06 Dec 2012

EconStories Attacks Mainstream Obsession With Consumption, Daniel Kuehn Cries Foul

Daniel Kuehn, Economics 78 Comments

This is pretty funny, though incredibly geeky:

Daniel Kuehn, of course, is shocked that Papola et al. keep kicking this poor strawman.

Meanwhile, for my IER job I am looking at this New Yorker piece pushing for a carbon tax. I came across this passage:

As we all know, the official Republican term for the rich is “job creators.” The official Republican formula for creating jobs, therefore, is to hand the rich an ever-larger share of the nation’s disposable income.
Trouble is, the rich can do any number of things with the extra money. They can save it. They can speculate with it in the stock market. They can use it to book a larger suite at the Cipriani for a Venice weekend. And yes, some of them might spend or invest some of it in a way that creates a job for someone. But there is no guarantee that that someone will be American, as opposed to, say, Chinese.

However, if the extra cash goes to regular people, a little at a time in each paycheck, they are highly likely to spend it—spend it right away and right here, in the United States.

When it comes to tax cuts, especially in a period of high unemployment, flagging demand, and big corporate profits, when investors are sitting on piles of cash, payroll tax cuts are much, much more stimulative than high-end income tax cuts. The only thing more stimulative, of course, is “new federal spending”—because when the government spends money the money gets spent.

Yes yes, this is all consistent with a single-minded focus on investment. But notice when the writer explicitly mentioned it, he said “might spend or invest some of it.” That’s part of what “my side” is talking about–the very term spending is generally taken to mean consumption spending.

78 Responses to “EconStories Attacks Mainstream Obsession With Consumption, Daniel Kuehn Cries Foul”

  1. guest says:

    But there is no guarantee that that someone will be American, as opposed to, say, Chinese.

    Cheap imports? Sweet:

    Defending the Undefendable (Chapter 23: The Importer) by Walter Block
    http://www.youtube.com/watch?v=PTT_WHyzZ54

    Nobody is entitled to a job:

    Defending the Undefendable (Chapter 30: The Scab) by Walter Block
    http://www.youtube.com/watch?v=2IiW7WgDcHA

  2. Tel says:

    As we all know, the official Republican term for the rich is “job creators.” The official Republican formula for creating jobs, therefore, is to hand the rich an ever-larger share of the nation’s disposable income.
    Trouble is, the rich can do any number of things with the extra money.

    There is absolutely no need to hand money to the rich. They already have money, that’s what makes them rich.

    I do agree that in the case of bailout money coming from the taxpayer to the undeserving… often it was Republican policy, and I’m against it, most Austrian economists (I think) are against it, some Republicans are also against it.

    But there is no guarantee that that someone will be American, as opposed to, say, Chinese.

    Well on a floating currency there IS a guarantee, providing the government can keep its hands out and not borrow vast amounts from abroad. If balance of trade is consistently one-sided then the currency will move to prevent that and force it to balance up again. No one forced the US government to sell massive treasuries to China and Japan.

    However, if the extra cash goes to regular people, a little at a time in each paycheck, they are highly likely to spend it—spend it right away and right here, in the United States.

    There’s no better guarantee either way around. Plenty of “regular people” will choose to buy a Japanese car, or a “made in China” toy for their kids. If anything the poor are massively more price sensitive in their spending than the rich.

    • guest says:

      Ron Paul talking about how, with sound money, you don’t need to worry about trade deficits:

      Classic Ron Paul – 1988 Campaign Interview (part 2)
      http://www.youtube.com/watch?v=Tpp5XOJPGlM

      It’s only a problem when fiat monies are involved.

      • Tel says:

        Agreed!

        But even when fiat money is involved we still have a mechanism for handling trade deficits, which is a floating currency.

        You may argue one mechanism if better than the other, but they both balance the trade. Until they get manipulated.

        • guest says:

          What I’m saying is that it doesn’t matter if its balanced.

          The trade deficit doesn’t mean anything except when we’re using fiat money.

          Imports don’t need to be balanced with exports. We need to give something of actual value in exchange for our imports, rather than pieces of paper; but if some people found it more cost effective to buy from China, rather than from their own area, that would be fine.

          Cheap goods don’t hurt us. Some people may lose jobs, but nobody was ever entitled to a job in the first place.

          Also … cheap goods don’t make us poorer! :D :

          Defending the Undefendable (Chapter 23: The Importer) by Walter Block
          http://www.youtube.com/watch?v=PTT_WHyzZ54

          That video answers all of the protectionists’ arguments. It’s very well thought out.

          • guest says:

            Also, also …

            The people who directly benefit from cheap imports will now be able to spend on things that happen to be cheaper here, creating employment in those sectors.

            Again, that video is great.

  3. Daniel Kuehn says:

    Right – a major problem is that much of the public is too consumption-minded. But:

    1. That’s not what macro debates are about
    2. There’s nothing at all fallacious about saying boosting consumption can boost output

    I wasn’t surprised at all by the video. Quite the opposite. But if people come out of it thinking demand-side explanations of downturns are fallacious then people will be mislead by Papola’s video.

    It’s like Kirk Cameron for economics.

    • Bob Murphy says:

      It’s like Kirk Cameron for economics.

      That is the greatest compliment you could have paid us.

      • Daniel Kuehn says:

        It probably is.

        • Bob Murphy says:

          At least you didn’t say we were Boner. (He was a character on that show. I still can’t believe they did that.)

          • Ken B says:

            I can’t believe Long’s parents named him Rod.

            When we were looking for a name for my son one combination I vetoed without explanation was a particular combination of family names, John Holmes B.

    • Major_Freedom says:

      There’s nothing at all fallacious about saying boosting consumption can boost output

      Actually there is something fallacious with that. Consumption is the reward for boosting output. It is taking real resources out of the economic system, without putting real resources into the economy.

      Consumption can easily be seen as not able to boost output by considering a situation where every single individual starting tomorrow began to spend their entire incomes on their own consumption. Business owners, investors, entrepreneurs, workers, everyone. All consumption. What would happen? Output would collapse, and very soon all capital accumulation would be consumed and used up, and at some point, no resources would be left.

      Now, this scenario, while extreme, and unlikely, shows us that consumption does not boost output even when consumption is less than 100%. Output is ONLY boosted through productive activity, not consumption activity.

      The reason much of the public is consumption minded is precisely because of the myth you mentioned above is perpetuated by the economics profession to not only students, but members of the press, politicians, and authors. It is why virtually every journalist, when reporting a drop in consumption spending, communicates it in a downtrodden way as if the economy necessarily suffers with lower consumption.

      Demand side explanations of downturns are fallacious. Humans have a practically infinite desire to consume. The reason why aggregate cosnumer spending and investment drop is because the economy is out of equilibrium to such a degree that it will take quite some time to recalculate, reallocate, and produce that which consumers actually want to buy when they want to buy it. The decline in aggregate spending is a derivative, not causal, phenomena during recessions.

      • Bob Roddis says:

        Obama: “Look, I get the Keynesian thing. But it’s not where the electorate is.”

        http://factsandotherstubbornthings.blogspot.com/2012/08/obama-and-keynesian-thing.html

        We really need a public that doesn’t think “demand” is the primary driver of unemployment right now. Or ever. Or the “primary driver” of anything. Ever.

        If you don’t have something to exchange at the moment, work at it and get something to exchange.

        • Lord Keynes says:

          Obama: “Look, I get the Keynesian thing. But it’s not where the electorate is.”

          And Obama was wrong, as a matter of fact.

          The evidence over the past few years:

          2012:
          “Those who had heard at least something about the stimulus program were then asked whether the stimulus was the right or wrong thing to do for the country. A solid majority (55 percent) thought the stimulus program was the right thing to do.“
          http://www.americanprogress.org/issues/public-opinion/news/2012/09/17/38031/public-opinion-snapshot-stimulus-plan-not-so-bad-after-all/

          2009:
          Americans overwhelmingly want Congress to pass an economic stimulus bill, a USA TODAY/Gallup Poll finds,

          http://usatoday30.usatoday.com/news/washington/2009-02-02-poll-stimulus_N.htm

          “Fifty-two percent of Americans interviewed Wednesday night are in favor of Congress passing a roughly $800 billion economic stimulus package; 38% are opposed.”

          http://www.gallup.com/poll/114184/public-support-stimulus-package-unchanged.aspx

          “The latest Gallup poll shows that support for the stimulus package has reached 59 percent in favor and just 33 percent opposed, despite the fact that the question mentions a price tag of “at least $800 billion.” That’s up from 52-38 in favor on February 4″

          http://www.americanprogress.org/issues/public-opinion/news/2009/02/16/5629/public-opinion-snapshot-support-for-economic-stimulus-package-increases

          • Major_Freedom says:

            In other news, 4 poor people voted to redistribute a 5th person’s wealth by force.

            It was justified because the 4 people outnumbered the 5th person.

        • Bob Roddis says:

          I notice that LK’s definitive poll questions were not in the form of: “Do you think Obama’s program of unpayable debt and deficit launched in 2009 was a good or bad thing?” I’m amazed the questions didn’t first explain how the “stimulus” program was designed to help puppies and kittens and asked if the respondent was opposed to helping puppies and kittens.

          In 2009 Congress passed a $781 stimulus program with money for roads, education, energy and other areas designed to revive the economy. Republicans have charged that it was a waste of money that didn’t help the economy and added to the national debt, while supporters of this program say it kept the economy from being in much worse shape and has helped the country in areas like energy independence. How much have you seen or heard about the stimulus program? Would you say a lot, a little or nothing?

          A lot 48%

          A little 37%

          Nothing 14%
          \
          [A little plus nothing = 51% - a VERY informed electorate]

          Follow up question (since the first question obviously was not designed to influence the response to the second question):

          Asked of those who have heard about the program:

          “From what you have seen or heard about the stimulus program do you think it was the right thing to do for the country or wrong for the country?”

          Right thing 55%

          Wrong thing 36%

          Unsure/refused 9%

          The public does not even understand that inflation is a purposeful government policy or that the central Keynesian plank is that unpayable debt is the cause of prosperity. Someone should tell them.

    • Silas Barta says:

      Daniel_Kuehn, I appreciate how you’ve worked overtime to correct the fallacy, every time it comes up, that “consumers need to start spending more” to “improve the economy”.

      Well, except that, according to you, it’s rarer than a white stag, so I guess you’ve been effective, and I never hear that fallacy anymore.

      • Daniel Kuehn says:

        Silas you need to distinguish between what I’ve said about people who claim the Keynesian argument is a consumptionist argument and what I’ve said about consumptionism and the general public.

        I almost always am criticizing people who attribute consumptionism to Keynesianism. I criticize Keynesians who occassionally slip into that talk (Krugman, for example, can be bad about this sometimes – DeLong, not as much). And as a Keynesian of a sort I also just like to explain why the problem is around investment.

        An entirely separate issue is public perception of the problem. I have mixed views on this. Obviously I’d like the public to be as best informed as possible, so I’d like to dispel that view from the public as well. Then again, at least a public concerned with consumptionism recognizes the situation as a demand-side problem. That’s nice. To that extent I don’t want to be too harsh on the public. A big reason why Keynesianism caught on in the U.S. was that underconsumptionism was already popular as a theory. The fields had already been plowed for a demand side explanation.

        • Major_Freedom says:

          DK, why do you think it is that Keynesians “slip into that talk”, whereas Austrians do not?

          Do you think it may have something to do with Keynesian theory? That there is “something” in it to make even Paul Krugman, and many, many other Keynesians, as well as journalists, politicians, authors, etc, to “slip into that talk” so often?

          Do you think this is all a big coincidence that it is the Keynesians who are saying this kind of stuff? Why oh why are Keynesians attributed with “consumptionism”?

          Then again, at least a public concerned with consumptionism recognizes the situation as a demand-side problem.

          Oh yeah, that’s why.

          • Daniel Kuehn says:

            There’s nothing wrong with saying falling consumption is bad.

            We focus on investment because that’s what fluctuates as an empirical matter.

            If consumption were less stable we’d be talking about that. So the problem is not with a theory that talks about consumption and investment. The problem is with talk that overemphasizes the consumption side of it.

            So no, nothing wrong with Keynesian theory.

            Clearly Krugman is not an ignoramus. The spending people often think about is consumption because for the most part we’re consumers, not investors. Not a big deal, and not a problem with Keynesian theory.

            • Major_Freedom says:

              There’s nothing wrong with saying falling consumption is bad.

              This is why you and other Keynesians are accused of consumptionism, DK. It’s because of comments like that.

              No, falling consumption is NOT bad. Falling consumption is necessary if there is going to be an increase in investment and capital accumulation, which increases the productivity of labor and improves standards of living.

              Regarding falling consumption as inherently bad means that you must regard the onset of investment from an initially rude state of society with only consumption spending, as inherently bad. That the rise in standard of living since is inherently bad.

              We focus on investment because that’s what fluctuates as an empirical matter.
              If consumption were less stable we’d be talking about that. So the problem is not with a theory that talks about consumption and investment. The problem is with talk that overemphasizes the consumption side of it.

              You mean the overemphasizing of consumption you engaged in above, when you said there is nothing wrong with saying falling consumption is bad?

              And yes, as an empirical matter investment does fluctuate relative more than consumption. Do you know why?

              So no, nothing wrong with Keynesian theory.

              Don’t see how that comment follows. If anything you just showed (one thing among many) what is wrong with it.

              Clearly Krugman is not an ignoramus. The spending people often think about is consumption because for the most part we’re consumers, not investors. Not a big deal, and not a problem with Keynesian theory.

              Wait, so you’re saying the reason why people have developed the mentality that spending means consumption spending, which leads to consumptionist fallacies, is not because of Keynesian theory, but because “most people are consumers”?

              Well where did they get the idea that “spending” is what drives economies, which of course does not rule out consumption spending as a driver?

              • Lord Keynes says:

                “No, falling consumption is NOT bad. Falling consumption is necessary if there is going to be an increase in investment and capital accumulation”

                Only in a world with no idle resources, no unused capacity, no unemployment, and no no idle resources, no unused capacity, and no unemployment in other nations willing to sell you their products.

                M_F’s economic model has very little to do with reality, where over many decades nations have had serious problems of unused resources.

                Even when you get to booming economies with full employment, Keynesianism’s other side kicks in: demand contraction.

              • Major_Freedom says:

                Only in a world with no idle resources, no unused capacity, no unemployment, and no no idle resources, no unused capacity, and no unemployment in other nations willing to sell you their products.

                Haha

                Only in a world with no idle resources, and no idle resources, and no idle resources, and no idle resources, and, and, and…

                Only in a world with no idle resources? OK, then you mean only in the real world.

                M_F’s economic model has very little to do with reality, where over many decades nations have had serious problems of unused resources.

                Problems like what? I have a car in my garage that I haven’t used in over a month. Is it “idle”? If so, then does that mean the solution is for the government to print money, make the price of gas go up, so that I will use my car more often than I otherwise would have used it?

                I own a machine that helps produce widgets. I have been trying to sell it for a time, with no takers yet. How long does that machine have to be owned by me before it becomes “idle”?

                A person just bought the machine. They are now storing it in a warehouse. How long do they have to store it before it becomes “idle”?

                The doctrine of idle resources was demolished by William Hutt. I suggest you read his book.

                Even when you get to booming economies with full employment, Keynesianism’s other side kicks in: demand contraction.

                That is a symptom of a prior cause, which is the problem.

                You’re like a middle age physician who thinks he can cure chicken pox by cutting out all the blisters.

              • Lord Keynes says:

                “Problems like what? I have a car in my garage that I haven’t used”..etc.

                Nope, not idiotic examples like that.

                I mean large scale involuntary employment, like, say, what the US has now:

                http://www.shadowstats.com/alternate_data/unemployment-charts

                But perhaps all those people ready and willing work don’t really exist!

                Perhaps they should all read the Austrian cultist Hutt, and then they’d learn that idle resource don’t exist, don’t you know!

              • Major_Freedom says:

                Nope, not idiotic examples like that.
                I mean large scale involuntary employment

                So you mean a whole lot of cars sitting in garages?

                like, say, what the US has now:

                You’re begging the question.

                If people are receiving government handouts to not work, or being threatened with jail if they work for less than the mandated price floor, and there are people who are unemployed, who are utilizing capital goods, then the problem is more extensive disequilibrium than otherwise.

                That doesn’t prove it’s a demand side problem.

                But perhaps all those people ready and willing work don’t really exist!

                You Keynesians only wish they didn’t exist, then the exploitative gains would be concentrated to those in the state.

                Perhaps they should all read the Austrian cultist Hutt, and then they’d learn that idle resource don’t exist, don’t you know!

                Haha, “cultist”. Says the person who names himself after the intellectual figure he follows. If anyone is a cultist, it’s you.

                Oh, and I’ll wait for you to read Hutt’s book, to show you why you’re living in a fantasy world.

              • guest says:

                Toom Woods addressing the “idle resources” argument:

                Why You’ve Never Heard of the Great Depression of 1920 | Thomas E. Woods, Jr.
                http://www.youtube.com/watch?v=czcUmnsprQI#t=38m15s

                It shouldn’t have been built in the first place. It was a miscalculation based on an artificial boom. It’s a waste of resources that needs to be liquidated.

              • Daniel Kuehn says:

                Oh God, please take whatever Woods says about 1920-21 with a grain of salt.

              • Ken B says:

                “Oh God, please take whatever Woods says about 1920-21 with a grain of salt.”
                Salt’s not enough Daniel. Swallow nothing Woods says about anything without a chaser of ipecac.

              • Bob Murphy says:

                We Austrians have a lot of self-righteouness, but when it comes to smugness, you guys take the cake. (David Glasner too.)

              • Bob Murphy says:

                Mainly the writings of the Southern pro-slavery politician John C. Calhoun.

                I am not going to check, but I hope Max Boot in all of his other writings refers to Thomas Jefferson as a “pro-slavery politician.”

              • K.P. says:

                Is it possible to be worse than smug? Because I’d say Max Boot nailed it, if so.

              • Ken B says:

                Well I don’t know Boot, but I’ve described TJ in such terms. The man had an amazingly convenient conscience.
                But Calhoun was pro-slavery in a way Jefferson was not. Calhoun argued slavery was a good thing. TJ likened it to holding a wolf by the ears, and not liking it.
                Calhoun argued it was good for the slaves, and TJ never argued that.

          • Daniel Kuehn says:

            It is a demand side problem.

            So sure, since it’s a little consumption and a lot of investment, talk in terms of consumption comes from the fact that it’s a demand side story.

            That’s a minor thing that just always needs to be pushed back into the investment direction.

            But Austrians who say that it is not a capital-based or investment-based theory are simply wrong on a factual level.

            You see? There’s a big difference between the fallacy of overemphasizing consumption more than I’d like and the fallacy of claiming Keynesianism is not an investment-based theory. The second seems a lot dumber and a lot more serious.

            • Ken B says:

              OK, here’s a thought experiment.
              Martians drug everyone . When people spend they throw up and faint. People spend less of course. I expect we’re all worse off.
              Now the Venusians give us an antidote.
              Will the economy improve? Why is this not a demand driven recovery?

              • Major_Freedom says:

                Not sure if you’re being sarcastic or not.

                If so, haha?

                If not, then the answer is there are no Martians removing people’s practically infinite desire for additional wealth. Given that there are no Martians drugging everyone, it means that the problem is with investment, not with people’s desire for more wealth.

              • Ken B says:

                A desire for greater wealth isn’t at issue. A desire to spend more is. Or that’s how I read DK anyway. He doesn’t mean by demand “ohh I’d like a coffee but I won’t buy it” he means “I’m gonna get me a coffee yessirree.”

              • Major_Freedom says:

                A desire for greater wealth isn’t at issue.

                Then neither is the reduction in production and output.

                A desire to spend more is. Or that’s how I read DK anyway. He doesn’t mean by demand “ohh I’d like a coffee but I won’t buy it” he means “I’m gonna get me a coffee yessirree.”

                So he must mean relative prices are not correct.

                The desire to earn more money is also practically infinite.

            • Major_Freedom says:

              It is a demand side problem

              No, it isn’t. See Adam Smith(!) and subsequent economists who knew that the desire for additional wealth is practically infinite.

              So sure, since it’s a little consumption and a lot of investment, talk in terms of consumption comes from the fact that it’s a demand side story.

              I don’t recall Keynes talking about any “Marginal Propensity to Invest”, or “Paradox of Consumption”.

              No, he talked about marginal propensities to consume, and paradox of saving, despite the fact that by symmetry, the same “problem” would arise if people suddenly reduced their investment with no corresponding rise in consumption, and if people suddenly all tried to consume more without investing more.

              Why didn’t Keynes talk of these investment spending “problems” if it was “mostly” investment and “little” consumption?

              That’s a minor thing that just always needs to be pushed back into the investment direction.

              Why does it need to be pushed from consumption to investment, as opposed to investment to consumption, if it is really mostly about investment?

              But Austrians who say that it is not a capital-based or investment-based theory are simply wrong on a factual level.

              Except Keynes believed that there is a limit to investment in a free market, such that saving out of incomes chronically exceeds available investment, which allegedly results in saving leakages, hoarding, unemployment, and that government budget deficits, which supposedly reduces unemployment.

              He also argued that if people didn’t save, such that the marginal propensity to consume was equal to “unity”, i.e. 100%, (or if there was more investment, but Keynes already rules that out on the basis that there is an alleged limit to investment) then there would allegedly not be any unemployment. Think about that. How is that NOT a theory of consumption?

              You see? There’s a big difference between the fallacy of overemphasizing consumption more than I’d like and the fallacy of claiming Keynesianism is not an investment-based theory. The second seems a lot dumber and a lot more serious.

              I think you’re mistaking what makes you feel uncomfortable, with what is dumb and serious.

              Keynesianism is not an investment-based theory. It mentions investment, it refers to investment, it includes investment as “K”, but it is not an investment BASED theory. There is a difference between a theory being investment BASED and a theory that mentions investment.

              Like I said above, there is a good reason why Keynesians “slip into that talk”, whereas Austrians never do. It has to do with the theory itself.

              • Lord Keynes says:

                “I don’t recall Keynes talking about any “Marginal Propensity to Invest””

                The GT is utterly filled with Keynes’s analysis of the propensity to invest .

                M_F shows he is an ignoramus, running his mouth off without much understanding of what he is even talking about.

              • Major_Freedom says:

                The GT is utterly filled with Keynes’s analysis of the propensity to invest .

                Utterly filled? Please. There are passing mentions of it, but nothing like the emphasis on the propensity to consume.

                LK shows his inability to justify his revisionist interpretation of (bad) economics textbooks.

              • Lord Keynes says:

                “There are passing mentions of it, but nothing like the emphasis on the propensity to consume.”

                Yes, I suppose whole chapters on investment and the propensity to investment through expectations (e.g. Chapters 11, 12, 13, 15, 16, 17, 18) are just “passing mentions”!

                In fact – in my edition of the GT (by Harvest/HBJ New York, 1964) – Keynes devotes a 100 pages to investment – and it is the core and meat of the GT, while the “Propensity to Consume” (chapters 8-10) gets only 42 pages.

                You are an absolute and risible ignoramus, M_F.

                There is hardly a word you say that can be taken seriously.

              • Major_Freedom says:

                Yes, I suppose whole chapters on investment and the propensity to investment through expectations (e.g. Chapters 11, 12, 13, 15, 16, 17, 18) are just “passing mentions”!

                Quotes please.

                In fact – in my edition of the GT (by Harvest/HBJ New York, 1964) – Keynes devotes a 100 pages to investment – and it is the core and meat of the GT, while the “Propensity to Consume” (chapters 8-10) gets only 42 pages.

                No, the core and meat of the GT is consumption.

                He writes:

                “Our independent variables are, in the first instance, the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest, though, as we have already seen, these are capable of further analysis.”

                The variables that underlie the core of Keynes’ theory are the propensity to consume, the marginal efficiency of capital (which to Keynes rests on consumption), and the rate of interest (which is a function of liquidity preference and the saving schedule, which is, you guessed it, tied to consumption out of income.

                You are an absolute and risible ignoramus, M_F.
                There is hardly a word you say that can be taken seriously.

                You sound mad. It must really hurt to be proven wrong all the time.

              • Major_Freedom says:

                LK, why isn’t “the propensity to invest” an independent variable in Keynes’ system?

                Why is the marginal propensity to consume an independent variable?

                You may have the book in front of you, but like everything else data related, you lack understanding.

              • Lord Keynes says:

                “LK, why isn’t “the propensity to invest” an independent variable in Keynes’ system?”

                You continue to show your sheer ignorance. In Keynes’s system inducement to invest is the difference between MEC and rate of interest. So MEC conveys an important part of Keynes’s focus on investment.

                If you had bothered to look at the complete chapter from which you quote above, you’d have seen the concern with investment and cause of the propensity to invest:

                “The schedule of the marginal efficiency of capital depends, however, partly on the given factors and partly on the prospective yield of capital-assets of different kinds; whilst the rate of interest depends partly on the state of liquidity-preference (i.e. on the liquidity function) and partly on the quantity of money measured in terms of wage-units. Thus we can sometimes regard our ultimate independent variables as consisting of (1) the three fundamental psychological factors, namely, the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital-assets, (2) the wage-unit as determined by the bargains reached between employers and employed, and (3) the quantity of money as determined by the action of the central bank; so that, if we take as given the factors specified above, these variables determine the national income (or dividend) and the quantity of employment. But these again would be capable of being subjected to further analysis, and are not, so to speak, our ultimate atomic independent elements.”

              • Daniel Kuehn says:

                Holy Jesus MF, please get a fricken clue before you speak about Keynesianism again: http://factsandotherstubbornthings.blogspot.com/2012/12/pick-up-book-kids.html

              • Major_Freedom says:

                Wow, the acolytes are thinking they’re out swinging, when really it’s all hand waving.

                LK:

                In Keynes’s system inducement to invest is the difference between MEC and rate of interest.

                Both of which tacitly assume there is a limit to the amount of savings can be profitably invested (the MEC does this by contradicting the context of whether a fall in wage rates and prices can succeed in reducing unemployment, and instead assume a different, indeed opposite context of rising wage rates and prices), and this limit is caused by an allegedly insufficient marginal propensity to consume that prevails in the market (saving out of income exceeds investment opportunities).

                The MEC is a function of consumption in Keynes’ system, despite the fact that investment spending also generates revenues to capital goods sellers.

                the concern with investment and cause of the propensity to invest:

                “The schedule of the marginal efficiency of capital depends, however, partly on the given factors and partly on the prospective yield of capital-assets of different kinds; whilst the rate of interest depends partly on the state of liquidity-preference (i.e. on the liquidity function) and partly on the quantity of money measured in terms of wage-units. Thus we can sometimes regard our ultimate independent variables as consisting of (1) the three fundamental psychological factors, namely, the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital-assets

                You’re just citing quotes that prove my point. The psychological factors are either consumption oriented (propensity to consume), cash hoarding oriented (liquidity preference), and consumer spending oriented (future yield of capital assets).

                You and DK are getting your panties in a twist because you believe Keynes’ theory is actually focused on investment, when it is focused on consumption, as both my quotes show, and as your quote, which you thought supported your claim) shows.

                ————–

                Daniel Kuehn:

                Holy Jesus MF, please get a fricken clue before you speak about Keynesianism again:

                Nothing you wrote contradicts what I argued, DK. More <a href="http://factsandotherstubbornthings.blogspot.ca/2012/12/pick-up-book-kids.html?showComment=1354915626959#c7048099579444011176"here.

              • Major_Freedom says:

                Try link again:

                Here

              • Lord Keynes says:

                Typical of the buffoon, M-F.

                His statement above:

                there are passing mentions of it [investment], but nothing like the emphasis on the propensity to consume.

                After being refuted quite clearly, he now changes the subject: to some ways in which MEC are also affected by consumption.

                That doesn’t change the fact that he was wrong and has now demonstrated his ignorance of the GT.

              • Major_Freedom says:

                LK:

                to some ways in which MEC are also affected by consumption.

                The MEC according to Keynes depends on consumption, it is not just “affected” by it.

  4. Tel says:

    More depressing, but a good companion volume to the Christman carols:

    http://www.youtube.com/watch?v=iTBODoBaCns

    I think it’s a great idea to get people thinking about the savings vs consumption debate, but obviously there are a lot of details that aren’t going to fit into a 30 second video clip. All very well encouraging people to save, but the point is that government has persistently destroyed real saving opportunities:

    * A continuous inflationary environment encourages people to go into debt.

    * People now have an expectation of around 2% to 3% inflation, so they plan accordingly.

    * Capital gains tax destroys direct deposit investment (especially in Australia where a working person gets hit at full marginal income tax rate for interest returned on deposits, you totally can’t win, pensioners get “deeming” rates which hit you with tax regardless of actual earnings).

    * People are afraid of the stock market because so much weird stuff happens (like millisecond robot trades for example) and limited liability companies have resulted in a complete disconnect between actions and responsibility.

    * Buying treasury bonds is not saving, it is just asking government to pick a consumer who will consume those resources instead of you. The return is microscopic and get taxed even on that.

    * Most people are already so far in debt right now that they just want to pay a bit off, and that’s hardly actually saving anything… it is just paying back for spending you have already done.

    * Property rights are systematically under attack, so if you do end up owning anything, you can’t have great expectations of being able to keep it.

    My conclusion is that convincing people at the bottom of the heap that they should save is useless, because they were long ago deprived of any viable savings vehicle. They know it, so they have given up trying.

    • guest says:
      • Tel says:

        I have no problem with free association of individuals under a private charter, exchanging whatever rights with each other that they see fit. What they cannot do as private individuals is write a charter that removes rights from unrelated parties.

        Suppose I create a corporate entity that has only very few assets, and the corporate entity runs a profitable factory that happens to pollute a river and poison the fish downstream. So it might be 5 years before the pollution downstream gets bad enough that the people who were eating the fish get back to me and presumably make some sort of claim. During those 5 years, the corporation made profits and paid out dividends so the assets are always low (all the equipment and buildings are rented BTW).

        So a private charter would normally be unable to remove any rights from the people downstream who have a claim for damages. However, a limited liability charter can do exactly that, and it requires a privilege granted by government.

        There’s worse abuses out there, for example in Australia we have compulsory superannuation, so your boss takes money from your wage and puts it into a fund, the fund manager usually buys into some sort of indexed fund and the indexed fund buy actual shares. The guy who “owns” those shares is now three steps removed from the company itself (and certainly they don’t let you have a vote), but then some fund manager takes that vote and votes in a board of directors who hire a CEO. Finally the CEO makes the actual decisions (generally decides to pay herself a lot of money). So the actual guy who worked for that money is now five steps removed from having any say in decisions relating to the running of the company.

        That’s now the complete opposite of why we have ownership in the first place! Actions => consequences.

      • Tel says:

        STEPHAN KINSELLA :

        Second, we have to distinguish here between contractual debts, and debts arising from torts (or even intentional crimes). As for the former, this is easy to dispatch: someone loaning money to, extending credit to, or engaging in a contract with a corporation is implicitly agreeing to pursue only the assets of the corporation itself in case of a claim, not the personal assets of shareholders (unless it insists on some shareholders personally guaranteeing a loan or contract, as if often the case for smaller companies).

        Half agree on that one.

        Yes creditors go into a voluntary agreement (e.g. selling goods on account) but a proper contract is “a meeting of the minds” requiring that it be clearly spelled out and understood. For example, in many cases we have compulsory insurance (e.g. when you get a mortgage) but then you can get your insurance from a limited liability insurance company — that’s not insurance at all. So then further on down the chain, we get told that everything is covered by insurance, because insurance is compulsory — no nothing is really covered, it’s a tissue of limited liability.

        If everyone clearly understood there is no backstop, then I’d be OK with it, but right now it is being used as a scam. Maybe the answer is an education system or something.

        The problem with this theory is the assumption that in a private law society, “shareholders” should be vicariously liable for the negligence of others. There is, in fact, no libertarian justification for this view, as libertarian theorists such as Robert Hessen, Murray Rothbard, and Roger Pilon have argued.2 In this situation, some employee of a firm has committed some tort—a negligent act (such as a FedEx truck driver negligently crashing into some victim). Here the victim has a right to sue the negligent employee-tortfeasor. The question is: Who else’s assets can the victim go after? Can he sue the managers, or the directors, or go after corporate assets, or sue shareholders?

        This ignores the division of labour, it might be easy to make a truck driver personally liable for damages caused by that truck, but in a more complicated factory situation every guy says, “I just do this bit here, don’t know anything about the other stuff going on.”

        You can be sure everyone will be pointing the figure at everyone else, but anyway we have precedent for this situation.

        Suppose a gang commit a robbery and someone gets killed in the process, when they get caught they all say, “I was robbing the place, but I had no idea there was a murder happening.” What they will find is they are jointly on the hook, because they worked as a team.

        • guest says:

          If someone dumps factory garbage into a river as part of its intended operation, and does so without some sort of arrangement with the folks downstream, then it would be the managers, specifically, that would be liable, not the shareholders or workers.

          But if an individual worker deviates from his duties, and injures someone, then only that person is liable, not the managers or shareholders.

          As for the robbery/murder scenario, you want to be protected from the government overstepping its authority, so it’s dangerous to accept that they can just charge everyone involved with murder.

          Someone is guilty, to be sure; But better we don’t give the government license to make assumptions.

          (I’m an American, but it wouldn’t make sense for me to appeal to our [intended] legal structure in our discussion, especially since you’re an Australian. Hopefully you will agree that I was able to transcend either of our respective countries’ legalese – not that I presume to tell you upon what you and your fellow Australians ought to base your society.)

          • Tel says:

            In the Australian case, if you read through the early documentation of the New South Wales Parliament (when we were running under British law) at least a quarter of the business of the government was handling petitions for limited liability corporations. The stuff is available online BTW, but not in a nicely indexed format.

            If there was a natural common-law equivalent available at the time, why would anyone petition government with such a request?

            • guest says:

              Because, although corporations would exist in a free market, they only work as intended for so long.
              :D

              The profits they make attract competitors, and before long the corporate structure is counter-productive.

              Check out Ron Paul talking about this and related issues:

              Anti-Trust and Monopoly (with Ron Paul)
              http://www.youtube.com/watch?v=8C4gRRk2i-M

      • Tel says:

        There’s one more issue that’s a bit unrelated which is the old joke (that isn’t really a joke):

        What’s the difference between Capitalism and Communism?

        A few mergers and acquisitions.

        So basically one firm gets a bit of economy of scale happening and then buys its competitors, giving it more momentum so it buys even more of its competitors. Pretty soon you don’t have real competition any more. We can have some sort of government anti-trust regulator, but those things never work.

        Peter Klein has been working on some natural limits to the size of a firm before it becomes unwieldy and must fall over. However I think it is somewhat self evident that government granted limited liability does artificially increase the ability for a firm to raise capital and expand itself. I mean, that was the purpose of it in the first place.

        • guest says:

          So basically one firm gets a bit of economy of scale happening and then buys its competitors, giving it more momentum so it buys even more of its competitors.

          Tom Woods takes on the issue of predatory pricing in this video (timestamped):

          The Politically Incorrect Guide to American History, Lecture 8 | Thomas E. Woods, Jr.
          Myths and Facts About Big Business
          http://www.youtube.com/watch?v=SGeA1Sbd4XM#t=12m01s

          A firm can never get “too big” in a free market, and it’s actually extremely difficult to pull off predatory pricing without government protections.

          It’s not the issue people think it is.

  5. Cody S says:

    Something I can’t stand about the quoted text:

    Trouble is, the rich can do any number of things with the extra money. They can save it.

    And in so doing, loan it to a bank, which then invests it in enterprise, stocks, and even in government bonds, lending it again to the government to spend on roads, bridges, schools, and of course murderous children sent abroad to scare all the tan folk.

    Creating jobs for bankers and clerks, traders, treasury employees, politicians, political aides, soldiers, and of course foreign trauma surgeons.

    They can speculate with it in the stock market.

    Where it becomes capital for businesses to use in expansion, r&d, or simply to balance accounts, wherein it goes to banks, as above.

    And thus goes to new employees, construction workers, scientists, engineers, and of course everyone already mentioned.

    They can use it to book a larger suite at the Cipriani for a Venice weekend.

    Spending money on travel and the tourist industry…

    And it goes to travel agents, airline employees, baggage handlers, TSA, and of course the makers of x-ray machines, latex gloves and personal lubricant.

    And yes, some of them might spend or invest some of it in a way that creates a job for someone.

    But HOW? I CAN’T SEE HOW IT COULD BE POSSIBLE.

    Sorry, I know this is obvious to everyone reading, but I needed an outlet.

    Carry on.

  6. Bob Roddis says:

    If Daniel “Stranglelove” Kuehn is going to bring up Tom Woods and the 1920 depression, I guess it’s time to again visit Kuehn’s paper on that depression.

    Kuehn’s 1920 depression paper basically proves Tom Woods to be right about that depression and it explains why we never hear much about it in the court-economist/court-historian literature.

    In Kuehn’s marvelous paper, he thinks he is disproving Austrian School analysis of the 1920 depression. Instead, he unintentionally proves that it was the Fed’s funding of WWI that caused the artificial boom. The first big post-Fed recession was the result of the government’s First World War boom followed by the post-war bust. There’s nothing in his article about a “free market” having an inherent “structural” problem causing unemployment.

    2. The austerity depression of 1920–21

    During WorldWar I federal expenditures ballooned and although the new income tax was able to partially finance the war effort, most of the financing was done through federal borrowing and by the highly accommodating monetary policy of the Federal Reserve. The role of the Federal Reserve at this time was expressed unambiguously by the New York Federal Reserve Bank Governor Benjamin Strong, who told a Congressional committee in 1921 that ‘I feel that I, or the bank at least, was their [the Treasury’s] agent and servant in those matters’ and further added that the wartime inflation caused by the low interest rates maintained by the bank were ‘inevitable, unescapable, and necessary’ for prosecuting the war (Strong, 1930).

    However, after the war ended the deficit spending of the Wilson administration and the expansionary policy of the Federal Reserve were sharply curtailed to bring a halt to the inflation. By November 1919 the Wilson administration balanced the federal budget, slashing monthly expenditures by almost 75% in a matter of months.4 The New York Federal Reserve Bank raised the discount rate by 244 basis points over the course of eight months, with other Reserve System banks following suit. Shortly after these austerity measures were taken, the 1920–21 depression was under way. Postwar industrial production in the USA peaked in January 1920 as the economy moved into a major depression, with production levels dropping by 32.5% by March 1921.5 This loss in output is second only to the Great Depression in American economic history (Romer, 1999), although its duration was considerably shorter. Declines in output were matched by precipitous drops in employment and the price level. The proximate cause of the 1920–21 depression was a deliberate fiscal and monetary retrenchment following World War I.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1591030

    The horribly distorted price structure that resulted from this intervention did indeed snap back extremely quickly considering what can only be considered very limited government interventions to fix the problem.

    Further, Britain went off the gold standard in WWI. This allows governments to fund wars without actually having to tax resources from the public in real time as such taxation might arouse the rabble against the war. It was Churchill’s foolish attempt to reestablish a gold standard at the pre-war par that contributed to the Great Depression along with fractional reserve banking which artificially bid up prices to unsustainable levels.

    The unfounded assertion that these problems were caused by “the gold standard” and/or “the free market” and/or laissez faire is academic fraud.

    There is no antecedent “market failure” event that needed to be cured with Keynesian intervention. All of the problems were transparently the result of prior monetary and “fiscal” interventions, not market failure.

    • Daniel Kuehn says:

      Write it up, submit it to the RAE, and then I’ll write a reply.

      We have gone over my plain language a bazillion times now that I was not “disproving” the Austrian theory.

      If you want to keep claiming this, let’s get it on record in a jury of scientific peers.

    • Daniel Kuehn says:

      I didn’t bring it up – btw. I was responding to someone else who brought it up.

  7. Bob Roddis says:

    So, it’s your position that all you were trying to prove was that:

    a) There should be more emphasis on the fact that most of the budget slashing occurred under Wilson and not Harding;

    b) There was actually more intervention than was described by the Austrian writers and

    c) The interventions that actually occurred were perfectly consistent with Keynes’ prescriptions under the circumstances and thus the event does not disprove the efficacy of “traditional” Keynesian policies when enacted under the proper circumstances.

    There, I said it.

    • Daniel Kuehn says:

      I think a.) makes the idea that fiscal austerity saved the day less tenable, yes. I certainly think b.) is important.

      c.) was the principle argument.

      I encouraged more work on thinking about it in Austrian theoretical terms. I don’t know how successful that would be.

      See – that’s not hard. Why the need to keep saying I thought I was disproving Austrian economics?

      • Bob Roddis says:

        I’m really not clear on how my a, b and c above are inconsistent with:

        “In Kuehn’s marvelous paper, he thinks he is disproving Austrian School analysis of the 1920 depression.”

        That’s not quite the same thing as me saying you thought you were disproving “Austrian economics”.

        In any event, you wrote a nice paper that shows that the problems were caused by war, the Fed and wartime policy and what happens when you try to undo them.

        Let’s not forget Krugman chiming in and alleging that Daniel Kuehn has more. it turns out that the Austrians/Austerians have their timing all wrong:

        http://krugman.blogs.nytimes.com/2012/01/23/more-than-you-want-to-know-about-warren-harding/

        But what of Tom Woods and Wilson “the stroke of luck”?

        • Bob Roddis says:

          The last sentence should say:

          <i?But what of Tom Woods and Wilson's “stroke of luck”?

          And who denies that “austerity” in the form of budget slashing contributed to the 1920 depression?

  8. John Papola says:

    Here’s a copy-and-paste from a comment on Daniel’s all-to-predictable blog post.

    I don’t care about what economists write to each other behind JSTOR paywalls and in language and equations that nobody understands. I care about what economists, pundits and politicians say to the general public. I care about what’s driving our cultural understanding about the way an economy works and grows. Since these two things are at odds with one another, I put particular emphasis as a filmmaker on the latter since it matters, and not the former.

    And an overwhelming number of them talk about how consumer spending can “drive growth” because “consumer spending is 70% of GDP”. That is a fallacy. And when nobel-prize winning Keynesian economists are saying that consumption grows the economy, I have every right to criticize that position for the fallacy that it is. The fact that they publicly contradict the technical literature and even their own work has nothing to do with my intellectual honesty and everything to do with theirs.

    Consumption doesn’t grow the economy. Period. Consumption uses stuff up. It shrinks the stock of value. And I’m fully aware of the technocratic tweak about demand for money and the ideal of nominal spending stability. I’m unaware of any sudden nominal shocks that weren’t reactions to some inciting phenomenon like a rash of business failures. People don’t just suddenly hoard cash for no reason. And regardless, if they do, money supply should be increased to meet that demand. I included this in my 2010 video with Larry White. It’s got nothing to do with this video. It would confuse people to attempt including it.

    It’s not an academic paper, Daniel. And thank god… because nobody reads those and no politicians either. Hence we hear that UI benefits are a stimulus and tax cuts for those who have to spend every nickel on consumption are better than those for people who might save the money. That’s the point. That’s what matters because it’s what the public is actually told about policy. It’s false. It’s nonsense. So I honestly and openly criticize it. I’m open and honest about my position. It’s clear. I stand by it 100%.

    • Gene Callahan says:

      “I don’t care about what economists write to each other behind JSTOR paywalls and in language and equations that nobody understands.”

      Nope, I don’t understand none of that there ‘conomics business, but that don’t stop me from knowin’ it’s just moonshine.

  9. Lord Keynes says:

    “And an overwhelming number of them talk about how consumer spending can “drive growth” because “consumer spending is 70% of GDP”. That is a fallacy. And when nobel-prize winning Keynesian economists are saying that consumption grows the economy, I have every right to criticize that position for the fallacy that it is. “

    So you’re saying that producers/capitalists do not increase output and employment in response to increases in demand? If capitalists did not increase their output when demand surges, then basically you are saying that one of the reasons why capitalism works is false.

    • guest says:

      Consumers do their demanding with their supply.

      They can demand all they want, but if they don’t have anything that has been produced (or will produce) to offer in trade, then production will not occur.

      They are both suppliers AND demanders, at any rate.

      (Though in a paper money system, this is not always the case.)

      • Lord Keynes says:

        Consumers do their demanding with their supply.

        So future supply never increases when a surge in current demand signals to producers that more needs to be produced?? You’re saying that capitalism doesn’t work?

        “They can demand all they want, but if they don’t have anything that has been produced (or will produce) to offer in trade, then production will not occur.
        ….

        (Though in a paper money system, this is not always the case.)”

        The words in bold invalidate what you’ve said before them.

        • guest says:

          So future supply never increases when a surge in current demand signals to producers that more needs to be produced??

          Only when it is expected that future demand will come in the form of consumers’ future supply. They have to be able to pay with something the other guy wants.

          (Though in a paper money system, this is not always the case.)”

          The words in bold invalidate what you’ve said before them.

          In a paper money system, the person “paying” with paper money is only a demander, since paper isn’t supply.

          I’m being tricked into giving something of value for a worthless IOU. The only reason people will trade for it is because the government is forcing us to accept it.

          I did not invalidate what I said before.

          • Gene Callahan says:

            “I’m being tricked into giving something of value for a worthless IOU.”

            Oooh, ooh, guest: Do you have any of these worthless IOUs sitting around? If so, I will give you my mailing address and I will take them off of your hands.

            • guest says:

              Or I can just write some numbers on a piece of paper.

              How many digits would you like it to have?

              I’m being FORCED to use the worthless IOUs.

            • Major_Freedom says:

              I’ll send you my IOUs as soon as the fiat bugs who say you can’t eat gold, and can’t earn dividends on gold, send me their gold.

              I’m still waiting.

  10. Lee A. Arnold says:

    I think the problem is that these Hayek enthusiasts do not understand that the economy needs different explanations at different times, because it is a complex system, not a single-causation system. Sometimes Hayek’s insights are germane, sometimes not. Another problem is that the demand-side slump is a sudden, emergent, mass-hydraulics problem, of an old-school Keynesian type, emerging from another, previous malfunction, of a “Bagehotian” type. We have clearly been in a demand slump, and the following, short flow-chart video may help more people to understand why:
    http://www.youtube.com/watch?v=LeZvQdk5UpU

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