"inflation - a subjective ideological concept"... Classical vs Keynesian definitions

Discussion in 'Economics' started by OTCkrak, Dec 15, 2007.

Makes sense or no?

  1. thank you for a clear explanation

    7 vote(s)
  2. factually wrong

    5 vote(s)
  3. ideologically biased

    2 vote(s)
  4. hillary 08

    1 vote(s)
  1. DANIEL VICTOR Dec 15 2007

    if you graduated college anytime before the year 2000 you will clearly remember that the textbooks on intermediate macroeconomic analysis introduced the keynesian models side-by-side with the classical interpretation... possibly even a chapter was devoted to a discussion between the debate between both economic theories... well it may suprise you that the debate is over... the most widely used textbooks for this intermediate course have completely abandoned the discussion... now including "only the best of all ideas"....according to the author! but most importantly are leaving a generation of college students without a real introduction of the classical theory of ecomomics...

    in many way the debate is ideological.. keynes belived that the markets were unable to smoothly find equilibrium..milton friedman belived that in a free-market the forces of supply and demand would force convergence. with world trade tarrifs, subsidies, the geo-political situation the world market is anything but free... but as a libertarian friedman viewed the state of a free market not only in principle but an obtainable future goal. the keynesian theory is based on the fact that the world is not a free market and people are ignorant and that governments must interfere with financial transactions. the fed is based on a congressional mandate to keep unemployement low... a basis that during the great depression seemed an essential duty of the government but at this point in an industrial economy is unessesary. the keynesian theory is based on the observations of the great depression which were later proven wrong to be incorrect by the monetarists. but the function focusing and artificially fixing employment continued to created a system of banking which contradicts the monetarist goal of increasing the real value a currency in a time of rising world industrialisation.

    the definition of inflation is ideologically debated because of the idea of a "real balance effect" which keynes excluded from his model and has major ramifications to the effects of artificially lowering interest rates including the ones that the fed has direct control of..go to a library of a major research university and there are hundreds and hundreds of books interpreting the classical model also called the dynamic model and the keynes is-lm model graduate programs on economics do not teach the is-lm model but because of its simplity is used to teach income identities to begining students.

    to summarize two points.. the classical model assumes the elasticity of money liquidity prefrence makes the the LM curve inheritently inelastic very steep. this is a major difference in both thoeries.. and at this point in time cannot be empirically disproven one way or another in a "long run".. the IS curve in the classical model is very elastic.... in the keynesian model these curves have opposite elasticities.

    another major discrepency is the effect of a shift in the LM curve. when the money supply is increased aka shifting the LM curve to the right ... the IS curve does not shift... in the keynesian model!!!an assumption ben bernanke defended in his testimony to the congressional committe of financial services. .. in the classical model which is no longer included in the most widely distributed macroeconomic texts...the IS curve ALSO shifts to the right, with an increase in the money supply. the keynesian model treats the LM curve as exogenoues... the classical theory includes the idea of a "real money balance" an economic effect that the value of someones wealth falls when the money supply is increased because prices go up and the value of someones wealth goes down. this fundamental theory has been ommitted in newer macro texts... an outrage because the ideological implications are necessary to understand the actions of the federal reserve

    the notion that wages and price expectations adjust in the medium run does not change the fact someone that has a depreciating liquid asset "cash" ...the purchasing power in the world market has been reduced two fold.. domestic inflation... and international appreciation of standard commodities. metals, energy etc. in relation to a depreciating fiat currency. this notion is in a sense ideological because some people want you to belive that only nominal values are relevant if you are a wage earner and a domestic consumer you buy your goods in the domestic market so only imports go up.. but when exports are cheap in the world market they have the effect af raising the wholesale price which results in higher prices domestically for consumers... and the CPI is not adjusted to take this into account this is very important because if it was the inflation figures would be much higher

    basically the dow jones index will inevitably be priced at 100,000 points but what is 100,000 points in relation to the price of gold/oil yuan/ euro? obviously if you are an active international trader you can move into the highest yielding bonds and stay ahead of the inflation but the national account deficit ballons and the average consumer which has no savings is f---kd in terms of real world purchasing power...

  2. Keynes:
    output adjusts to spending

    AE = C + I + G + Xn


    long term increases in the money supply lead to inflation

    that's pretty much all that one learns in entry level university macroeconomics.

  3. i was recently at a major library and researched over 50 books published from 1955-2006 with the title "macroeconomics" this title is reserved for intermediate classes as apposed to "intro/principles of macroeconomics" in the past 6-8 years a dramatic shift on the emphasis of topics has occured

    economics is a theoretical social science and the intellectual foundation of a undergrad degree which only requires a intermediate level of analysis is being hand picked by 2 -3 writters that cannot write an objective sentence. the key word is theory
  4. the debate is kinda like evolution vs intelligent design... both of the THEORIES... and THEORY is a BIGword... are valid but in the case of economics... the idea of inflation that the FED uses and has become mainsteam... for a number of reasons.. some of which i explained..

    creationism: the feds definition of inflation, is based on "convictions" about the welfare state

    evolution: is more science like the classical theory of economics... is under attack by "religious fanatics" who in this case is the fed....

    further more ALOT of very smart and powerfull people that have become rich....etc... 100% believe in the austrian theory of inflations so its not just crazy people yelling the fed is bad... there REALLY is a political reason that the federal reserve which is as "federal" as fedex... has so much control

    $100 today is going to be worth alot less in 20 years... if you keep it under a matresss...its very simple to invest in bonds and reinvest year after year and the idea of componding intrest is very powerfull so $100 today at 12% interest DOUBLES every 6 years.... so in 20 years... you have over $800... wheater or not that keeps up with inflation and whats the value of the dollar is in terms of commodities is the austrian critique

    the problem is that the welfare state we have is promulgated by the fed and is based on the consumer not saving and spending everything. if the consumer suddenly became trifty and "the wanksters stoped buying 24 inch rims" etc... the economy would be in trouble ..

    the special interest backing the fed are its banks that thrive off a HUGE base of debt that keep making the rich richer because only the people on "wall street" are using the nominal rates to there advantage... poor people who dont have investment capital and in terms of a 20 year old with no investment capital...6 years seems like a long time to double $100... why not live in debt and die with debt... "in the long run we are all dead"? but to truly be FREE and to be "free to choose" you need to have something called a NET WORTH which is a privilege few will ever injoy. and those two last quotes summarize my whole argument..

    daniel victor 12- 16
  5. mokwit


    Inflation is business being able to get away with putting up prices - something they are constantly looking to do/probing for.
  6. Inflation = distortion / anomaly in price competitiveness
  7. According to Mises: