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 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.”