EXPLAINING THE RAP VIDEO.

EXPLAINING THE RAP VIDEO. Kids, here is an excellent explanation of the Keynes-Hayek rap video I linked to yesterday (link via instapundit). Keynes and Hayek are usually considered to be diametrically opposed, with Keynes being the liberal and Hayek the conservative. But notice how each of them stresses the importance of uncertainty and lack of knowledge. Take Keynes first. Rap: “C, I, G, all together gets to Y .” Explanation: “It’s the central equation of macroeconomics. C + I + G = Y.” I is investment and when Keynes explains what determines investment, he winds up saying that investment is determined by “animal spirits.” Try testing that proposition empirically. As the rap says: “Business is driven by the animal spirits….” For Hayek, uncertainty and lack of knowledge make centralized planning and centralized policies ineffective. The Explanation gives an example of the difficulty of designing stimulus programs: “How many of …[the unemployed]…” are dry-wall hangers who won’t benefit at all from highway building?” Rap: “That simple equation, too much aggregation .” Explanation: “One major criticism of C + I + G = Y is that those four simple looking variables conceal tremendous complexity.” Kids, if you listen to the rap and read the explanation, you’ll know a lot of macroeconomics.