses.

K: No. Households and businesses do not want to spend any more. The savings would have sat idle.We need the government to spend those savings, because no one else will.

C: We need to talk about capital markets. You seem to think that we can have an excess of savingswithout driving down interest rates. I don't see how that can happen.

K: It has to do with the demand for money. If people save using bonds or stocks, more saving shouldreduce the interest rate and/or raise stock prices. But if they save using money that they stick under themattress, the interest rate does not go down.

C: So a recession is driven by a big increase in saving in the form of currency? Do we observe thesevast currency hoards during recessions?

K: No, because the desired saving does not translate into actual saving. It only drives down demandand drives down income.

C: Since you brought up money, let's talk about it. We know that money is a unit of account. Inthinking about money, I carefully separate nominal magnitudes from real magnitudes.

The prices that matter are relative prices. If I want to consume more hot dogs and fewer haircuts, thequestion of how many more hot dogs I can get if I give up one haircut is answered by the relative priceof hot dogs in terms of haircuts. It matters to me how many hot dogs I have to forego in order topurchase a haircut. However, it does not matter whether hot dogs prices are quoted in dollars, pennies,or yen. The dollar price of a haircut can and will change with the supply of money. Still, the “real”cost of a haircut (meaning the hot dogs that I must forego to obtain one) will stay the same.

When there is an excess supply of money, the proverbial “too much money chasing too few goods,” wehave general inflation, in which all prices rise. When there is an excess demand for money, then allprices fall. However, to a first approximation, relative prices are not affected by such phenomena.

If people suddenly decide to save in the form of money, then that creates an excess demand for moneyrelative to its supply. That puts downward pressure on prices. It does not cause some sort of generalexcess demand.

K: I do not think that we observe the sorts of purely neutral inflations and deflations that you thinkought to happen in theory. At the aggregate level, it may help to think of prices as fixed. While theyare fixed, it is quantities that adjust, not prices. The easiest way to look at it is that quantities are whataffect quantities. Investment affects output. Output affects employment. Employment affects income.Income affects saving. If you hold prices fixed, it is clear how this can happen. In the simplest terms,jobs create spending and spending creates jobs.

As for prices, I emphasize feedback between wages and prices. Firms set prices as a markup over laborcosts. Meanwhile, workers bargain for wages in attempt to keep up with prices and perhaps get aheadof other workers. Thus, price- and wage-setting are something like an “arms race” in which increasesin one lead to increases in the other.

Hence, while your Classical dichotomy is between nominal magnitudes and real magnitudes, my basicdichotomy is between quantities and prices. Prices affect prices, but not quantities; quantities affectquantities, but not prices.

C: Hang on. Are you telling me to assume that the price mechanism does not operate, because that isthe way you think of things, or are you telling me that you have persuasive evidence that the pricemechanism does not operate? I keep coming back to basic microeconomics. You say that neithersaving nor investment responds to interest rates. In that case, then interest rates should falldramatically when there is this excess of savings that you say can emerge. Furthermore, ifunemployment is high, then wages should fall dramatically.

K: You always talk about what should happen. But look at what did happen during the GreatDepression. We had persistent, high levels of unemployment. If classical economics denies that thiscan happen, then so much the worse for classical economics. In the real world, perhaps there issomething that interferes with the wage-adjustment mechanism; or perhaps any downward movementsin wages feed back adversely in other ways, making downward wage adjustment ineffective inreducing unemployment.