08 Dec 2012

Keynes Hearts Saving?

Daniel Kuehn, Economics, Krugman 150 Comments

John Papola, creator (with Russ Roberts) of the Hayek-Keynes rap videos and the latest Christmas video, is perplexed that he is getting push-back from people saying he’s setting up a strawman by implying that Keynesianism promotes the idea that consumption drives the economy.

John sent me an email with a quote from the General Theory itself, and said he had done research beforehand to be sure this wasn’t a right-wing invention. He doesn’t think it is. (And remember the Paul Krugman column I pointed to, before.)

Moreover the richer the community, the wider will tend to be the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system. For a poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be compatible with the employment of its poorer members. If in a potentially wealthy community the inducement to invest is weak, then, in spite of its potential wealth, the working of the principle of effective demand will compel it to reduce its actual output, until, in spite of its potential wealth, it has become so poor that its surplus over its consumption is sufficiently diminished to correspond to the weakness of the inducement to invest.

But worse still. Not only is the marginal propensity to consume[6] weaker in a wealthy community, but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive unless the rate of interest falls at a sufficiently rapid rate; which ‘brings us to the theory of the rate of interest and to the reasons why it does not automatically fall to the appropriate level, which will occupy Book IV.”

The General Theory – Page 28.

Two other quick points:

==> People tried to turn my Krugman column against me, by pointing to an earlier Krugman piece in which he explained that a boost in savings wasn’t a problem. Right, and in that very piece, Krugman is chiding other Keynesians for saying it would be. Thus, people are “proving” to me (and John) that Keynesians don’t actually think underconsumption is a problem, by pointing to Krugman lecturing his peers that they need to stop saying it is.

==> Daniel Kuehn and I think Gene Callahan (?) have tried to tell me that even something called “the paradox of thrift” was never a warning about the dangers of thrift, but instead was a story about a mismatch between investment and saving, and in fact would be just as applicable to a situation in which people didn’t save more, but decided to cut their investment spending. No, that would be “the paradox of investment” (or something). The “paradox of thrift” is about thrift. That’s why they called it that. If I complain that the National Institutes of Health is too focused on fighting cancer, you can’t say, “Oh, but cancer is a sickness, and so really any program program for cancer funding is really fighting all sickness.”

150 Responses to “Keynes Hearts Saving?”

  1. Daniel Kuehn says:

    As I said before, if you want to call that particular paradoxical premise-conclusion duo “the paradox of thrift”, I see nothing particularly wrong with that.

    I think the really important part is the mechanism that gives us that premise-conclusion duo and so I think about the paradox of thrift in terms of the whole explanation, which is an explanation about the match-up of savings and investment.

    Remember the context of that Bob. MF was saying Keynes never talked about something he spent a lot of time talking about it. If you want to fight about nomenclature I’ll just concede your point because I don’t think that’s a big deal. But don’t tell me MF was grasping Keynes’s argument there.

    • Major_Freedom says:

      As I said before, if you want to call that particular paradoxical premise-conclusion duo “the paradox of thrift”, I see nothing particularly wrong with that.

      Huh? You said that reduced investment without a corresponding increase in consumption is allegedly the paradox of thrift. Now you’re saying Bob is claiming that is the paradox of thrift and that you are OK with it?

      I think the really important part is the mechanism that gives us that premise-conclusion duo and so I think about the paradox of thrift in terms of the whole explanation, which is an explanation about the match-up of savings and investment.

      Keynes wrote:

      “The theories which we have examined above are directed, in substance, to the constituent of effective demand which depends on the sufficiency of the inducement to invest. It is no new thing, however, to ascribe the evils of unemployment to the insufficiency of the other constituent, namely, the insufficiency of the propensity to consume. But this alternative explanation of the economic evils of the day — equally unpopular with the classical economists — played a much smaller part in sixteenth- and seventeenth-century thinking and has only gathered force in comparatively recent times.”

      Keynes then quotes J. A. Hobson:

      Saving enriches and spending impoverishes the community along with the individual, and it may be generally defined as an assertion that the effective love of money is the root of all economic good. Not merely does it enrich the thrifty individual himself, but it raises wages, gives work to the unemployed, and scatters blessings on every side. From the daily papers to the latest economic treatise, from the pulpit to the House of Commons, this conclusion is reiterated and re-stated till it appears positively impious to question it. Yet the educated world, supported by the majority of economic thinkers, up to the publication of Ricardo’s work strenuously denied this doctrine, and its ultimate acceptance was exclusively due to their inability to meet the now exploded wages-fund doctrine. That the conclusion should have survived the argument on which it logically stood, can be explained on no other hypothesis than the commanding authority of the great men who asserted it. Economic critics have ventured to attack the theory in detail, but they have shrunk appalled from touching its main conclusions. Our purpose is to show that these conclusions are not tenable, that an undue exercise of the habit of saving is possible, and that such undue exercise impoverishes the Community, throws labourers out of work, drives down wages, and spreads that gloom and prostration through the commercial world which is known as Depression in Trade. …

      “The object of production is to provide “utilities and conveniences” for consumers, and the process is a continuous one from the first handling of the raw material to the moment when it is finally consumed as a utility or a convenience. The only use of Capital being to aid the production of these utilities and conveniences, the total used will necessarily vary with the total of utilities and conveniences daily or weekly consumed. Now saving, while it increases the existing aggregate of Capital, simultaneously reduces the quantity of utilities and conveniences consumed; any undue exercise of this habit must, therefore, cause an accumulation of Capital in excess of that which is required for use, and this excess will exist in the form of general over-production.”

      So it’s clear that by “saving”, Hobson doesn’t mean only cash hoarding. By “saving” he means expansion of capital.

      In response, Keynes writes:

      “In the last sentence of this passage there appears the root of Hobson’s mistake, namely, his supposing that it is a case of excessive saving causing the actual accumulation of capital in excess of what is required, which is, in fact, a secondary evil which only occurs through mistakes of foresight; whereas the primary evil is a propensity to save in conditions of full employment more than the equivalent of the capital which is required, thus preventing full employment except when there is a mistake of foresight.”

      So Keynes is claiming that saving which causes an expansion of capital is really only detrimental when it takes place in conditions of full employment. The only way to interpret this response is that Keynes believes additional saving at the point of full employment, even if the saving is accompanied by investment and expansion of capital, generates unemployment.

      Now why would he claim that? Well, for that we’re going to have to go back the MEC doctrine, where Keynes writes:

      “If there is an increased investment in any given type of capital during any period of time, the marginal efficiency of that type of capital will diminish as the investment in it is increased, partly because the prospective yield will fall as the supply of that type of capital is increased, and partly because, as a rule, pressure on the facilities for producing that type of capital will cause its supply price to increase [...] Thus for each type of capital we can build up a schedule, showing by how much investment in it will have to increase within the period, in order that its marginal efficiency should fall to any given figure. We can then aggregate these schedules for all the different types of capital, so as to provide a schedule relating the rate of aggregate investment to the corresponding marginal efficiency of capital in general which that rate of investment will establish. We shall call this the investment demand-schedule; or, alternatively the schedule of the marginal efficiency of capital.”

      I won’t get into the specifics of why this passage is wrong (I already alluded to why in a previous post, of contradicting the context of falling prices and wage rates…), because the point I want to make here is that Keynes believed that at full employment, there is no more room for additional saving and investment, because it will allegedly increase capital goods prices and drive the rate of return down to less than 2%, which will then lead businessmen and investors to hoard cash, and that will supposedly make unemployment rise. Thus Keynes believed that government budget deficits are the only solution to the “problem” he perceived. For then the rate of return on capital will increase, and that is supposed to eliminate the cash hoarding, and eliminate unemployment.

      Keynes also wrote this crucial passage [I have added commentary in square brackets]:

      “Perhaps it will help to rebut the crude conclusion that a reduction in money-wages will increase employment “because it reduces the cost of production”, if we follow up the course of events on the hypothesis most favourable to this view, namely that at the outset entrepreneurs expect the reduction in money-wages to have this effect. It is indeed not unlikely that the individual entrepreneur, seeing his own costs reduced, will overlook at the outset the repercussions on the demand for his product and will act on the assumption that he will be able to sell at a profit a larger
      output than before. If, then, entrepreneurs generally act on this expectation, will they in fact succeed in increasing their profits? Only if the community’s marginal propensity to consume is equal to unity, so that there is no gap between the increment of income and the increment of consumption [that is, there is no additional saving]; or if there is an increase in investment, corresponding to the gap between the increment of income and the increment of consumption, which will only occur if the schedule of marginal efficiencies of capital has increased relatively to the rate of interest [that is, either the MEC must move to the right, which Keynes believed there is no reason for it to do, or interest rates have to fall, which it cannot do if it is already at 2%]. Thus the proceeds realised from the increased output will disappoint the entrepreneurs and employment will fall back again to its previous figure, unless the marginal propensity to consume is equal to unity [that is, there is no additional saving] or the reduction in money-wages has had the effect of increasing the schedule of marginal efficiencies of capital relatively to the rate of interest and hence the amount of investment [Keynes means increasing investment that is able to make a profit, of 2% or more]. For if entrepreneurs offer employment on a scale which, if they could sell their output at the expected price, would provide the public with incomes out of which they would save more than the amount of current investment, entrepreneurs are bound to make a loss equal to the difference; and this will be the case absolutely irrespective of the level of money wages.

      That last italicized passage is the core of Keynesianism. That is why Keynes emphasized the “marginal propensity to consume.” For if the public did not consume out of their incomes to a sufficient degree, then, because investment is already capped for the reasons I have inserted above in square brackets, Keynes believed entrepreneurs are guaranteed to make a loss.

      Thus, consumption is the core of Keynesianism. He approached the concept of capital with such recklessness, such confusion, that his mistakes lead him to believe that consumption was the final ultimate savior.

      —————————

      Remember the context of that Bob. MF was saying Keynes never talked about something he spent a lot of time talking about it. If you want to fight about nomenclature I’ll just concede your point because I don’t think that’s a big deal. But don’t tell me MF was grasping Keynes’s argument there.

      As I wrote on your blog, and as I explained to you on this blog, I didn’t say Keynes “never talked about something”, or “stuff”, or investment. I said Keynes never spoke of problems associated with the “paradox of consumption”, among other things that, by symmetry, would also impoverish the community. The paradox of consumption was never addressed because according to his doctrine, there can never be too much consumption spending. This is why Keynes thought that no unemployment would result “if the community’s marginal propensity to consume is equal to unity”. Imagine if everyone consumed 100% of their incomes! The demand for wages would collapse to zero. The demand for capital goods would collapse to zero. Output would collapse. Unemployment would soar. In today’s conditions, billions of people would die. But Keynes believed that as long as there is “spending”, even if only consumer spending (MPC = unity), then the community will supposedly be driven to prosperity.

      I am very much “grasping Keynes’s argument”. I will take your prattle otherwise to be what it usually is: agenda driven rhetoric designed solely to prevent a terrible “economist” from being exposed as intellectually responsible for impoverishment at the hands of Keynesian minded politicians.

      Murphy’s judgment is better than yours. You should take heed of his lead.

      • Major_Freedom says:

        Sorry for the terrible bolding. Murphy, can you end the bold after the last square bracket? Nothing after that should be bolded.

  2. Nick Rowe says:

    I think you are right about the Paradox of “Thrift”. There is no paradox of thrift. It should really he called the Paradox of Hoarding the Medium of Exchange. (Not so catchy a name though).

    • guest says:

      Nothing wrong with hoarding your own property.

      Defending the Undefendable (Chapter 15: The Miser) by Walter Block
      http://www.youtube.com/watch?v=x4XSEVJLrdY

      Money is supposed to be a good (instead of paper) like any other good, and no one is entitled to someone else’s goods simply because they find it useful to use as a medium of exchange.

      • Lord Keynes says:

        And Keynesian stimulus via bond issues does not force people to lend money to the government. They do not buy bonds by force. It is voluntary.

        Nor do open market operations actually involve taking someone’s hoarded money by force.

        You will complain no doubt that such measure cause inflation and erode the value of money, yet any private sector money creation by debt/credit money can cause inflation too.

        If private sector money creation and inflation isn’t immoral, nor is government money creation.

        • guest says:

          You will complain no doubt that such measure cause inflation and erode the value of money, yet any private sector money creation by debt/credit money can cause inflation too.

          If private sector money creation and inflation isn’t immoral, nor is government money creation.

          Private sector paper money creation IS immoral, though. The Austrian argument against the Fed isn’t that the government is the one doing the inflation, but rather that government gives artificial protections to counterfeiters of real money.

          In a free market, people would tend to circulate precious metals rather than notes, due to the problems with paper money.

          And Keynesian stimulus via bond issues does not force people to lend money to the government. They do not buy bonds by force. It is voluntary.

          Nor do open market operations actually involve taking someone’s hoarded money by force.

          There’s a difference in bonds that will be paid in precious metals, and those which will be paid in other IOUs.

          People are only willing to buy bonds which will be paid in paper money because they are forced to use the paper money that the bonds will pay.

          Why would I want to be paid in paper, if I could help it?

          (Bonds are not an asset, btw. They are an IOU, and represent an incomplete transaction.)

          • Lord Keynes says:

            “Private sector paper money creation IS immoral, though.”

            So you’re saying that every time business people freely create and accept negotiable bills of exchange, promissory notes, sight drafts, and negotiable cheques, they’re all engaged in unmitigated evil?

            On what grounds? Do you think that the bad effects of such credit money make it immoral? (in other words, a consequentialist ethical argument).

            You would use force and violence to coerce innocent business people and stop them from freely and voluntarily using credit money?

            “In a free market, people would tend to circulate precious metals rather than notes, due to the problems with paper money.”

            The whole history of capitalism proves you wrong.

            Credit money was created on the free market from ancient Roman times, through the Middle ages to the modern period.

            W. V. Harris, “A Revisionist View of Roman Money,” Journal of Roman Studies 96 (2006): 1–24

            John H. Munro, “The Medieval Origins of the Financial Revolution: Usury, Rentes, and Negotiability,” The International History Review 25.3 (2003): 505-562.

            • guest says:

              W. V. Harris, “A Revisionist View of Roman Money,” Journal of Roman Studies 96 (2006): 1–24

              John H. Munro, “The Medieval Origins of the Financial Revolution: Usury, Rentes, and Negotiability,” The International History Review 25.3 (2003): 505-562.

              A cursory search did not provide a link to an online text of these resources.

              But I did read these, and you can tell me if they suffice:

              The Romans and Fractional Reserve Banking
              http://socialdemocracy21stcentury.blogspot.com/2011/02/romans-and-fractional-reserve-banking.html

              Huerta de Soto on the Mutuum Contract: A Critique
              http://socialdemocracy21stcentury.blogspot.com/2012/08/huerta-de-soto-on-mutuum-contract.html

              Huerta de Soto on Banking in Ancient Rome: A Critique
              http://socialdemocracy21stcentury.blogspot.com/2012/09/huerta-de-soto-on-banking-in-ancient.html

              You would use force and violence to coerce innocent business people and stop them from freely and voluntarily using credit money?

              Anything to which is voluntarily agreed is fine. I would not seek to use government to force people to use precious metals rather than paper against their will.

              But yes, paper money is fraud. When government isn’t there to play Corporatism, people realize this on their own and they move away from paper money.

              And in seeming contrast to your view that paper money was chosen freely in Rome, one of your [confirm?] articles suggests the opposite:

              The Romans and Fractional Reserve Banking
              http://socialdemocracy21stcentury.blogspot.com/2011/02/romans-and-fractional-reserve-banking.html

              (Quoting Harris)

              It can also be demonstrated, in case it needs to be, that classical banks practised fractional reserve banking – for otherwise there would have been no need in the crisis of 85 B.C. to give the bankers of Ephesus ten years to pay back their depositors.

              It looks like people were trying to redeem their paper (i.e. abandon paper money), but the government was allowing the banks to suspend specie payment for 10 years.

              Government was protecting banks from failure. People were forced to use paper money in the interim.

              That doesn’t seem voluntary to me. That seems like cronyism.

              And cronyism suggests that it was government that was giving people an artificially elevated level of risk tolerance for the banks’ paper money. That’s moral hazard.

              (I don’t know what happened between government and the banks before that crisis. According to your research, would you say that the government was granting the banks privileges?)

            • Joseph Fetz says:

              This is probably one of the few cases where I will have to fully agree with LK.

              Okay, now I am going to go and give myself a swirly.

              • guest says:

                My reply is awaiting approval, at the moment.

              • Joseph Fetz says:

                BTW, I am speaking specifically about LK’s second comment.

            • Ken B says:

              Lots of banks in America issued their own paper in the 1800s. It circulated just fine.

              • Major_Freedom says:

                Except when the piper had to be paid, and the state enforced “bank holidays.”

              • Ken B says:

                The claim was that people won’t voluntarily use paper. It’s a false claim.

              • Major_Freedom says:

                Sure, but during the 1800s paper was backed (not 100%) by gold and silver. It wasn’t paper paper. It was precious metals backed paper.

              • Major_Freedom says:

                Except for a few isolated (but significant) counter-examples.

              • Lord Keynes says:

                ” It wasn’t paper paper. It was precious metals backed paper.”

                The issue above was:

                “Private sector paper money creation IS immoral, though.”

                That was interpreted by all parties as private sector “paper” debt instruments, possibly backed by commodity money, not fiat money.

                Yet another fallacy of equivocation from M_F.

          • tpt says:

            F. Hayek:

            “we must free ourselves from what is a widespread but basically wrong belief. Under the Gold Standard, or any other metallic standard, the value of money is not really derived from gold. The fact is, that the necessity of redeeming the money they issue in gold, places upon the issuers a discipline which forces them to control the quantity of money in an appropriate manner; I think it is quite as legitimate to say that under a gold standard it is the demand of gold for monetary purposes which determines that value of gold”

            “it is an erroneous belief that the value of gold or any metallic basis determines directly the value of the money.”

            http://mises.org/daily/3204

            • tpt says:

              “gold is not really necessary to secure a good currency. I think it is entirely possible for private enterprise to issue a token money which the public will learn to expect to preserve its value…”

              “I do believe that if today all the legal obstacles were removed which prevent such an issue of private money under distinct names, in the first instance indeed, as all of you would expect, people would from their own experience be led to rush for the only thing they know and understand, and start using gold. But this very fact would after a while make it very doubtful whether gold was for the purpose of money really a good standard. It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value of gold would go up; but that very fact would make it very unsuitable as money. You do not want to incur debts in terms of a unit which constantly goes up in value as it would in this case, so people would begin to look for another kind of money: if they were free to choose the money, in terms of which they kept their books, made their calculations, incurred debts or lent money, they would prefer a standard which remains stable in purchasing power.”

              http://mises.org/daily/3204

              • tpt says:

                (Above quotes from Hayek)

              • guest says:

                You do not want to incur debts in terms of a unit which constantly goes up in value as it would in this case, so people would begin to look for another kind of money …

                Real wages rise under a currency that constantly gains value, so this isn’t a problem.

                Besides, “stable prices” require inflation, which is self-defeating – it results in price inflation which will require further monetary inflation.

                People only seek “stable prices” because they think that falling prices leads to depression. But this isn’t true.

                Here’s Tom Woods on the issue of deflation:

                No, Rick Santorum, We Don’t Need a Little Inflation
                http://www.youtube.com/watch?v=J6a10UuQFOM

                Answering the Same Old Arguments Against Sound Money | Thomas E. Woods, Jr.
                http://www.youtube.com/watch?v=h-PxMzSyujw#t=27m21s

                The second video – the link is timestamped – is more in depth, continuing for the remainder of the video.

              • tpt says:

                “Real wages rise under a currency that constantly gains value, so this isn’t a problem”.

                Incorrect.

                “Besides, “stable prices” require inflation, which is self-defeating – it results in price inflation”

                Hayek disagrees.

                “People only seek “stable prices” because they think that falling prices leads to depression. But this isn’t true.”

                Hayek disagrees.

              • guest says:

                “Real wages rise under a currency that constantly gains value, so this isn’t a problem”.

                Incorrect.

                Increased production due to capital and an extension of the structure of production leads to lower prices.

                Do you disagree?

                Hayek disagrees.

                And?:

                Biography of F. A. Hayek (1899-1992)
                http://mises.org/page/1454/Biography-of-F-A-Hayek-18991992

                Some observers charge that Hayek’s later work, particularly after he began to turn away from technical economics, shows more influence of his friend Sir Karl Popper than of Carl Menger or Mises: one critic speaks of “Hayek I” and “Hayek II”; another writes on “Hayek’s Transformation.”(22)

                Recently, the relationship between Mises and Hayek has become a full-fledged “de-homogenization” debate.

                The Kochtopus vs. Murray N. Rothbard, Part II
                http://www.lewrockwell.com/gordon/gordon39.html

                After he finished his PhD in 1987, Cowen was for a time a professor at the University of California at Irvine, and he used to visit me sometimes in Los Angeles. I was impressed with his remarkable intelligence and enjoyed talking with him. But I remember how surprised I was one day when he told me that he did not regard Ludwig von Mises very highly. Here he fitted in all-too-well with another policy of Richard Fink and the Kochtopus leadership. They regarded Mises as a controversial figure: his “extremism” would interfere with the mission of arousing mainstream interest in the Austrian School. Accordingly, Hayek should be stressed and Mises downplayed.

                The Odyssey of Sound Economics
                http://lewrockwell.com/orig13/sanchez-d2.1.1.html

                Due to this, the fourth generation of the Austrian School, including F.A. Hayek, under the prevailing influence of the writings of Wieser and Schumpeter, was captivated by the Walrasian approach. Hayek, in his early works, “viewed general-equilibrium theory as the core of economic theory.”[3] However, Hayek was also influenced by Mises to a significant degree (especially in his early “macroeconomics”) and made enormous contributions to causal-realist production and business-cycle theory.

                Sound economics suffered a tremendous blow when, as Salerno tells it,

                the new major funding source for I.H.S. and the Cato Institute, a newly-established libertarian “think tank,” made a momentous decision in the late 1970s to deliberately downplay the role of Ludwig von Mises in Austrian economics because his radical intransigence in economic method, theory, and policy risked alienating moderate, neoclassical “free-market” economists, graduate students, and economic policymakers who the new financial-institutional axis was eager to draw into its ambit.

                As time went on, Mises’s name was mentioned less and less at conferences and symposia sponsored by these financially allied institutions and soon became almost anathema. As Mises was being phased out, there emerged an increasing emphasis on the contributions of Friedrich Hayek, who had won the Nobel Prize in 1974.[7]

                All that to say that Hayek wasn’t right about everything.

        • Major_Freedom says:

          Bonds have to be paid back: Taxes or money printing. Taxes are forced payments. Money printing is forced real wealth redistribution as people are forced to pay taxes in the very currency the state is printing.

          Government paper money creation is not immoral per se, but forcing people to pay taxes in it, while the state monopolizes said currency, that is immoral.

          Hoarding your own property is not immoral.

          • tpt says:

            “Government paper money creation is not immoral per se, but forcing people to pay taxes in it, while the state monopolizes said currency, that is immoral.”

            Why?

            • Major_Freedom says:

              Because initiating violence is immoral.

              • tpt says:

                Neither taxation nor money creation is an “initiation of violence”.

              • Major_Freedom says:

                Taxation is theft which is based on initiation of violence.

                Printing money is not inherently violent, but forcing people to pay taxes in them is violence, and using force to prevent monetary competition is violence.

              • K.P. says:

                How do you you think taxes work exactly?

              • tpt says:

                “Taxation is theft which is based on initiation of violence.”

                Taxation is not theft. Money owed in tax lawfully belongs to the government. A tax obligation is a debt owed to the government.

                Receiving money that you are owed, and which lawfully belongs to you, is not theft.

                Theft is unlawfully taking property without the consent of the owner. But money paid in tax lawfully belongs to the government, not to the taxpayer.

                Tax and theft are demonstrably different. To say otherwise is to make up some other language which is not English.

                “forcing people to pay taxes in them is violence, and using force to prevent monetary competition is violence”

                Once again you are abusing the language.

                Money owed in tax lawfully belongs to the government. Refusing to pay money owed is a crime. If one chooses to commit a crime by breaking the law, the law is (normally) enforced. However, it is a category error to confuse force, or enforcement, with the law itself.

                Force is also not the same thing as violence. Violence is an extreme form of physical force intended to cause harm, damage or death. Requiring payment of taxes in a certain currency is clearly not violence. Outlawing what you call “monetary competition” is also clearly not violence. Neither is either of these things “force”. Enforcement of the law, when people choose to break the law, is force. But not the law itself.

              • guest says:

                The government is never the entity that is owed anything. Government is supposed to facilitate the contract that citizens have among themselves.

                Government can’t own property (which is one of the things our Founders got wrong) because it’s not a person, or multiple specific people [key word: specific] such that they would have a right over that property.

                You could say that the government could be used to seek taxes from those who chose to be part of the contract for continued services from the government (like an insurance arrangement); But at no time could the government REQUIRE taxes.

                Further, should one wish to leave the contract, and since the government cannot own property, the individual would keep his property and be excluded from the privileges of the contract.

              • tpt says:

                “Government can’t own property”

                The government can own property. This is demonstrated by the fact that it DOES own property.

                What you are trying to say is that the government shouldn’t own property. This is a political point of view, not a statement of fact.

                “at no time could the government REQUIRE taxes”

                Legally it can. Again you are talking about what you think should be the case, not what is. You are expressing your political ideology.

                “should one wish to leave the contract”

                If you do not like the laws of the US you can either choose to break them, i.e. commit a crime, or you can try to change them.
                Alternatively you can choose to leave the country.

              • guest says:

                “Government can’t own property”

                The government can own property. This is demonstrated by the fact that it DOES own property.

                Can a rock own property? Would you be satisfied if someone said “the law says a rock can own property”?

                What I’m saying is that it is LOGICALLY impossible for the government to own property, in spite of what it proclaims are laws that suggest the contrary.

                The reason I gave for my view is that:

                … because it’s not a person, or multiple specific people [key word: specific] such that they would have a right over that property.

                Obligations are to SOMEONE. But unless those Someones are specified, then there is no one to which one can logically be obligated.

                This is why the government cannot own property.

              • tpt says:

                “Can a rock own property?”

                The government isn’t a rock.

                “it is LOGICALLY impossible for the government to own property”

                The proof that you are wrong is staring you in the face. It does own property. There must be something wrong with your logic.

              • guest says:

                The proof that you are wrong is staring you in the face. It does own property. There must be something wrong with your logic.

                Nothing wrong with my logic; Your reasoning is an example of the logical fallacy of Argument from Authority.

                That which you claim is proof of your position is merely a group of people claiming authority they cannot logically possess.

                Just because someone claims to own something doesn’t mean they do.

              • tpt says:

                “Your reasoning is an example of the logical fallacy of Argument from Authority.”

                Nope. Argument from Fact.

              • guest says:

                “Your reasoning is an example of the logical fallacy of Argument from Authority.”

                Nope. Argument from Fact.

                *Chuckle*
                :D

    • skylien says:

      @ Rowe

      Thanks for that comment. That shows me that I cannot be that off in my thinking:

      DK said recently:
      “That’s not a very helpful way of talking about the paradox of thrift, Bob. Consumers are welcome to save more.. The question is not how much they are consuming relative to how much they are saving – it’s how much they are investing relative to how much they are saving.”

      And I said:
      “You mean the “paradox of thrift” better was called “the problem of hoarding” ?”

      http://consultingbyrpm.com/blog/2012/11/yes-gene-keynesians-do-focus-on-consumption-more-than-investment.html#comment-50750

      I got no answer though unfortunately..

  3. Daniel Kuehn says:

    And as I reiterated in a post this morning: saying consumption can boost growth is not a fallacy and you can get that from Keynesianism. We ought to argue against that because it’s probably not the best policy.

    But it’s wrong to say that Keynesian theory is an underconsumptionist theory. Don’t you see how these are very different claims?

    • Transformer says:

      While Keynesianism may have evolved in a way that downplays under-consumptionism, do you not agree that the quote in Bob’s post is a very clear statement of it from Keynes himself ?

  4. Lord Keynes says:

    There is a simple antidote to this caricature of Keynesianism, and it is available in (of all places!) an “Austrian Economics Newsletter” of 1983, where George L. S. Shackle summed up the essence of Keynes’ theory:

    [sc. Keynes's] … theory of involuntary unemployment is perfectly simple and can be expressed in a paragraph, or in a sentence. If you express it in a sentence, you simply say that enterprise is the launching of resources upon a project whose outcome you do not, and cannot, know. The business of enterprise involves investment, the investing of large amounts of resources–huge sums of money–in things whose outcome you cannot be certain of, which could perfectly well turn into a disaster or a brilliant success.

    The people who do this kind of investing are essentially gamblers and they can lose their nerve. And if they decide to withdraw from trade, they sweep their chips up from the table. If they decide it’s too risky, if their nerve gives out and they can’t bring themselves to go on investing, they cease to give employment and that is the explanation.”

    “An Interview with G.L.S. Shackle,” The Austrian Economics Newsletter, Spring 1983.
    http://mises.org/journals/aen/shackle.asp

    The whole question then becomes: how do you restore that private sector investment and substitute something for it in the meantime to increase employment, income and output.

    If you do not believe increasing demand for products via consumption is one factor that affects and increases private investment, then tell me: how does the law of demand even work? How does capitalism even work at all to supply goods demanded by consumers?

    If Keynesian wasn’t concerned with investment, then why do many Keynesian stimulus programs through history take the form of public infrastructure/public investment ?

    • Transformer says:

      This accurately captures a Keynesian view of what might lead to to an economic slowdown. I don’t think its enough to explain “involuntary employment” though for which you also need the MPC parts of Keynes theory

      And it is clear from the quote in Murphy’s post that Keynes viewed that part of his theory as “general” and would cause problem in rich economies on an ongoing basis , and not just cause periodic recessions as implied in the Shackle quote.

    • Major_Freedom says:

      The whole question then becomes: how do you restore that private sector investment and substitute something for it in the meantime to increase employment, income and output.

      “Restore” private sector investment presupposes a non-private sector solution. The question is thus rhetorical and questioning begging.

      The real question is should the state initiate force to bring about an increase spending greater than what individuals would have preferred to spend voluntarily.

      If Keynesian wasn’t concerned with investment, then why do many Keynesian stimulus programs through history take the form of public infrastructure/public investment ?

      Because if the mafia spent money on ONLY weapons of war, spying, and sexual harassment at airports, then the people would finally revolt to the aggression.

      This is a political thing more than it is a Keynesian doctrine thing. Keynesian doctrine does not distinguish between spending $100 billion on weapons of war, or $100 billion on more dilapidated roads and bridges. As Joseph Stiglitz pointed out, “All government spending is stimulative.” Thus, if the state spends $100 billion to bomb innocent people who live over oil, or kidnap and throw into cages people who do things to their own bodies the state does not approve, then Keynesians have ZERO, NADA, ZILCH foundation from which to argue that this spending is not stimulative according to Keynesian doctrine.

      • Lord Keynes says:

        “The real question is should the state initiate force to bring about an increase spending greater than what individuals would have preferred to spend voluntarily.”

        More proof that Austrian arguments mostly just retreat to moral issues when they get defeated on economics.

        “As Joseph Stiglitz pointed out, “All government spending is stimulative.” “

        First, prove that Stiglitz even said that.

        Secondly, it is obviously wrong.

        Thirdly, perhaps you’re such an idiot you think no economist with a Keynesian viewpoint would object to the things you mention on ethical grounds, not just economic grounds!

        • Major_Freedom says:

          More proof that Austrian arguments mostly just retreat to moral issues when they get defeated on economics.

          As opposed to the moral issue of “we OUGHT to increase employment and output on the basis of force against those who OUGHT to consent to it”?

          Just more proof that Keynesians are hypocrites when they claim free market advocates are the ones “moralizing.”

          First, prove that Stiglitz even said that.

          I am on an iPad, and if I change tabs to go search for it, this tab will refresh and I will lose everything I typed. I can promise you that he said it, and if you Google “Stiglitz + All Government Spending is Stimulative”, you will find it rather easily.

          Secondly, it is obviously wrong.

          I know it’s wrong, but according to Keynesian theory, it’s not wrong. Keynesian theory does not discriminate among government spending. Aggregate demand is aggregate demand is aggregate demand.

          Thirdly, perhaps you’re such an idiot you think no economist with a Keynesian viewpoint would object to the things you mention on ethical grounds, not just economic grounds!

          They wouldn’t be objecting on the basis of Keynesian theory. Keynes said that if nothing else, even deficits to finance pyramid building and wars, will serve to increase wealth just like roads and bridges, because of the “spending”, not the real investment allocation. Keynes himself did not discriminate among government spending, so if any self-professed Keynesian did that, then they would not be doing that because of their cartload of garbage worldview.

          • Lord Keynes says:

            “Keynes himself did not discriminate among government spending, so if any self-professed Keynesian did that, “

            Utter garbage.

            In fact, Keynes regarded war as an evil and as wasteful spending, and ever advocated it as a serious policy.

            Of course, we wouldn’t expect you to show minimal honesty or basic knowledge:

            If we can cure unemployment for the wasted purposes of armaments, we can cure it for the productive purposes of peace. Good may come out of evil.

            http://books.google.com/books?id=zGlBAQAAIAAJ&q=%22If+we+can+cure+unemployment+for+the+wasted+purposes+of+armaments,+we+can+cure+it+for+the+productive+purposes+of+peace%22&dq=%22If+we+can+cure+unemployment+for+the+wasted+purposes+of+armaments,+we+can+cure+it+for+the+productive+purposes+of+peace%22&hl=en&sa=X&ei=JkDEUNSzAuvqmAWyrYCIBw&ved=0CDsQ6AEwAg

            • Lord Keynes says:

              and NEVER advocated it as a serious policy.

              • Dave says:

                But he does seem to believe that the money spent on the armaments is stimulative nevertheless. Considering that he premises the statement with “If we can cure unemployment for the wasted purposes of armaments” rather than saying “We can’t cure unemployment for the wasted purposes of armaments.”

              • Major_Freedom says:

                “as a serious policy”

                Haha, what absurdity.

                A advocates for X, and you want to deny it with thr excuse that A isn’t mentally “serious” about it?

                You claiming to read minds now?

              • Lord Keynes says:

                “A advocates for X, and you want to deny it with thr excuse that A isn’t mentally “serious” about it?”

                Yeah, cite me evidence that Keynes actually advocated war as a serious policy solution to depression.

                You won’t of course.

                Oh, and a google search shows no such statement by Stiglitz about how “all government spending is stimulative.”

              • Major_Freedom says:

                If A advocates for X, then A does not have to advocate for X “seriously” in order to be an actual advocate of X.

                Keynes argued that “Pyramid-building, earthquakes, even wars may serve to increase wealth”. He does not have to be “serious” in order for him to have argued that pyramid-building, earthquakes, even wars may serve to increase wealth.

              • Major_Freedom says:

                Stiglitz:

                “Advocates of austerity believe that mystically, as the deficits come down, confidence in the economy will be restored and investment will boom. For 75 years there has been a contest between this theory and Keynesian theory, which argued that spending more now, especially on public investments (or tax cuts designed to encourage private investment) was more likely to restore growth, even though it increased the deficit.”

                Stiglitz is speaking favorably of Keynesian theory here. Saying that “government spending, especially on public investments” (i.e. healthcare, education, etc) would grow the economy, means Stiglitz is not excluding “non-public” government spending as spending that grows the economy.

                The fact that he may rank healthcare and education spending above war and other spending, does not mean that he is ruling out war and other spending as stimulative. He is saying all government stimulative, and within that stimulative category, some spending is more stimulative than other spending.

                —————————–

                More pearls of “wisdom”:

                “If the government simultaneously raises taxes and raises spending, by the same amount, it stimulates the economy and creates jobs.”

                This is a statement that I am sure not even you are stupid enough to believe. Apparently, raising taxes to finance a war stimulates the economy.

                “Cutbacks in government spending will mean lower output and higher unemployment, unless something else fills the gap.”

                The implication here is that if the government cut spending on anything, there will allegedly be a reduction in output. This again implies all government spending is stimulative.

                “Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits.”

                Saying “especially on investments in education, technology and infrastructure”, again means he isn’t ruling out other spending, like war spending, leads to lower long-term deficits (which means stimulates the economy).

                Sources:

                http://www.goodreads.com/author/show/6426.Joseph_E_Stiglitz/blog

                http://www.goodreads.com/author/show/6426.Joseph_E_Stiglitz/blog?page=2

              • Lord Keynes says:

                LOL.. not a shred of evidence that Stiglitz ever said, in these words “all government spending is stimulative” in the sense in which you used that expression above.

                In your original comment above you used “”all government spending is stimulative” in the sense of all CONCEIVABLE and POSSIBLE type of government spending.

                Now you just shift the goal posts – using the fallacy of equivocation – to a new meaning: all government spending on current programs, not the ridiculous imaginary examples you come up with above.

              • Major_Freedom says:

                LOL.. not a shred of evidence that Stiglitz ever said, in these words “all government spending is stimulative” in the sense in which you used that expression above.

                LOL, I gave all the evidence needed.

                Only a dishonest person would deny it.

                In your original comment above you used “”all government spending is stimulative” in the sense of all CONCEIVABLE and POSSIBLE type of government spending.

                Yes, that is what Stiglitz said when he wrote that “government spending, especially on public investments.” That includes ALL government spending, for anything.

                Now you just shift the goal posts – using the fallacy of equivocation – to a new meaning: all government spending on current programs, not the ridiculous imaginary examples you come up with above.

                Except he was talking about government spending going forward in that one comment, not past or current spending.

            • Major_Freedom says:

              In fact, Keynes regarded war as an evil and as wasteful spending, and ever advocated it as a serious policy.

              I did not say Keynes did not regard war as an evil or as wasteful spending. I said he did not discriminate one form of government spending vis a vis another, when it comes to the alleged stimulative effect such government spending brings.

              Keynes wrote:

              “When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted, the above reasoning shows how “wasteful” loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

              In other words, Keynes believed that if politicians refused to borrow and spend money on pork projects, then even pyramid and war spending would accomplish the “stimulus” that government spending allegedly brings.

              You quote Keynes as writing:

              “If we can cure unemployment for the wasted purposes of armaments, we can cure it for the productive purposes of peace. Good may come out of evil. ”

              Thanks for reiterating my point. Keynes is claiming that government spending on conflicts with against other states (forced payments for tanks and missiles) can accomplish the same thing as government spending on conflicts with its own citizenry (forced payments for roads, bridges, etc).

              He is saying that unemployment can be cured by either “external” or “internal” government spending.

              That he called one evil and the other good has no bearing on the point I am making about not discriminating among spending for the purposes of “stimulus”

          • Lord Keynes says:

            “I can promise you that he said it, and if you Google “Stiglitz + All Government Spending is Stimulative”, you will find it rather easily.”

            Oh, and a google search shows no such statement by Stiglitz.

        • Major_Freedom says:

          It’s funny that you think countering Keynesian morality with free market morality is somehow “retreating”.

          You constantly moralize when you get defeated on the economics. When your economics fails, you fall back on insinuating that those in the government (and thus those the government robs and harasses) have a moral duty to ensure that those who are unemployed and resources that are “idle”, are put back into “motion”.

          Keynesian doctrine contains the implicit moral of property rights violations. You are in no position to cry foul every time someone counters that ethic with another, less violent ethic.

          • tpt says:

            “those the government robs”

            Taxation isn’t theft. Again, you’re just twisting the language to fit your ideology.

            • Major_Freedom says:

              Taxation is theft, because it is backed by force, not consent.

              • tpt says:

                “Taxation is theft, because it is backed by force, not consent.”

                The law is “backed” by force. If you break the law, it is enforced.

                If you refuse to pay a debt to someone, payment can be legally enforced. If you refuse to pay a debt owed to the government (tax), payment can be legally enforced. The two are no different in that sense. Taxation itself is not force. Law enforcement is, however.

                Taxation would only be theft if the government were to take something which didn’t lawfully belong to it, without the owner’s consent.

                But money owed to the government in tax lawfully belongs to the government.

                A tax obligation represents a debt owed to the government. Payment of debts is not voluntary, but obligatory.

              • Bala says:

                “A tax obligation represents a debt owed to the government.”

                How does it become a debt “owed”?

            • Richie says:

              Taxation would only be theft if the government were to take something which didn’t lawfully belong to it, without the owner’s consent.

              This is my favorite comment ever.

              • tpt says:

                Read the next bit.

                Money paid in tax LAWFULLY BELONGS TO the government.

              • Richie says:

                Ok. I’ll write a law that says every dime of your paycheck belongs to me. Are you going to break the law?

              • tpt says:

                If you consider the law to be unjust you can either try to break it, or try to change it. Or you can leave the country.

                “Unjust taxation” was a major cause of the American revolution, hence the slogan “no taxation without representation”.

                Note: the slogan was not “no taxation”.

              • Major_Freedom says:

                tpt (Toilet paper thief?):

                If you don’t like Richie’s proposal, you can leave the country.

                Since you are so far sticking around, you have consented to his proposal, and failure to pay him would constitute theft against him.

              • tpt says:

                As far as I’m aware Richie’s proposal is not actually law.

                I presume that in your ideal world laws would still exist. If people disagreed with those laws, what options would be open to them?

                Are you assuming that in your ideal world there would be no such disagreement?

              • Anonymous says:

                tpt:

                As far as I’m aware Richie’s proposal is not actually law.

                Oh but it is his law. It is Richie’s law. You’re breaking his law.

                I presume that in your ideal world laws would still exist. If people disagreed with those laws, what options would be open to them?

                It would at least contain security and protection providers, who are ostensibly hired to protect against initiations of force, who don’t themselves initiate force.

                Are you assuming that in your ideal world there would be no such disagreement?

                Disagreements do not imply a state. If they did, then we would have a world super-state to solve disagreements between states.

              • Major_Freedom says:

                tpt:

                As far as I’m aware Richie’s proposal is not actually law.

                It is Richie’s law. You are breaking the law.

              • tpt says:

                Who decides what the law is in your utopia?

              • Major_Freedom says:

                I can only talk about laws on my property.

                In your Utopia, others are supposed to treat their own bodies and property in ways satisfactory to you, a non-owner.

              • tpt says:

                “In your Utopia, others are supposed to treat their own bodies and property in ways satisfactory to you, a non-owner.”

                Really? Where did you get that from?

              • Major_Freedom says:

                tpt:

                “In your Utopia, others are supposed to treat their own bodies and property in ways satisfactory to you, a non-owner.”

                Really? Where did you get that from?

                From your insistence that my property be given to those in the state, at whatever amount the states wants, as opposed to those I want to do business with, where myself and others agree how much property I turn over.

                You insist this no matter what I or any other property owners actually prefer. You want other people to use their property in ways that are satisfactory to you, and if they don’t, then you advocate for initiating violence against them. You may believe you’re just a regular “citizen” who is “doing his duty”, but you are, whether you are aware of it or not, thinking and speaking just like a hoodlum.

          • tpt says:

            “property rights violations.”

            WTF??

            • Major_Freedom says:

              Did I stutter?

              • Ken B says:

                Oh no MF. The one thing you do not suffer from is an inability to produce words.

              • Major_Freedom says:

                I pale in comparison to Russell and Whitehead explaining 1+1=2.

            • tpt says:

              “Keynesian doctrine contains the implicit moral of property rights violations.”

              No it doesn’t.

              You define things that are not property rights violations as “property rights violations”.

              • Major_Freedom says:

                No it doesn’t.

                Yes it does. Keynesian policies require violence in the field of money production (to monopolize it), and deficits (which are financed by violence backed taxation).

                You define things that are not property rights violations as “property rights violations”.

                You define things that are property rights violations, as not property rights violations.

              • Ken B says:

                You define things that are not property as property.

              • Bob Murphy says:

                Ken I’m serious, do you work from home? What’s your deal man? I view MF as an elemental force of nature, but you?!

              • Ken B says:

                No Bob. But notice I’m only on for a short period each day.
                I will concede it’s been a slow month at work though!

              • ElementaryForceOfNature says:

                [THUNDER]

              • Ken B says:

                Speaking of slow days … Few things better on a slow day than Douwe Eisenga. Harken, and be convinced! http://www.youtube.com/watch?v=Gdec8es1qjM

              • Ken B says:

                ElementaryForceOfNature:[THUNDER]

                And yet people here don’t believe in Thor! Are you blind you atheists? Blind?

              • tpt says:

                “Keynesian policies require violence in the field of money production (to monopolize it), and deficits (which are financed by violence backed taxation).”

                Law enforcement may involve the use of physical force, or in extreme cases violence, if a criminal or suspect refuses all cooperation with judicial or law enforcement bodies, or else poses a threat to law enforcement agents or members of the public. Certain punishments for crimes, such as incarceration, may also involve the use of physical force. Calling all forms of force “violence”, however, is once again simply a distortion of the language.

                Keynesian policies acknowledge the fact that governments exist and have certain legal powers, such as the power to tax and spend, and the power to issue money. These powers, it is argued, can and should be used in beneficial ways. Whether governments should have these powers in the first place remains a political question. Most people believe they should.

              • Major_Freedom says:

                tpt:

                Law enforcement may involve the use of physical force, or in extreme cases violence, if a criminal or suspect refuses all cooperation with judicial or law enforcement bodies, or else poses a threat to law enforcement agents or members of the public.

                How about those who peacefully resist and do not harm anyone?

                Calling all forms of force “violence”, however, is once again simply a distortion of the language.

                I am not talking about initiations of force, not just force.

                Keynesian policies acknowledge the fact that governments exist and have certain legal powers, such as the power to tax and spend, and the power to issue money.

                That power is aggressive, not defensive.

                These powers, it is argued, can and should be used in beneficial ways.

                Initiating force against people does not make their lives better off.

                Whether governments should have these powers in the first place remains a political question. Most people believe they should.

                The Keynesians love the violence.

              • Ken B says:

                “Keynesian policies require violence [in the form of involuntary taxation]”

                This can’t be right as it is logically possible for everyone to assent to the required taxes.

              • tpt says:

                “Initiating force against people does not make their lives better off.”

                By “initiating force” do you mean enforcing the law when people break the law?

                Most people believe the law should be enforced. You don’t seem to think so.

                “The Keynesians love the violence.”

                You appear to use the term “violence” to describe anything you don’t like.

              • Major_Freedom says:

                Ken B:

                This can’t be right as it is logically possible for everyone to assent to the required taxes.

                Then they wouldn’t be taxes, but voluntary sales revenues. It would be as likely as every individual shopping at Wal-Mart.

                tpt:

                By “initiating force” do you mean enforcing the law when people break the law?

                No, I mean initiating force against people who have not initiated force themselves. Regardless of what the positive law says.

                Most people believe the law should be enforced. You don’t seem to think so.

                Not all laws are just.

                “The Keynesians love the violence.”

                You appear to use the term “violence” to describe anything you don’t like.

                No, I call violent acts “violent acts”. I dislike things that are not violent, like the level of your awareness.

      • tpt says:

        “The real question is should the state initiate force to bring about an increase spending greater than what individuals would have preferred to spend voluntarily.”

        What is this nonsense about “initiate force”?

        Taxation isn’t an “initiation of force”, nor is borrowing, money creation or spending by the government.

        You can’t just twist the english language and make stuff up to fit your ideology, that’s not good manners.

        • Major_Freedom says:

          What is this nonsense about “initiate force”?

          Truth is nonsense?

          Taxation isn’t an “initiation of force”, nor is borrowing, money creation or spending by the government.

          Taxation is based on initiations of force, not consent.

          You can’t just twist the english language and make stuff up to fit your ideology, that’s not good manners.

          It is a twisting of the English language for you to call theft from those in government “taxation”.

          • tpt says:

            Taxation is law.

            If someone chooses to commit a crime by breaking the law, the law is normally enforced.

            You are confusing law with law enforcement.

            Law itself is not force. Law enforcement is. It’s a category error to conflate the two.

            • Major_Freedom says:

              The tax law is unjust.

              Nobody is confusing law with enforcement.

            • tpt says:

              “The tax law is unjust”

              ok, this is your view.

              How are you going to change the law?

              • Major_Freedom says:

                How are you going to change the law?

                Education.

        • Anonymous says:

          Taxation isn’t an “initiation of force”

          Great! I won’t pay my taxes that will be due on April 15. That’s a relief.

  5. Joshua Wojnilower says:

    Bob – You mention John “is perplexed that he is getting push-back from people saying he’s setting up a strawman by implying that Keynesianism promotes the idea that consumption drives the economy.”

    I posted this at Daniel’s but will mention it here too… it seems important to differentiate between what drives the economy and what drives business cycles/unemployment. Since consumption is ~70% of GDP, it would seem correct to say consumption is the major contributor (i.e. drives) output. That statement, however, is very different from stating that fluctuations in consumption are the primary driver of business cycles and unemployment.

    I admit to not having followed all of the posts and comments in this ongoing conversation, but frequently notice that semantics appears to play a large role.

  6. Bill Woolsey says:

    Keynes blamed recessions on reduced investment.

    He sometimes worried that inadequate investment would be a constant problem.

    The element of truth in the paradox of thrift that for the “macroeconomy” saving can only increase with invetment. If there is no more investment, there is no more saving.

    It is my view that if investment cannot increase, it is better not to have saving. That is, saving by some needs to be matched by dissaving by others.

    But I don’t think the no more investment is possible scenario is realistic.

    From a simple micro perspective, an increase in the supply of saving or decrease in the investment demand leads to saving greater than investmnet.

    The natural interest rate–the interest rate where saving equals investment–is lower.

    Assuming actual market interest rates fall, then the quantity of saving supplied falls. That is the same thing as more consumption. So, the base market process that adjusts to an increase in saving supplied or a decreace in investment demand _is_ a signal to increase consuption.

    The other effect of lower market interest rates is an increase in investment demand. So a increase in saving supply and decrease in investment demand creates a signal to expand investment demand.

    There is no paradox of more saving leading to less saving or less investment leading to more investment. These are just partial offsets, and the simple response of how changes in supply or demand lead to changes in price which lead to changes in quantity supplied and quantity demanded.

    Still, if investment falls or saving rises, the market process is for a lower interest rate to “stimulate” consumption and investment spending.

    Rowe was correct that the paradox of thrift is really a paradox of hoarding. If there is no increase in the demand to hold money (or decrease in the quantity of money) then the shift in saving or investment will lead to shifts in the supplies or demands for financial assets so that market interest rates adjust exactly in the right way.

    However, if the demand for money rises (say because firms earn profits and hold money rather than buy capital goods, or households on net repay bank loans and banks accumualte reserves rather than relend the money out) then market interest rates will not adjust enough to bring investmnet and saving back into eqilibirum.

    An appropriate monetary keeps keeps the quantity of money from falling and rather expands it to match the increase in the demand to hold it. In this scenario of a decrease in investment demand or increase in saving supply, this is coordinating. Just like the direct market effects of buying and selling finanical assets brings interest rates down and so stimulates consumption and invsetment, an appropriate monetary policy just brings the interest rates down enough so that saving and investment are again equal.

    Now, the quantity of money fails to match with the demand to hold money, or even falls below the demand to hold money, then the market process that brings the market to equilibirum is a lower level of prices (including wages.)

    As real money balances increase, some of those the increase real money balances buy finanical assets. This pushes market interest rates lower, “stimulating” consumption and investmnet.

    However, if nominal interest rates hit zero, or some more traditional liquidity trap applies, then when the price level falls low enough, and real money balances rises high enough, then real wealth will be high enough that consumption will rise enough that the supply of saving will fall enough that saving and investment are back to equilibirum.

    The lower price level and higher real wealth “stimulates” consumption.

    So, the market process in response to an increase in supply of saving involves a “stimulation” of consumption (and investment.) If investment doesn’t respond at all, then the market process that occurs due to an increase in saving is that consumption is stimulated until the iniital increase in saving is fully reversed.

    I have never understood why anyone would think that going through the deflationary process so that the real quantity of money rises and investment and consumption spending are stimulared is any better than expanding the quantity of money to provide the same stimulation to real consumption and real investment.

    • Major_Freedom says:

      Bill Woolsey:

      Keynes blamed recessions on reduced investment.

      This is not correct. Keynes blamed recessions on insufficient “spending”, which is either insufficient investment spending or insufficient consumption spending. And, what’s more, he held that under certain conditions (full employment, interest rates below 2%, among other conditions) there is no room for additional investment spending, and so the only solution is more consumer spending.

      • Major_Freedom says:

        I should have said:

        “and so the only solution to deal with the issue of increased incomes is more consumer spending.”

  7. Gene Callahan says:

    “and in fact would be just as applicable to a situation in which people didn’t save more, but decided to cut their investment spending.”

    Right, the “paradox” occurs when S > II. It doesn’t matter why S > II. The analysis would be the same whether S rose or II fell.

    • Joseph Fetz says:

      True, but I think that this evades the question of what savings are. Obviously, since we live in a monetary economy, it makes sense to speak of savings in monetary terms. If I hoard money for a period of time, eventually that money will be spent or invested in the future. The only case where this is not true is if the money is destroyed or consumed in its own right (Landsburg wouldn’t like me to say “consumed”, but there really is no other word to describe a situation whereby somebody keeps money for the utility of the money itself).

      Here, let me put this another way. Let’s say that in a given time period I hoard x amount of dollars. Eventually, in another period of time, I will either spend or invest that money. So, if you look at both time periods, they cancel out, and thus S=I. The paradox of thrift only looks at the first time period, and says, “aha, savings is greater than investment, so we must stimulate in order to equilibrate the two”. But, this (equilibration) will happen anyway, given time.

      The only cases that I can see savings not being equal to investment is in the case I already pointed out above (destroyed/consumed) resulting in S>I, the other being an injection of new credit money, in which case S<I. Hoarding is only a temporary condition, so there really is no paradox.

      Of course, this also brings about the whole short-run vs long-run debate.

      • Major_Freedom says:

        You should refrain from putting yourself down on occasion (which I notice). What you said here could not have been said better.

        • Joseph Fetz says:

          Thanks Major. I’m aware that I do in fact do that, and that I probably shouldn’t. The best explanation that I’ve come up with is that my perfectionism can’t seem to come to grips with my own imperfections. It’s a vicious cycle that results in issues of self-esteem, which are only reconciled through outward admission of my own perceived imperfections. IOW, it’s like insulting myself makes me feel better about myself. Strange, I know.

    • Joseph Fetz says:

      I should mention that in the cases where I show S>I or S<I, we can no longer refer to those sums of money as savings.

      • Daniel Kuehn says:

        There would be an adjustment in Y to ensure that there is never a point when S does not equal I. That’s why you hear some people refer to “planned” or “anticipated” savings and investment being higher or lower than each other.

        • Major_Freedom says:

          There would be an adjustment in Y to ensure that there is never a point when S does not equal I.

          If you think S is always equal to I, did you not just adandon the entire Keynesian justification for “stimulus”?

      • Daniel Kuehn says:

        Accounting identities must hold in other words, but that does not mean they will hold at the level that we wanted them to.

        • Joseph Fetz says:

          “Accounting identities must hold in other words, but that does not mean they will hold at the level that we wanted them to.”

          That’s the point, not all people want the same things. Why should a small group of men be the judge of that based upon *their* theory.

          We’ve all got desires, wants, ambitions, ideas, reservations, hesitancies, peeves, dislikes, likes, and a great many more things that make us who we are: why don’t you let people have these things freely?

          Why do you instead have to go guiding, manipulating, steering, stimulating, crediting, debiting, subsidizing, taxing, diluting, expropriating, experimenting, and “easing” peoples lives based upon your own view of the world?

          You might respond to this by saying, “oh, you’re doing the same thing, trying to impose a social structure, trying to engineer society, blah blah blah”. The difference is that I don’t try to force people, I don’t use a monopoly of violence in order to reach my aims.

          The primary reason that I agreed with LK above is that he was arguing that individuals should be allowed to make their own choice (or course, I know that he doesn’t actually believe this). The problem that I have is people like yourself believing that you can run an entire economy based upon output, and impose it upon the whole of a particular society through violence and theft. To skew the whole playing field through the fiscal, monetary, or legislative policy of the ruling monopoly.

          Not everything in the real-life market is equilibrated at any given point in time, this is due to human error. Failure and success is inevitable, that’s part of the process of improvement and progress in human society. But all you guys want to see is that frigging Y go up, so you do anything you can to make that happen, and try to ensure that it stays that way. You want to make human error systemic: through your own infallibility, you want to attempt to control the infallibility of millions or billions in some systematic order. Do you not see the difficulty in doing this accurately?

          • Daniel Kuehn says:

            re: “The problem that I have is people like yourself believing that you can run an entire economy based upon output, and impose it upon the whole of a particular society through violence and theft.”

            If it makes you feel better, I don’t think this (at least I don’t think I do).

            re: “But all you guys want to see is that frigging Y go up, so you do anything you can to make that happen, and try to ensure that it stays that way.”

            No, I don’t think that’s it at all.

            • Major_Freedom says:

              1. The Keynesian activities you advocate are based on force, not consent.

              2. The “stimulus” to aggregate demand you advocate, i.e. stimulus to Y, is the solution to “demand side problems” that you perceive.

              • tpt says:

                “The Keynesian activities you advocate are based on force”

                Bullshit.

              • Major_Freedom says:

                It’s not BS.

        • Major_Freedom says:

          I don’t want those accounting identities to be held at any level other than what results from individuals respecting each other’s persons and property.

          How about you?

          • tpt says:

            Sanctimonious.

            • Major_Freedom says:

              Moral.

              • tpt says:

                Pseudo-moral.

              • K.P. says:

                Getting better!

              • Major_Freedom says:

                Violence != moral.

              • tpt says:

                MF

                are you saying it’s immoral to use violence to enforce the law?

              • Major_Freedom says:

                No, I’m saying it’s immoral to initiate force against people’s persons or property.

                Those who are themselves initiators of violence, I hold can be stopped with the use of violence.

                But those in the state do not just use force against those who initiate it. Those in the state initiate force themselves.

              • Ken B says:

                And yet in our secession squabbles you defended those who would seize federal parks and roads and prevent American citizens from entering them.
                You have a very flexible notion of ‘initiating.’

              • Major_Freedom says:

                And yet in our secession squabbles you defended those who would seize federal parks and roads and prevent American citizens from entering them.

                Did I? Or did you merely infer that any support for secession must contain the proviso that should the state secede, they must necessarily “seize” federal parks and roads, and that this represents an initiation of force against citizens not in the state?

                You could have asked what I thought about such transition issues, rather than assume I believe what you think the implications of secession entail.

                You have a very flexible notion of ‘initiating.’

                It’s actually an issue of flexible/vague property rights, not flexible definitions of violence. For we must identify who are the owners first before we can identify violations of property rights. The reason you think the definition of violence is flexible is because the definition of property is flexible.

                So I will ask: Who exactly are the owners of the federal parks and roads in Texas, say? I define legitimate property is that which is produced, homesteaded, and traded for. Do any of these apply to the federal parks and roads? If so, then those people are the owners. If Texas secedes, then it would be like having foreign owned parks and roads in the country.

              • Major_Freedom says:

                Oh, and if you say that should any Texans seize federal parks and roads, this would nullify the legitimacy of the secession, because it is based on initiating of violence against the prior state property, then you pretty much just made a case of nullifying the country of the US.

                Once private property owners begin to act like statesmen, things get somewhat messy and difficult to disentangle.

                None of this however proves secession isn’t justified, nor does it prove my definition of initiation of violence is flexible.

              • guest says:

                There’s no such thing as “Federal parks and roads”, except for post roads.

                The Fifth Amendment speaks of “public use”, but there is no Constitutionally delegated power which requires Federal parks, so these parks are unconstitutional.

                Those “parks” belong either to specific individuals or have reverted back to a commons, depending on whether the previous owner willingly gave up his property (for pay, or otherwise).

                (This is the constitutional position, but the Constitution is nevertheless wrong for claiming that the government can own any land at all.)

  8. Tel says:

    Moreover the richer the community, the wider will tend to be the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system.

    So logically, if everyone farms a small plot of land using only their bare hands, and never trades with anyone at all, there is no gap between actual and potential production, and we have full employment — the best possible economic system as signed off on by Lord Maynard Keynes!

  9. Tel says:

    That’s the typical quote from the General Theory (chapter 24 section II):

    Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

    A bit turgid, but I read it to mean that interest rates get pushed down until anyone can borrow cheaply (i.e. “no scarcity of capital”), and if people are not inclined to save because the reward for not consuming is inadequate, then the State just steps in and makes up the difference (i.e. “communal saving through the agency of the State” which is basically government deficits and QE).

    I’ll point out that in practice, these low interest rates are offered to the few, not to the many… but other than that, the Fed is working pretty much according to Keynes (at least, according to that little paragraph).

  10. Ken B says:

    @tpt and MF: Before you guys waste a lot of pixels …

    Tpt, MF claims taxation is levied contrary to consent in many cases, and that the extraction is done by force, a form of violence. He is correct.
    MF: tpt believes that there is a moral obligation to consent to at least some level of taxation. He claims that you do not deal with this except by a simple denial of it, a denial given without argument or justification. He is correct.

    Now, let the games the begin.

    • Major_Freedom says:

      Let the games begin? The games are over, the visitor team lost, the fans went home, and tpt is still on the field believing that if he just scores one more goal, he’ll win.

      • Economic Therapist says:

        As Dirty Harry said: “You’re a legend in your own mind.” The paying of taxes is a civic obligation that a community imposes on its members in order to pay for public services, such as a police service, law courts, roads, sewers, power lines, education, a health service. If you don’t like paying taxes, buy yourself a island and live there with your fellow anarchists.

        • Richie says:

          The paying of taxes is a civic obligation that a community imposes on its members in order to pay for public services, such as a police service, law courts, roads, sewers, power lines, education, a health service.

          Right, because none of those things could be provided “privately” by greedy capitalist pigs. Only the altruistic members of society (a.k.a. politicians) have the heart and desire to be so kind to force payment from its “consumers” to “give” those things to us.

        • Major_Freedom says:

          The state is not the community.

          It is not the obligation of private property owners to leave their own land if others are bothering them.

          Those in the state are all totally and completely free to refrain from trespassing, stealong from, and harassing property owners, and go move to North Korea.

          • tpt says:

            Who decides what the law is in your ideal world? You?

            What options are available to those that disagree with your laws?

            I take it in your ideal world the right to vote on such matters has been stripped from the population (including all future generations), along with every other right that doesn’t fit with your particular political ideology.

            • Ken B says:

              You should ask him about secession …

              /evil cackling

            • Major_Freedom says:

              Who decides what the law is in your ideal world? You?

              I can only answer for what laws are valid on my property. If you want to have your own set of laws on your property, be my guest.

              What options are available to those that disagree with your laws?

              They can travel away from my land if they don’t agree. They can live in utopia in N. Korea.

              I take it in your ideal world the right to vote on such matters has been stripped from the population (including all future generations), along with every other right that doesn’t fit with your particular political ideology.

              I am not anti-vote. I am anti-majority rule regarding other people’s property. 99 people do not have a right to steal from an individual just because they outnumber them.

    • Richie says:

      tpt believes that there is a moral obligation to consent to at least some level of taxation.

      tpt needs to prove why a moral obligation exists.

      • Major_Freedom says:

        A gun is his proof.

        • Ken B says:

          “When I hear the word ‘taxation’ I reach for my Smith & Wesson.”

          • Major_Freedom says:

            You work for the IRS?

  11. tpt says:

    Friedrich Hayek:

    “in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market”

    Law, Legislation and Liberty, Volume 3.

    • Major_Freedom says:

      Hayek was wrong.

      • Ken B says:

        It’s OK MF, I’ll hide you in my basement and smuggle you out.

      • tpt says:

        “Hayek was wrong”

        I think he would probably disagree with you on that.

        • Major_Freedom says:

          You don’t say!

  12. Ken B says:

    So you’re calling Sumner out on the infield fly rule?

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