Planet Money - SUMMER SCHOOL 1: Recessions & Rap Battles

Episode Date: July 14, 2022

It's macro time! Today: Keynes vs. Hayek. Season 3 of summer school is here asking the biggest economic questions about what makes an entire economy grow or contract? Things like, is there a "right" level of unemployment? Who gains from trade? What rhymes with 'paradox of thrift'? Also, inflation, we'll get to inflation. Episode 1 begins with the rise of macroeconomics as a field, with one of the great economic debates of the 20th century: what causes booms and busts, and what can the government do about it? How free should a free market be? It's a debate (over beats and with an actual rap battle) between John Maynard Keynes and F.A Hayek.Watch this Tik Tok to learn more. | Subscribe to our weekly newsletter here. | Listen to past seasons of Summer School here. | Listen to our econ songs of the summer on Spotify. |Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Hey everyone, I'm Stacey Bannock-Smith and this is Planet Money Summer School. Your guide to understanding the economy. Now, I do realize that learning economics might seem like a questionable summer activity, right? Like, shouldn't you be going to the beach or to a baseball game or something? But that is the beauty of Planet Money Summer School. You can do both. Planet Money Summer School is beach towel and ball field friendly, guaranteed. No textbooks, no classrooms, just fundamental economic principles with a side of delight delivered

right into your earbuds wherever you are. So the thing that I have always loved about economics is that it can help the world around us make more sense, seem less confusing, less scary. It can show the logic and the reasons behind some of the big economic forces that are shaping our lives. Now, this is season three of Planet Money Summer School, and this season we are getting back to basics, the big economic questions, aka macroeconomics. So every Wednesday through Labor Day, we will call class into session and bring you one big idea per episode, like how to fight inflation or how to measure an economy. We will take a classic Planet Money episode and pair it with insights from our esteemed professor guides.

And this semester they are Luigi Zingales. Hey, Luigi. Hi. Luigi, you are a professor of finance at the University of Chicago's Booth School of Business, but you are originally from Italy, right? Yes, indeed. With a name like Luigi and my accent, where can I be from? And we are also joined by economist Kristen Brody. Hey, Kristen. Hi. Kristen, would you mind introducing yourself?

I am the director of the Economic Mobility Project at the Chicago Federal Reserve. All right. Well, today we're going to be talking about the origin of the study of macroeconomics. And its origin is actually pretty dramatic and pretty dark. You could even say macroeconomics was born in the dark, one of the darkest times in modern economic history, a time when the economy was pretty out of control. Huge booms, horrible busts, banks going broke, destroying countless businesses and countless lives. And this one man who thought economics could come to the rescue. Today on the show, we go back into the economic darkness, into the depths of one of the worst financial crises the world has ever seen. And we hear a very, very, very nerdy, very wonky rap battle that tries to help us find our way out of the economic darkness and back into the light.

We're opposed. We oppose each other philosophically in the same studio. We've been going back and forth for a century. I want to steer markets. I want them set free. There's a booming bus cycle and good reason to fear it. Okay, class. We begin our first lesson with a rivalry about the fundamental questions of economics. And it all starts during the Great Depression. So, Kristen, if you don't mind, could you paint us a picture of what was going starts during the Great Depression. So, Kristen, if you don't mind, could you paint us a picture of what was going on during the Great Depression?

The Depression started, I guess you would say, with the Wall Street crash in October of 1929. And it really hit bottom in the winter of 1932 and to 33. So when you think about something lasting that long, that was that major, like the high unemployment, the poverty, the low profits, deflation, falling farm incomes. By 1932, nearly one man out of four was unemployed. Farmers reacted to falling prices with drastic measures, locking dairy plants and dumping non-structured. That same winter, the richest country in the world began a bitter journey downhill. But around the corners wind the lengthening bread lines, and a whole new class of citizens appears in American society, the new poor.

The economy, this kind of ecosystem which connects all of us, shop owners and farmers and factory workers and bankers, it had imploded and destroyed all of these businesses and fortunes and lives. The economy was burning and nobody knew how to put the fire out. The financial house of cards collapses and the overinflated stock market plunges into a great depression. A financial panic grips the world. And in this moment, economists all over the world got to work trying to study this situation, try to figure out what could be done to fix things or at least make things less awful. And one of the people whose light shone the most brightly was one of the most famous economists who ever lived, John Maynard Keynes.

Keynes presented his ideas in his book, The General Theory of Employment, Interest, and Money. And in it, Keynes lays out his philosophy about the role the government should play in an economic crisis and in the economy in general. The book got a ton of attention. It even kicked off something called the Keynesian Revolution. It also got a lot of pushback, including from this Austrian economist named Friedrich von Hayek. Christian Luigi, how would you characterize these two economists? I would like to stress the difference in their personality. First of all, Keynes was senior to Hayek, and he was already a well-established economist when Hayek was up and coming. But also sort of Keynes was incredibly popular from day

one, was charming, was very witty, was the life of a party. And he had a very interesting, also personal life. So was really an entertaining person. He was friends with Virginia Woolf. He was with that whole kind of group of like bohemian kind of artisty types, right? He was quite the bon vivant, as they say. Exactly. And Hayek was kind of a little bit on the boring side. When you see his performances on TV, et cetera, he's an acquired taste. He's not somebody that will charm you day one. It's not like

Bon Vivant in any form or shape. So in the terrible darkness of the Great Depression, these two economists start a debate, a debate about how to bring a spiraling economy out of the darkness and back into the light. In fact, in one of our very earliest episodes, Planet Money Originals' Alex Bloomberg and Hannah Jaffe-Waltalt took on the topic of macroeconomics and John Maynard Keynes and Friedrich von Hayek in, you know, a very memorable way. They used a rap battle, this rap battle that was going viral at the time between Keynes and Hayek. And it had been written to kind of summarize the fundamentals of macro economics and this debate at the heart of macro economics. And I should say, you know, the lyrics are pretty dense in this rap and it goes pretty fast. So, Kristen, maybe could you sum up some

of the big ideas that we're going to hear? Yeah. So Hayek is defending classical liberalism and free market capitalism. And Keynes is basically saying that, yes, maybe in the long run things will work out, but what happens in the meantime? And what happens is unemployment or homelessness. What happens to the education system? What happens to people's jobs? What happens to people's jobs, what happens to consumption, that yes, in the end, it may all work out, but how many people and businesses will suffer in the short run? Right. So this is all kind of debating this question of what role the government

should play in an economy and when. And Hayek is championing this idea that the government should kind of back off our economy, this little ecosystem, he says, you know, it'll balance itself out in the long run. And if the government swoops in and tries to solve one problem, it could throw off this ecosystem and just create a bunch more problems that it didn't anticipate. And Keynes is like, no, people need help now. We can't just back off at this moment when businesses and people are suffering. In fact, he has this very famous line that he's well known for, which says, in the long run, we're all dead. Like, you gotta help people now.

And so the story of our rap battle, just to give you a little setup, it begins with the two people who wrote the rap battle, economist Russ Roberts and this TV producer, John Poplow. And they're basically, at first, just kind of trying to figure out different ways to explain big economic ideas in an engaging way. Here's Alex and Hannah.

So a TV producer and a libertarian economist sit down and start brainstorming. Sounds like the beginning of a joke. I picture them with a whiteboard having some seriously geeky conversations about how to make a seriously geeky topic cool, which is always a recipe for it. Brilliant, beautiful, amazing art. And our first thing was a genuine just sort of criticism. It was actually a spoof of Stayin' Alive, where Keynes is the John Travolta character at the start of the movie, walking down the street,

singing, my ideas are stayin' alive. You know, you can tell by the way I use my walk. I'm a econ man. I love to talk kind of stuff. And, um, and we kind of realized, you know, me coming from media world, it's like the music licensing issues are going to be a disaster. And I, and so, I mean, it was that, and then it was also like, we just, you know, took a step back and said, you know, this isn't really the kind of the way we want to approach this. We want to have that fuller. We want to embody our ideals, and our ideals are not hacking it up.

It was actually Russ said jokingly, what if we did a rap song? Nine months later, Alex, that joke has become a reality. And it's actually pretty good. Let's just play a little here. John Maynard Keynes. F.A. Hayek. Yeah, we're opposed. We oppose each other philosophically. In the same studio. We've been going back and forth for a century. I want to steer markets. I want them set free. There's a boom and bust cycle and good reason to fear it. Play more interest rates. No, it's the animal spirit.

John Maynard Keynes wrote the book on modern macro. So what's happening here is that Keynes and Hayek are, the conceit is they're at an econ conference together. They've come back from the dead. They're at an econ conference together, of course, because that's the first thing you do if you came back from the dead. And they go out on the town drinking and arguing economics. Now, Hayek, he's definitely a free market guy,

very suspicious of any type of government intervention. But Keynes, as you can hear in his rap, thinks the government needs to come in when things get bad. Depression, recession, now your question's in session. Have a seat and I'll school you in one simple lesson. Boom, 1929, the big crash. We didn't bounce back, economy's in the trash. Persistent unemployment, the result of sticky wages.

Waiting for recovery? That's outrageous. I had a real plan. Any fool can understand. The advice real simple. Who's aggregate demand? C-I-G altogether gets to Y. Keep that total growing.

Watch the economy fly. We've been going back and forth for a century. C-I-G altogether gets to Y. They are not shying away from the economy fly. We've been going back and forth for a century. CIG altogether gets to why they are not shying away from the technical stuff. And just to be clear, this isn't, you know, we're not seeing Russ and John here in front of us. These are two performers performing the song that they wrote. But Russ and John did write the raps, and they do get sort of into the weeds. They mention sticky wages, aggregate demand, capital structure.

But they also do a really good job, I think, of crystallizing certain points in economics. You know, rap imposes a precision on your speech. You know, you have to be very short and very precise. And my favorite example is, so Keynes has been rapping, and then it's Hayek's turn to come on the scene, and he says to Keynes, you're all wrong. The place you should study isn't the bust. It's the boom Kins, you're all wrong. That new money is confused for real loanable funds. But it's just inflation that's driving the ones who invest in new projects like housing construction. The boom plants the seeds for its future destruction.

Like any good hip hop narrative, there's a lot of smack coming. In the long run, my friend, it's your theory that's dead. So sorry there, buddy, if that sounds like invective. Prepare to get schooled in my Austrian perspective. And you should prepare to get schooled about Keynes and Hayek's perspective by our two intrepid economists right after the break. Hey, Kenny Malone here, popping in quickly to plug an episode that we just released for Planet Money Plus subscribers.

It is Microface the Musical. That is the real musical that grew out of our project, We Buy a Superhero. This was recorded at a live show we did recently, and it is a musical all about Planet Money's very own comic book superhero, Microface. It is incredibly nerdy and economics-y and kind of still boggles my mind that it's real. But yes, Microface. It is incredibly nerdy and economics-y and kind of still boggles my mind

that it's real. But yes, Microface the musical coming first to Planet Money Plus subscribers. And do not worry if you don't subscribe, you're still going to get to hear this musical soon. It's just that for subscribers, we decided to put it out a little bit early. And by the way, if you missed the memo on all of this stuff, subscribing to Planet Money Plus is a way to support our work, keep the show going. And as a thank you, we're going to serve up some regular bonus episodes, including things like early access to our musical. But you should know that these episodes are not the same as the ones that you enjoy for free every week. Those are not going to change. You're always going to be able to get those, whether you subscribe to Planet Money Plus or not.

But if you do want to support the show through Planet Money Plus, there's a subscription link in the episode notes. And as always, thank you for your support and thank you for listening. Now, back to the show. Hey, everybody. Okay, we are back in 2022 with our professors, Kristen and Luigi. So, guys, there's a lot to unpack here, but I don't know, any initial thoughts about our rap battle? I think the thing that I sort of dreamed about is, like, maybe we could do a rap battle, Luigi and I. I do love where we're going with this, but maybe let's just take a look at some of the economic issues in our rap battle.

The biggest question here really is what causes an economic bust, right? I mean, this is at the heart of the Keynes-Hayek rap battle. We heard them talking about it very sort of succinctly in this little snippet. There's a boom and bust cycle and good reason to fear it. Playful interest rates. It's the animal spirit. One of the interesting things when we talk about Keynes, he talks about animal spirits, which I think is an interesting term.

Oh my gosh. Animal spirits has got to be one of my favorite economic terms. So it was used by Keynes to describe emotions and the role that they play in the economy, because economists had tended to kind of think that people act rationally, that you can predict what they're going to do, that their decisions make logical sense. But Keynes thought things like fear and panic and FOMO played a really big role in a country's economy. They could move markets.

And so it's really talking about how people make financial decisions, right? And not just how, but how their emotions or how their confidence or pessimism in the economy determines how they spend money. Yes. And actually, I would love to talk about confidence for a second, because I really feel like this is one of the central issues in this rap battle in macroeconomics. Confidence is definitely, you know, it's like in the animal spirit family and it is a powerful force because and definitely weigh in here, Kristen, from what I understand, like when people feel confident about the economy, they will spend more money. They buy stuff. Not just people, but businesses as well, right? So should they go ahead and make a certain capital investment or hire workers, things that would boost the economy? Or should they kind of hold

back on making those investments and making hiring decisions if things aren't going to go well? So that's one of the things that the government has to think about, which is consumer and business confidence in terms of how people spend or save. Keynes, he's afraid that there are psychological boom and bust and that maybe the government should intervene to minimize the damage of this psychological boom and bust. And this is because Keynes is all concerned about something called aggregate demand. So aggregate demand is basically just demand, like consumer demand for stuff. But it's aggregated. It's from the whole country.

And, you know, Luigi, like you say, with the whole psychological boom and bust, if people are worried about the economy, it's likely that they will kind of panic and they'll stop buying as much stuff. So how consumers decide how much they're willing to spend or how much they're willing to save based on what they think is going to happen in the economy. Do you think that things are going to go well and that you're going to keep getting a paycheck and making money and so you're willing to spend on goods and services? Or do you think that things aren't going to go well and so therefore you need to save? Because Keynes thought it could actually be a bad thing if people started saving money when the economy hit a rough patch. And that sounded really weird to me when I first heard it, right? I mean, you would think, you know, that is exactly when you want people to save money. So they're, you

know, a little protected from the economic downturn. But this hits at this point, and I want to be sure to talk about this, because we heard this in the lyrics, this term paradox of thrift. So this was this kind of revolutionary idea from Keynes that if people save money, if they're thrifty when the economy is hitting a rough patch, it might be a good idea for them personally, but it can be really, really bad for the economy overall. And that's because if everybody's saving money and being thrifty and they're not buying stuff or they're buying a lot less stuff, demand for stuff across the whole country, aggregate demand, goes down. So businesses are selling less stuff, demand for stuff across the whole country, aggregate demand, goes down. So businesses are selling less stuff. They are not making as much money. So they start laying people off. And

then all those laid off people stop buying stuff. And that causes more businesses to lose money and lay more people off. And so things get worse and worse. And so when the economy is getting bad, Keynes says that is when the government should step in and get money to people and businesses, keep them spending, keep those animal spirits high. You see, it's all about spending. Hear the register, cha-ching. Circular flow, the dough is everything.

So if that flow is getting low, doesn't matter the reason. We need more government spending. Now it's stimulus season. So forget about saving. Get it straight out of your head. Like I said, in the long run, we're all dead. Savings is destruction.

That's the paradox of thrift. Don't keep money in your pocket or that growth will never lift because business is driven by the animal spirits, the bull and the bear. And there's reasons to fear. It's effects on capital investment, income, and growth. That's why the state should fill the gap with stimulus,

both the monetary and the... So Hayek thinks it is dangerous for the government to meddle too much in the economy because of this idea that if the economy starts slowing down and then people react to that, they start saving a little more money or buying less stuff, that is a signal to companies to make less stuff or lower their prices.

And those kinds of things can actually bring the economy back into balance. That's the idea. Prices, the prices of things, were a really big deal for Hayek. Luigi, maybe you can talk a little bit about this, right? Because there was this idea that the government meddling too much in the economy would potentially mess with the power of prices as this really important signal about how to get an economy back on track, right? In Hayek, there is this sense that left to itself, the economy will work the best, that prices are very important signal of information that direct the agents to work or consume in the right

direction. And so interventions are distorting those prices and might make biggest damage in long term rather than benefit. Right, because if the government's giving people money, making it really easy to borrow, things like that, prices will keep going up. People will feel rich and confident and they'll keep spending and prices will keep rising. And if a lot of prices rise, that is called inflation. And, you know, that spending, says Hayek, is not sustainable. So instead of the economy kind of slowing down a little like it naturally might if the government wasn't making everyone sort of temporarily and artificially rich and confident, the economy gets hotter and hotter and then it crashes. So here's how.

The place you should study isn't the bust. It's the boom that should make you feel leery. That's the thrust of my theory. The capital structure is key. Malinvestments wreck the economy. The boom gets started with an expansion of credit. The Fed sets rates low. Are you starting to get it?

That new money is confused for real loanable funds. But it's just inflation that's driving the ones who invest in new projects like housing construction. The boom plants the seeds for its future destruction. The savings aren't real. Consumption's up too. And the grasping for resources reveals there's too few. So the boom turns to bust as the interest rates rise. Okay, so these are some of the core economic ideas in our rap battle. But there is one part of the 2009 piece that we didn't play.

And it doesn't necessarily directly relate to economics, but it is a completely surreal moment involving an international pop star. It is a completely surreal moment involving an international pop star. And it happens by total serendipity. You could almost say that the podcast doesn't really start until she walks in. Stick around after the break. For a century, I want to steer markets. I want them set free. There's a boom and bust. Okay, so we are back with Alex Bloomberg and Hana Jaffe-Walt in 2009. And in this clip we're going to play, they have the economist Russ Roberts in the NPR New York office talking about his Keynes-Hayek rap video. Okay, so Russ Roberts, he comes into Planet Money. He was in New York, and he came to bring this video that he had made once it was done, just to show it to us. And we're all hanging

out in our cubes, and we're watching it on his laptop. And this woman walks by, just looking famous. She has these crazy ripped up pants and big boots, and her hair, blonde hair is enormous. And she has like Sharpie marker written all over her arms. And it turns out it's Kesha, international pop superstar. She sings the song Tick Tock, which is the number one single. I'm talking pedicure on our toes, toes, trying on all our clothes, clothes, boys blowing up our phones, phones. So Kesha was in the bureau being interviewed by Scott Simon for Weekend Edition. And here we are, a bunch of economic storks with an economist raving about how great his economics rap is. And this superstar is walking around in our midst, a world expert on pop songs.

And it just felt like we should solicit her professional opinion. Right. So I went out in front and I saw some people sitting there. I was like, who's with Keisha? And they told me it's Kesha. But Kesha was totally enthusiastic. Yeah, she just came right back. And I have to say, I was nervous for Russ.

I thought that Kesha would kind of make fun of him. But she sat quietly. She watched the entire thing. And it's not short. And she seemed truly absorbed. And then the moment came, the moment of truth. The song ended. All eyes turned to Kesha, who was unequivocal.

It's, like, legit. And it's really good raps. Thank you. It's really good rapping. It's the animal spirit. I remember it. I'm impressed. And that was it. Kesha's people herded her out of the office right after that. Okay, guys, now we've just gone deep down the

macroeconomic rabbit hole and come back into the light and met Kesha. Okay, but back to economics, back to our story. America's economy, we should say, emerges from the Depression a pretty Keynesian economy, pretty solidly in Keynes' camp. President Roosevelt's New Deal has the government spending millions of dollars, putting all of these millions of Americans to work, hiring workers across the country, building roads, building dams. And in the 2008 recession, the government found new ways to jump in and get money to businesses and people. So Keynes, you could really say that Keynes won the rap battle. And of course, you know, this is a rap battle, so he's not going to not point that out. My general theories made quite an impression that out. I mean, in a lot of ways, Keynes is right,

right? Governments all over the world pretty universally start getting money to people and businesses when the economy turns south. But the amount of money that gets spent, how that money gets spent, where that money comes from, all of that, I mean, Luigi, correct me if I'm wrong here, that is still very much the stuff of battles. Am I right?

I think that there is, of course, this tension is still present. I think that probably it's very hard to find any economist worth his name that doesn't recognize that in the middle of the depression, you should use the fiscal lever and push up the economy a bit. But also, I think there's no economist worth his name that is not worried about the misallocation

of capital. I think that Keynes is a Depression fighter, and Hayek is the one warning in the boom that things are not as good as they seem to be. So I think that you want to use Hayek in booms and Keynes in depression. So we are getting to the end of class. Time to review our concepts and get our homework. Did I not mention there was homework? There is homework, but, but, but, this is not your typical homework

that is like a punishment. This is fun homework. It is, you can think of it like a punishment. We promise you will be able to do it from your beach towel. And also there is an incentive to complete the homework. At the end of summer school, there will be a test online.

And if you pass the test, you will be eligible for a planet money diploma, a real diploma, but only really real in the sense that you can frame it and put it on your wall. So let's quickly go over what we've learned. The big vocabulary word today, the big one, macroeconomics. And that is the study of a whole economy, the overall economy, or an economic system. Second one, the paradox of thrift. That is this idea that when lots of people save money during an economic downturn, that can actually harm an economy. And even if it is good for the individuals who are doing the saving. Then there is aggregate demand. And that is just, you know, adding up all the demand from consumers and businesses buying things in a country or in a part of the economy, the aggregate demand.

And finally, my very favorite, animal spirits. That is the idea that people are not always rational beings, that emotions can shape how we save or spend or react to things in an economy. or spend or react to things in an economy. Speaking, by the way, of spirits, it is time for our economic song of the summer. Kristen, Luigi, I'm wondering, did any modern day songs or favorite songs popped into your head while we were listening to all of this music

and talking about all these economic ideas? I have a song. It's Seven Rings. Oh, right, Ariana Grande. That's a great song. Why that song? Why Seven Rings? In it, she sings about money and all of the things that it can be used to purchase. And she basically is just saying, like, you know, you can buy all of these things.

This sounds overspending. Luigi's inner Hayek has come out How many wings do you need to have? Yeah, you have like 10 fingers Well, I think it depends, right? I mean, like, how much money do you have? You have to look at marginal propensity to consume And how much money does the person have?

What proportion of their income or disposable income are they spending? Which made me think about GDP. It made me think about consumption. Yes. And speaking of which, next week, we are talking about GDP. That is gross domestic product. Some think of it as the king of economic indicators. And basically, we're going to be looking at how you go about measuring a whole economy. So here's your beach towel friendly homework. Give Seven Rings by Ariana Grande a listen and think about its economic implications.

And you can listen to this, we should say, on Planet Money's very own Summer School Spotify playlist. It's all about econ songs of the summer. We will update it every week with songs inspired by our economic lessons. And if you want

a little extra credit, think of a song that you like that makes you think about some part of the economy. And tell us what you picked. You can email us, planetmoneyatnpr.org or post it to social media,

Twitter, Instagram, TikTok. We are everywhere. Just use the hashtag PMSummerSchool. And every week, we'll pick a few of our favorites and add them to the playlist. And we will see you right here, same macro time, same macro place, next Wednesday. Planet Money Summer School is produced by Audrey Dilling, with help from Greg Morton, Emma Peasley, Willa Rubin, and Dave Blanchard. It's edited by Alex Goldmark. Engineering on this episode,

from Josh Newell. Our project manager is Devin Meller. Special thanks on this episode to Greg Rosalski and Doug Stan, who teaches macroeconomics at Boise High School. I am Stacey Vanek-Smith. Planet Money is a production of NPR. Thanks for listening. and a special thanks to our funder the alfred p sloan foundation for helping to support this podcast