Explaining the Success of the Keynesian Revolution
A lot of times Austrian economists will say that the Austrians used to be really popular and influential, but that they were eclipsed by the Keynesians in the 1930s. Then they might explain this outcome along the lines of, “The Keynesian economists told government officials exactly what they wanted to hear: spend more money to fix this depression, whereas the Austrians told them they were the problem, not the solution. So naturally, the Keynesians ended up teaching at the top rank schools (funded with tax dollars) and staffed all the important posts.”
Now usually, mainstream economists reject this type of explanation as a self-serving conspiracy theory. They will say the Austrians failed the “market test” in the academic arena. “If you Austrians had better ideas, they would have risen to the top in the peer-reviewed journals. Stop whining.”
In that context, I was very surprised to read Paul Krugman’s account of the Keynesian triumph:
If you go back to the state of American economics in the 1930s and even into the 1940s, it was not at all the model-oriented, mathematical field it later became. Institutional economics was still a powerful force, and many senior economists disliked mathematical modeling. When Paul Samuelson published Foundations of Economic Analysis in 1947, the chairman of Harvard’s economics department tried to limit the print run to 500, grudgingly accepted a run of 750, and ordered the mathematical type broken up immediately.
So why did model-oriented, math-heavy economics triumph? It wasn’t because general-equilibrium models of perfect competition had overwhelming empirical success. What happened, I’d argue, was Keynesian macroeconomics.
Think about it: In the 1930s you had a catastrophe, and if you were a public official or even just a layman looking for guidance and understanding, what did you get from institutionalists? Caricaturing, but only slightly, you got long, elliptical explanations that it all had deep historical roots and clearly there was no quick fix. Meanwhile, along came the Keynesians, who were model-oriented, and who basically said “Push this button”– increase G, and all will be well. And the experience of the wartime boom seemed to demonstrate that demand-side expansion did indeed work the way the Keynesians said it did.
Except for that last sentence–the part about Keynesianism “work”ing–Krugman’s narrative fits almost exactly the (allegedly) self-serving Austrian version.
Krugman may be saying what you think he’s saying. But, I think the last sentence is the most important. Keynesianism seemed vindicated by experience. The model-oriented Keynesianism Krugman has in mind started to be developed in the late 1930s, by which time most countries were already undertaking large military mobilizations. Policy-oriented economics began to focus on war finance, not on the business cycle (one factor Austrians like to bring up with trying to explain the dissipation of interest in Hayekian capital theory). Keynesianism really took off in the postwar, after the Great Depression had ended.
Even if the Keynesian model was not vindicated by experience, it would not disprove the thesis that politician’s self-interest is helped by Keynesian prescriptions. It would still encourage politicians to spend more money and the central bankers to print more money, even if all this hampered true recovery. We have seen this time and time again. There is a recession, and Keynesians tell the government to spend and inflate more, and if the economy slumps, it’s because there wasn’t enough spending and inflation. If spending and inflation increased, and the economy happens to recover regardless, then it was because of the spending and inflation.
At no time is the Keynesian model ever refuted by experience.
This is the intellectual equivalent of “You politicians can and should do what you find it in your self-interest to do.” That means, in general, more inflation and more spending.
The last sentence may be what Krugman believes (if he’s feeling honest that day), but in reality, the reason why Keynesianism spread actually has nothing to do with experience or models or testing. It has to do with an intellectual vacuum that was present in the mainstream, that failed to conclusively refute Keynesian theory with superior theory. Right before the Keynesian revolution, mainstream economists were, correctly, of the opinion that falling wage rates and prices cures depressions. But they couldn’t explain it very well. This was quite an uncomfortable position to be in, in an environment of the general population’s beliefs and wants.
Then Keynes came along, and offered a complex argument that said falling wage rates and prices were actually destructive, and that economists need not stay in their uncomfortable position any longer. They could join in the calls for more government, and not have to feel guilty about it any more. This was allowed to happen because mainstream economists of Keynes’ time did not have the tools to refute his arguments. The mainstream forgot all about some of the crucial teachings of the classicals, because classical economics was abandoned due to it relying in many respects on the labor theory of value. It was thought the entirety of classical economics was wrong because the labor theory of value was wrong.
The mainstream never abandoned Keynesianism because economics itself, to a majority degree, became another field under the purview of the government. Government essentially took over the field of economics. They could do this because economics wasn’t all that useful to the average businessman. Most of what constituted “economics” was the abstract, high level material you find in mathematics departments. Government funded schools, government funded economics, and even economists started to find it in their own self-interest to by and large teach Keynesianism.
It ebbed and flowed since the 1930s. It was thought by the 1970s that central banking alone can do what Keynesianism called for with Treasury spending and inflation. That failed, and so Keynesianism made another appearance, but this time, Austrianism entered the mainstream as well, since if you’re going to bring Keynes out of retirement, he can’t be the clear cut winner.
We’ve also seen politicians follow non-Keynesian prescriptions.
This simply isn’t true. Keynes’ General Theory was heavily criticized during the years immediately after its publication. Many of the “Keynesian” theories that were accepted were developed concurrently and by others (e.g. Hicks, Robertson, Kahn, et cetera) — and the circle of economists who did accept certain positions broadened over time. The “Keynesian revolution” was gradual, not immediate — it took over a decade.
Jonathan, there have never been anything but Keynesian applications of economic theory within government, otherwise there would have been a constant pillorying and calling for a receding of all government programs and interventions. Not until Ron Paul came in were there Austrian prescriptions, yet these were never executed or even taken into consideration. Slight idealist notions of accepting some government cuts is mere compromise and freindly-conservatism, it was not adherence to any school of economic thought, i.e. Andrew Jackson or Eisenhower even.
One could even go as far back as the Marginal Revolution to see when in fact Austrian Economics was even gathering a foothold amongst certain intelligentsia. If it is true that Classical Economics was even somewhat understood in politics, it was so fully diluted with Keynesian and interventionist ideas, it was basically quasi-Keynesianism, regardless of certain divergences in basic ideas. Walrasian style neo-classicism was the closest you would ever get to understanding marginalism, because most, if not all, of classical economics was a failure due to the adherence to the labor theory of value, and complete inaccurate perception of it.
Let’s be honest with each other here Jonathan, all economics has been bad since Adam Smith, he adhered to this pernicious Labor Theory of Value which has made economists feel designing unrealistic models and assumptions is somehow close to reality. MajorFreedom is right here, there needed not have been a supposed Keyensian Theory designed yet for Keynesianism to have existed in school teaching, when Keynesian teaching was embedded in civics already; Government intervention in the form of taxation or central banks et al.
“This simply isn’t true. Keynes’ General Theory was heavily criticized during the years immediately after its publication.”
Jonathan, this doesn’t challenge what I said. There is a difference between refutation, and attempts to critique.
The criticisms of the General Theory, from the mainstream, were weak and sporadic. There was Pigou, who came closest, but in the end was in the same overall frame of mind.
I don’t quite understand.
Yes, government wants economists with an economics that works just like they want engineers with engineering that works.
I don’t think anybody thinks the government didn’t want economists to give them answers. The concern is this case that they’re interested in economists that give them a useful answer.
Austrians have a button to push too: abolish central banks.
It just happens to be a dumb button whereas Keynesians have a useful button.
But nowhere does Krugman say that government hired Keynesians because they justified their power-grubbing self-interest.
What’s dumb about abolishing the central bank?
I don’t mean it as a challenge; I’d seriously just like your honest answer.
Suppose you had fallen on hard times financially and someone proposed getting rid of your counterfeiting operation as a solution? You might not accept that as a suitable Plan A.
“Useful” being the operative word.
Right, so useful and effective.
http://static1.businessinsider.com/image/506ed64f6bb3f7b452000007-437-397/labor-force-participation-rate.png
“It just happens to be a dumb button whereas Keynesians have a useful button.”
Useful? Like convincing the country that there is an impending alien invasion?
When is the next stimulus going to batter the coastline?
“Yes, government wants economists with an economics that works just like they want engineers with engineering that works.”
I think you may have hit on something there, DK. It certainly explains the O’care website AND the piss poor state of the economy.
Daniel, a much better metaphor for abolishing central banks is not pushing the button but destroying the device for pushing the buttons.
Or free banking, which just hands a button to everyone…
http://principiadiscordia.com/book/43.php
Yes, government wants economists with an economics that works just like they want engineers with engineering that works.
Are you really this naive? Yeah, they just want economics that “works”. Whether it supports their own personal interests or not is irrelevant.
Daniel_Kuehn, circa 10,000 BC: “The chieftain just wants advice that *works*. He has no incentive to take the advice of the guy who tells him to take 50% of my crops over the guy who tells him to take 10%.”
I’m not sure I follow. You seem to think I’m saying that politicians aren’t self interested. Trouble is I can’t find anywhere where I’ve said that.
Are you really that naive?
Daniel, when you’re called out on it you always react as if you were suspicious of politicians the whole time. Me? Insufficiently cynical? Never! Of course I am aware that politicians act in their own self-interest!
Most of the time though, this attitude is never apparent. As a middle-of-the-road kind of guy, I’m sure you get it in the neck from both sides.
But the thing is I’m not called out on this all the time – only from a few usual suspects that have a certain picture of me in their head. Silas is one of the worst.
Daniel what is in the self interest of politicians. To have a central bank or to abolish it?
It’s different for different politicians. Central banks have proven to be important for well functioning modern economies. I’m not going to rule decidedly against free banking – I’m relatively agnostic on it myself. But it is clear that central banking does a lot of good. So most politicians fill find it in their interests to support something with such substantial social payoffs.
Some politicians find it in their interest to advocate the opposite. We’ve seen in the last five years or so that that brings in lots of money and votes too.
What seems less significant in the support for central banks is a politician’s view of it as a way to satisfy their hunger for power – which is how this is usually portrayed. That doesn’t seem to make as much sense to me.
Again, Daniel, and not as a challenge, but a central bank does a lot of good…relative to what? Relative to the absence of a banking system, as in, central bank is better than nothing? Or relative to free banking or some other system, and if so, what makes you think that?
I’ve noticed that too Bothered. On this thread at least, DK uses the words good, useful, and dumb as if they are absolute and self evident. He doesn’t seem very interested in telling us how/why things are good or dumb.
DK must be truly young at heart. The way he uses adjectives reminds one of conversations with children. Why do I like it? Why, because it’s good! And not dumb too!
“So most politicians fill find it in their interests to support something with such substantial social payoffs.”
Your conception of political self-interest is how much a politician can get what they want by helping others, i.e. “social payoffs”?
You can’t think of any self-interest from politicians that have to do with…actual self-interest, meaning how would it benefit the politicians themselves, either power, material aggrandizement, or whatever?
Hilarious.
“Central banks have proven to be important for well functioning modern economies.”
Correlation doesn’t imply causation. They only are “proven” to be effective when you use such a fallacy.
Does any one else find it hilarious when Keynesians blame economic woes on deflation? Large scale deflation is built into our monetary system. What happens if we all want physical paper in our hands etc? Exactly. Yet “deflation” is the problem, and not the thing that created it.
How much deflation would there be without fractional reserve banking etc?
yet correlation still implies causation DK, tsk tsk tsk
I think that’s fair. Assuming the premise that Austrians are right about central banking, it still doesn’t seem likely that most politicians really understand how it helps their selfish interests.
Daniel, you are now making two important implications:
1: That Keynesian Economics (KE) is correct and Austrian Economcis wrong
2: That politicians are generally knowledgeable of Economics and are able to objectively assess both theories.
That is a bit unfair, isn’t it? Not to forget that 2 really strikes me as naïve.
To see what politicians would rather do you need to treat KE and AE equally in this thought experiment. Means both are wrong, right (this one is of course not possible) or it is not known; especially if you would admit that the mass of the voters and the mass of politicians is (still) economically ignorant and definitely not in a position to have a fair assessment of KE vs AE.
Hence what is left? An economically ignorant mass of voters who want benefits without being taxed and economically ignorant politicians who can exactly deliver this if they subscribe to KE (Spend and Borrow).
And this is exactly what I see happening in every single election campaign in Europe. There is not one politician who is even near Ron Paul, and I know no one but me who even knows AE. Ron Paul is an absolute exception, and the popularity of AE in the US is one as well.
Politicians will cater to public opinion, and if all people were ‘Austrians’ they would abolish the Fed, no question about this. But in an environment in which both groups voters and politicians are ignorant of economics they will by default pick KE and public choice explains why.
I mean what as an ignorant politician do you rather want to hear: “Yes spend more money, it will benefit you now and later because not spending now will hurt you now and later and by the way there is a lender of last resort who is always there to secure the credibility of the US”, or “No you have to restrict spending now and you must save now to have benefits later and you need to abolish the Fed which means it is YOUR job to take care about the credit standing of the US” *1
*1 This is during a situation in which there is lots of unemployment. I know that KE would not recommend public works or high deficits if there is full employment, although they would still say, not too much worries about the debt because “we owe it to ourselves”.
I mean if I were a Keynesian I would have no problems with admitting that politicians would rather take advice from me than from an Austrian because this way it is easier to win elections. And I would say, well that is just a lucky coincidence that what’s right and good goes hand in hand with what’s easy to do. Maybe we see gods work (ID?) in this relationship 😉
However I am really astounded that we need to argue about this (from my experience) so obvious fact that we can see on display at absolutely every election.
Of course ignorant voters also do (at some point!) become more and more skeptical of high government debts, which is the reason politicians at least pay lip service to that concern. I am very happy there is at least one strong public opinion working in the ‘Austrian’ favor, however this one is much too weak, it currently at best slows the process but does not stop deficit spending at all.
Right for you it is a problem, without this debt concern of the ignorant masses it was easier for you guys to abolish the deficit ceiling and have a two trillion deficit each year until you (think you) have your full employment without significant side effects. I suppose you would still be in favor for really big deficits in the range of 2T ?
debt ceiling not deficit ceiling..
“Central banks have proven to be important for well functioning modern economies.”
You can tell because we have a recession every decade or so, and that’s a good thing.
Central banks haven’t been proven to do anything. You’re dealing in the realm of counter-factuals. You literally CANNOT prove, either way, whether a central bank is good or not – at least not from the data.
Daniel, I do believe that you believe that central banking is “important for well functioning modern economies”.
But, in my opinion, this in no way means central banking is a good idea.
I’m Polish old enough to just remember the previous regime. I remember being amazed that one day my father showed me a wad of 200 notes 1000 old polish zloty each. And then he said: that’s what I earned this month. that was august 1989. in september 1991 he brought home 2 milion.
When, much later, I learned about John Law and his Banque Royale i was not suprised at all how that ended. I lived it, I know. It is rather suprising that after nearly 300 years and tens of thousands of extinct (read: worth less than paper they were printed on) paper money currencies ANYBODY thinks central bank is good idea.
You might say this time is different, but let me tell you that all was done before. Even “cypriot solution” was already tried in Poland in middle XX century. But they called it “denomination”, while secretly aiming to kill “cash speculators”.
(incidentally, communist linked then polish zloty to gold, effectively killing inflation. Communist and gold standard… crazy, right?)
I know you think I’m ranting, but there is a method in madness.
It’s in the form of a question: is there a real need for a central bank in gold-based economy? no context or anything. just straight question.
Of course what counts as “useful” to governments is rather different to what counts as “scientific” to Daniel.
Where’s the conspiracy? Stop the press! Governments opt for spending policy shocker!
“Power-grubbing” – is this different from ordinary power-mongering, or a special case?
It is useless to the average politician’s self-interest to tell them to push their spending button?
It is useful to the average politician’s self-interest to tell them to abolish central banking?
“Austrians have a button to push too: abolish central banks.
It just happens to be a dumb button whereas Keynesians have a useful button.”
This is the point where I remember your babbling about “free-market Keynesianism”, and then just let a remark like this stand on its own.
“government wants economists with an economics that works”
No, government wants economists with an economics that allows them to increase their power without absolutely destroying their tax base.
“The concern is this case that they’re interested in economists that give them a useful answer.”
Only useful in the same sense as “useful idiots”.
“Austrians have a button to push too: abolish central banks.
It just happens to be a dumb button whereas Keynesians have a useful button.”
Incorrect. Even if we were to boil down the Austrian answer to simply abolishing the central bank (it is a bit more complicated than just that), the difference is that the Austrian “button” decreases the power of the government and its friends, while the Keynesian one does the opposite.
So is it a coincidence that 100% of the economists in communist governments were marxists? You think free market Austrians filled the ranks of their ministries and universities? Think non that a few hours and you might be clued in why Keynesians are so popular in the U.S.
What, you couldn’t just say: “Many people fall for get rich quick schemes?”
You can blame Yglesias for the start of my constant preaching that no Keynesian in the galaxy understands basic Austrian concepts. (Actually, you can blame the Keynesians because no Keynesian in the galaxy does understand basic Austrian concepts, nor do they want to). In May, 2009, Yglesias wrote the following piece (which at one point had 300+ comments but which have since disappeared):
And not only have conservatives been sharply critical of Barack Obama’s American Recovery and Reinvestment Act, but conservatives have been increasingly critical of Ben Bernanke who, as best one can tell, is a rock-ribbed right-winger appointed to office by George W. Bush.
Hand-in-hand with this trend is, as Dave Weigel reports, Ron Paul’s success in evangelizing among congressional Republicans for the economic thought of Thomas Woods, a figure who conservative congressmen weren’t prone to listen to when he was arguing against Bush’s wartime policies. Now, however, Woods is pushing a fringe economic doctrine that tells the right what it wants to hear so he’s gaining popularity. The doctrine in question is so-called “Austrian” business cycle theory, memorably lampooned by Tyler Cowen. You can see other brief criticism from a libertarian point of view from Bryan Caplan or read Paul Krugman’s 1998 takedown.
But perhaps the best thing to read is this recent item from John Quiggin which lays out the ways in which Austrian Business Cycle theory was, at the time, a major advance but one that’s long since been superseded.
http://thinkprogress.org/yglesias/2009/05/05/192820/the-right-and-austrian-business-cycle-theory/
At the time, I had no idea what the Keynesians had to say about Austrian theory. This Yglesias piece was beyond all boundaries of fraud and dishonesty. He clearly has no familiarity with even basic Austrian concepts or analysis (nor does Mr. Quiggin) but is ready to smear the Austrians and Tom Woods because he has nothing else to offer. I slowly came to realize that EVERY Keynesian engages in this sort of “analysis” regarding Austrians and Austrian theory. I keep repeating that observation because I believe it is true and Austrians should understand that it is true. And we should always point it out before going on to argue the minutiae of the funny money regime. We must always note that not only will we never concede “the fact that prosperity over both the long- and short-term depends in part on competent demand management from a powerful bureaucratic organization” , we must constantly point out that the “Keynesian revolution” was (and continues to be) based in no small part upon completely ignoring and suppressing the pre-existing Austrian analysis of funny money price distortions, the nature of voluntary exchange, subjective value and economic calculation.
Note that Lord “Fixprice” Keynes is the exception to the rule of no Keynesian having any actual familiarity with even basic Austrian concepts. In his zeal to disprove Austrian analysis, he takes statements (often poorly worded statements) out of context and distorts them to give the false impression that there are serious problems with Austrian analysis. I think that his methods and distorted conclusions need to be rigorously attacked and refuted.
What is locally known as the “Bob Roddis Conundrum”, has already been explained by socialist author Upton Sinclair:
This also answers the other Bob’s question… Keynesian economics is very profitable to the people who get first dibs at the money fountain, and of course all the hanger-ons and enablers who sweet talk the public into accepting this supposedly for their own good.
In many ways, Keynesian economics is the ultimate economic theory because it not only adapts to the idea of self interested economic participants but it expands this further to cater to self interested Economists as well. If you think about it, the science of buying and selling should quite rightly be in the business of buying prizes and selling theories.
“Note that Lord “Fixprice” Keynes is the exception to the rule of no Keynesian having any actual familiarity with even basic Austrian concepts. In his zeal to disprove Austrian analysis, he takes statements (often poorly worded statements) out of context and distorts them to give the false impression that there are serious problems with Austrian analysis. “
No, roddis, you’re the one grossly ignorant of basic Austrian concepts.
You proudly told us you don’t understand the concept of a market clearing price.
Then on my blog you told us the Austrian price theory states:
“ONLY that people will determine the terms of their exchanges based upon their subjective values”
http://socialdemocracy21stcentury.blogspot.com/2013/10/when-austrians-throw-reality-to-wind.html?showComment=1381496393328#c7763535340346301935
You’re ignorance is breathtaking.
You’re ignorant of the role of market clearing prices in Austrian theory; ignorant of the idea that prices need to be flexible to achieve this; ignorant of the idea that Misesian economic coordination and full use of resources relies on widespread market clearing.
I took the trouble to this up, Bob’s comment was:
… and the relevant Austrian theory is explained quite well here:
MISES AND HIS UNDERSTANDING OF THE
CAPITALIST SYSTEM, Israel M. Kirzner 1999
Personally, I see it as quite reasonable to avoid a confusing term where multiple parties impart different meanings to that term and therefore lead to confusion. There are a lot of economic terms that fall into this category, “equilibrium” for example, and “inflation”.
The fact that Mises did not think market agents have “omniscience” does not refute anything I have said, nor does the fact that Mises’s idea of market clearing prices is somewhat different from Walrasian or Marshallian theory.
But the idea that Kirzner is really saying in that passage that flexible wages and prices converging towards their market clearing levels was NEVER held by Mises is utterly absurd.
Mises:
“The characteristic feature of the market price is that it equalizes supply and demand. The size of the demand coincides with the size of supply not only in the imaginary construction of the evenly rotating economy. The notion of the plain state of rest as developed by the elementary theory of prices is a faithful description of what comes to pass in the market at every instant. Any deviation of a market price from the height at which supply and demand are equal is – in the unhampered market – self-liquidating.”
(Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala. pp. 756–757).
When you say, “prices converging towards their market clearing levels”, what exactly do you mean by that?
Do you mean that some transaction occurred? Because after all every transaction that takes place must necessarily have equality of supply and demand… else the ledger does not balance.
Mises claims this process applies at every instant, and yet you use the words, “prices converging towards”, so are we talking about a time response that eventually converges to some price, or are we talking about an actual event, happening at a specific time?
It means that the prices of goods offered by sellers or businesses will be adjusted in trades to a level that stimulates more demand so that the seller can sell his stock and clear the market, exactly as Mises says:
“the characteristic feature of the market price is that it equalizes supply and demand. ….
Any deviation of a market price from the height at which supply and demand are equal is – in the unhampered market – self-liquidating.”
This is why Misesian economic coordination allows full use of resources:
“Mises conceives the market process as coordinative, ‘the essence of coordination of all elements of supply and demand.’ This means that the structure of realized (disequilibrium) prices, which continually emerges in the course of the market process and whose elements are employed for monetary calculation, performs the indispensable function of clearing all markets and, in the process, coordinating the productive employments and combinations of all resources with one another and with the anticipated preferences of consumers.”
(Salerno, Joseph T. 1993. “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6.2: p. 124).
LK:
This is not an answer. You’re just answering Tel’s question by repeating his question back to him.
He asked what it means to say:
“prices converging towards their market clearing levels”
Your answer was:
“It means that the prices of goods offered by sellers or businesses will be adjusted in trades to a level that stimulates more demand so that the seller can sell his stock and clear the market”
Not good enough.
Nothing in that statement by Mises requires that the PRICE is what changes given a change in demand. The supply being produced can just as easily change, or more easily in some cases.
LK, your obsession with “fixprices” is bordering on the absurd. Especially since you believe that a producer changing supply produced instead of price somehow refutes the idea that markets clear….
Tel just bitch slapped you, LK.
“But the idea that Kirzner is really saying in that passage that flexible wages and prices converging towards their market clearing levels was NEVER held by Mises is utterly absurd.”
What exactly does that mean? You are imparting your own interpretation there and suggesting Kirzner said Mises did not include it.
You wander into tin foil hat territory with your claims of a conspiracy of Keynesians to suppress Austrian economics. Perhaps Austrians do not understand the Keynesianism they so often rant about? After all, printing money is a not a central part of Keynesian economics yet it is the point that Austrians constantly complain about. Far less attention is given to the actual core of Keynesian economics, the need for a fiscal stimulus.
The comments in this thread seem to believe that Keynesianism is only popular because it suits the greedy ambition of politicians. Perhpas the people living in glasshouses should throw less stones.
Actually, printing money is THE BASIS of Keynesianism. Everything revolves around it – fighting propensity to save, trying to harness “animal spirits”, way to fund investment etc.
For God’s sake, Keynes in his book once EQUATES printing money with real saving.
Got a quotation to prove that last rather breathtaking assertion?
No quotation. Rather logical chain: saving and investment are “necessarily equal in amount, being, for the community as a whole, merely different aspects of the same thing”. “Investment, thus defined, includes, therefore, the increment of capital equipment, whether it consists of fixed capital, working capital or liquid capital”.
Then we have “the grant of a bank credit to an entrepreneur additional to the credits already existing allows him to make an addition to current investment” which “are just as genuine as any other savings”.
I know I’m manipulating quotations, but by no means are taken out of context. Because, as was shown by Henry Hazlitt:
For his “propensity to save” depends, for its alleged deflationary effects, on the tacit assumption that no part of savings is invested. His magically rejuvenating “multiplier,” to work out perfectly, assumes that this new investment comes into being without savings. In fact, the mathematics of the multiplier are upset if the recipients of the new income which the new investment is supposed to create do anything but spend the whole of the new income on consumption. If they “save” part of it, the multiplier is decreased. If they themselves *’invest” part of it, the multiplier is increased. Yet this multiplier is supposed to be predeterminable by a mathematical formula, and used as a basis of policy and prediction!
There is no “conspiracy” of Keynesians to suppress Austrian ideas. Their reaction to hearing even an outline of Austrian ideas is like putting a north pole magnet against another north pole. It’s like a baseball soaked in the the professor’s chemical coming into contact with wood in “It Happens Every Spring”.
http://www.youtube.com/watch?v=Yb3-P7f2aLM&feature=c4-overview&list=UU-tV0jJbfHrNX7qnjzLiMIA
The Keynesians’ profound intellectual incuriosity regarding Austrian ideas is truly astonishing. However, the reaction appears to be purely organic and originates with each individual Keynesian.
BTW, I’ve been looking for forty years for that very first Keynesian who understands basic Austrian concepts. Have you found him/her yet?
“If investors correctly anticipate that a decline in interest rates will be temporary, they won’t evaluate long-term investments on the basis of current rates.”
Businessmen are magical beings that can mystically determine whether a decrease in interest rates is “temporary” (i.e. artificially induced by monetary expansion) or simply the result of increased savings. Because “rational expectations”. (When did “rational expectations” turn into economic omniscience?)
And from that, I can conclude that Roddis is correct here. Again.
Thumbs up, Bob. You’ve shown Mr. Krugman has a level of awareness that I wouldn’t have attributed to him previously.
I suppose the Keynesian response will be, “Who cares how we got our foot in the door? Once Keynes’ ideas were given a chance, they blew the competition out of the water.” I suppose I wouldn’t either if I believed they had.
I don’t think any Keynesians balk at the idea that governments hire economists that give useful answers. They should!!!
The problem is with arguments that say Keynesianism took off because they facilitated power-hungry politicians.
THAT is the BS answer.
The claim that Keynesians provide good, useful answers – and that that explains their success in government and academia – is fine.
Useful answers that just “happened to” facilitate power-hungry politicians and money-hungry bankers. There, fixed.
But they really haven’t.
What? The Wall Street bankers didn’t get their bonus last year? Gosh!
Oh wait… they earned it, by getting bailouts and zero interest loans, but just for one moment suspend disbelief, and let’s pretend the rule of law was still in operation.
All those guys would be bankrupt right? They invested badly, they made mistakes they would be out on the street and looking for new jobs (like many other people are). That’s what is supposed to happen in a free market, we separate successful business from unsuccessful business, and we allow the successful to keep going, while winding up the failures, and redeploying those resources to something potentially more useful.
If I read DK correctly, it’s way more “useful” to transfer large sums of wealth from successful business to unsuccessful business by force.
No.
What else do you understand by taxation of money makers and subsidies to non-money makers?
What else do you understand by inflation that rewards non-money makers?
Right, it doesn’t appeal to politicians to be able to promise every voter something ‘good’. One half some kind of benefit. The other a great savings vehicle in form of a bond (which finances the candy for the other half, so you don’t need to increase taxes now). No one looses all gain, right? Really not self serving or convenient for them.. It is really the hard way..
Thanks DK, that’s a good example of the kind of response I was expecting. I don’t think anyone would deny that politicians find Keynesian analysis useful. The question is, why do politicians find Keynesian analysis useful?
Let’s put aside the “power-hungry” politicians for a moment. That seems like a hyperbolic caricature of what anti-Keynesians believe is happening here. It feels a bit reductio ad absurdum to me.
Back to the question, why do politicians find Keynesian analysis useful? Do they sit down and think, “I don’t know whether to pursue Policy X or Policy Y. I should consult a variety of economic perspectives and see which one makes the most sense.” Or are they thinking, “I want to pursue Policy X. Let’s see if there are any experts that will give me political cover.”
I lean towards the latter. Your comments seem to imply that you believe the former, but I could be missing something. I think politicians, like lawyers, are more interested in winning than they are in the truth. If you agree with that, you might be able to see why some would say that being useful to a politician does not award your ideology a gold star.
Andrew, former would be in line with Keynes’ teaching. He is in favor of “fair and disinterested government” doing the investing instead of animal-spirited privates.
As should be with statist-leaning-toward-fascism.
“The problem is with arguments that say Keynesianism took off because they facilitated power-hungry politicians.”
But they did. See: FDR and Truman’s records. I mean, really. A couple of overt fascists as President, but there was no power-hungry politician making the choices? Are you kidding me?
“And the experience of the wartime boom seemed to demonstrate that demand-side expansion did indeed work the way the Keynesians said it did.”
Another howler from PK.
I’m sure older Americans recount fondly how prosperous and carefree they were during the WWII “boom”… All this abundance and availability of food, gasoline, steel and rubber. Times were just great, weren’t they, Dr. K.? Can’t wait for the next one.
This myth of the wartime boom still persists because it is needed to prop up the legitimacy of Keynesian policy. They also predicted a post war bust that never happened. It is certainly true that you can take a big bite out of unemployment by conscripting 10 million people into the armed services and putting the rest to work building bombs and battleships, but does that doesn’t constitute a period of prosperity.
When you have wage and price controls, widespread shortages of consumer goods, lots of dead or wounded military personnel and workers toiling 10-12 hours a day, 6 days a week at the bomb factory that isn’t really prosperity. But if you believe it is then why not abandon free market capitalism entirely and conscript every worker into a government job in order to have permanent prosperity and virtually no unemployment via “demand management. After all, free markets are so chaotic, unstable, unfair and vulgar right?
Keynesian’s should just abandon their very unconvincing claims of fealty to free market economics and admit that they want a nationalized macro economy run by wise and compassionate technocratic geniuses.
” They also predicted a post war bust that never happened. ”
ONE economist did, Paul Samuelson. Keynes himself rejected the thesis of postwar stagnation!
Keynes also repudiated most of his theory right before he died in 1946.
“I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.”
(1) First, that *alleged* statement by Keynes at a lunch was merely reported by Henry Clay (a critic of Keynes), and there has never been any solid corroborating evidence from others that Keynes said such a thing.
(2) And secondly even if true it does not prove that Keynes repudiated the GT. Keynes was most probably repudiating the more radical interpretations of his thought, as in the policies of the Labour party that ruled the UK from 1945 and that started to nationalise some industries — policies Keynes did not support.
But most likely this was a mere diplomatic throwaway line Keynes said at lunch to disarm and mollify a critic:
http://socialdemocracy21stcentury.blogspot.com/2011/12/keynes-repudiated-keynesianism.html
(3) And lastly this is just like death bed conversion myths about Darwin, fictions invented by people to discredit theories they dislike.
If, for the sake of argument, Keynes DID repudiate the GT in last days without any reasons given or arguments offered, it is irrelevant to the truth of the arguments in the GT. They stand or fall on their own merits, not on some bizarre story about Keynes’s death bed conversion to free market capitalism.
If someone reported that Ludwig von Mises “converted” to Keynesianism on his death bed but that Mises never gave any arguments or reasons for doing so, do you think that would discredit all the ideas of Human Action and all ideas of Austrian economics?
Does Lionel Robbin’s “conversion” to Keynesianism by itself refute Hayek’s economics?
“If, for the sake of argument, Keynes DID repudiate the GT in last days without any reasons given or arguments offered, it is irrelevant to the truth of the arguments in the GT. They stand or fall on their own merits, not on some bizarre story about Keynes’s death bed conversion to free market capitalism.”
Uh, yes. If one can decipher which of the multitude of conflicting definitions Keynes is using in each sentence, and rejects basic concepts like scarcity of capital goods, then sure. Keynes’ arguments are separate from his alleged “conversion”. They fall into absurdity entirely on their own.
“If someone reported that Ludwig von Mises “converted” to Keynesianism on his death bed but that Mises never gave any arguments or reasons for doing so, do you think that would discredit all the ideas of Human Action and all ideas of Austrian economics?”
No, but it would at least warrant a closer look into his theory, to spend extra time critiquing it, because maybe there is a flaw in it that Mises’ followers could not find.
But Mises never did repuidiate his own work, because it’s extremely sound.
Keynesianism on the other hand is easily refuted. Chock full of contradictions and confusions. It’s precisely why there are 100 “versions” of it. Post, Neo, New, etc, etc. It’s because the original is such garbage that most economists cannot accept it. and the corrections are so fundamental that they could not even call themselves just “Keynesians”.
The better question is: why is it that Austrian theories weren’t able to convince people like Gordon Tullock or Bryan Caplan, etc.? Is it that they secretly hate free markets? Is it that they aren’t smart enough to understand the ideas? That they just haven’t read enough books on the subject for the obvious brilliance of the ideas to penetrate? Were they just too afraid to embrace unpopular ideas?
That you weren’t able to persuade Tullock is a thousand times more damning than the fact someone like Krugman disagrees with you.
Right – because Krugman just HATES free markets and is so dumb we wouldn’t expect him to get it.
Come on – the reason why Caplan and Tullock are damning is because of their political affiliations. Austrian economics jives with a certain politics. If you can’t convince people with that sort of politics that it’s a good idea the associated claim that Austrianism was rejected over politics gets a lot less tenable.
THAT’s why Caplan and Tullock are important.
Right – because Krugman just HATES free markets and is so dumb we wouldn’t expect him to get it.
Daniel, count to ten, and then point to where I said any such thing.
Blackadder – cut back on the condescension, and then look at your reasons for why Tullock and Caplan are important and then how you contrast that with Krugman.
You are saying that it’s silly to think that Tullock and Caplan aren’t advocates of free markets or aren’t intelligent, etc. etc. – so these aren’t obstacles to their seeing value in Austrian economics. This is why their rejection is a thousand times more damning.
I agree Tulock and Caplan are important, but not for any of the reasons you state. What’s important is that they take the political factor out of the equation because they are political sympathizers. Politics is allegedly a major source of the lack of success of Austrian economics. Anyone that seriously thinks that needs to consider the case of Tullock and Caplan.
Blackadder – cut back on the condescension, and then look at your reasons for why Tullock and Caplan are important and then how you contrast that with Krugman.
I’m sorry, it’s just that it’s hard to not to be condescending when someone has misread what I wrote so badly.
DK wrote:
Austrian economics jives with a certain politics. If you can’t convince people with that sort of politics that it’s a good idea the associated claim that Austrianism was rejected over politics gets a lot less tenable.
According to Daniel:
==> People don’t embrace Keynesian because they have a predisposition to empowering politicians–even if we’re talking about the politicians themselves who are embracing it.
==> But it IS true that people embrace Austrianism because they have a predisposition to disempowering politicians–even if we’re talking about Ron Paul.
Huh?
The whole point is that YOU GUYS seem to think politics drives what’s getting accepted.
My whole point is that it’s NOT.
How do you come out the other with me saying precisely the opposite?
That’s why Tullock and Caplan are important (and on the Keynesian side I suppose why Greg Mankiw, John Taylor, and to a certain extent even Bryan are important)
Daniel how can you possibly say that politics does not drive what’s accepted? What the hell is wrong with you?
Not in the way it’s usually portrayed by Austrians.
Keynesianism does not offer a meal ticket to the power hungry nor is that why Keynesianism rose in stature.
Nothing is wrong with me as far as I know – why talk to people like that? You come across as a jerk.
If this is true, then can this also be said of the Austrian economists?
Bob this is a serious misreading of DK’s point.
He is offering a counter example to your “political disposition is what decides” claim.
Now DK’s argument is weak I think. You don’t need to argue that everyone or even most politicians operate the way you say, only a sufficient mass to move the machinery.
OK yep, Daniel it’s possible I misunderstood what you were saying. I thought you were saying, “I, Daniel Kuehn, think it’s significant that Bryan Caplan rejected Austrian economics, since he agrees with their political views. Since the only explanation I have for why people are Austrian in the first place is that it says what they want to hear, it must *really* be a stupid system if even guys like Caplan can’t stomach it.”
But, if you were instead saying something like:
“I don’t look at politics at all when I try to understand why people embrace certain economic systems. But since you guys DO seem to do that, I think you should be uncomfortable about Caplan.”
So if you were saying #2, then I apologize for my snippiness.
Man, you jumped all over that conclusion. Poor guy never saw it coming.
It appears that Blackadder was attempting to say that Krugman would be less likely to adopt Austrianism because his existing beliefs are further from it. It would be a bigger leap for him than for Tullock or Caplan. Therefore, the fact that Tullock and Caplan dispute it is more damaging to the ideology.
It does not appear that he was trying to say that the answer to all the questions would be “yes” if applied to Krugman.
Does Keynesianism jive with a certain politics?
I think it’s pretty interesting how so many libertarians who follow Austrian economics tend to have came from different political ideologies. For example, I was a hardcore lefty for the first 25 years of my life, and one of those smugly ignorant lefties that thought republicans and free market people were either stupid or evil. Clinton was the greatest thing since sliced bread in my family. And It depressed me that John Kerry didn’t become president. The first two books I read by an economist were by Paul Krugman, and I immediately was trying to get everyone to read his books. I even thought the death tax was perfectly legitimate.
The only reason I eventually became an ancap was I started looking into Ron Paul in order to prove to a good friend of mine that he was just another evil republican. Slowly but surely RP raised doubts in what I had always believed to be true until he convinced me that I needed to study libertarianism and Austrian economics, and either figure out how to prove them wrong or prove my previous beliefs wrong.
Once I became an ancap, I was also able to convince my hardcore lefty mom, dad, sister, some cousins, 4 good friends to become ancaps. This is after they thought I was going crazy because of how drastically my positions changed. None of them gave up their views easily, either. They fought me tooth and nail the whole way, and didn’t fully change their minds until they started reading the books, articles, etc that I was recommending.
Same story for my hardcore righty family and friends. I was never able to get them to move an inch towards becoming a liberal, but I got all of them to become ancaps as soon as they started reading the literature.
Obviously, that’s anecdotal evidence, but it is why I find arguments like the one from this post to be so persuasive.
I think it’s pretty interesting how so many libertarians who follow Austrian economics tend to have came from different political ideologies.
What would be the alternative? That they were raised as Austrians?
I’m more talking about how many people that become Austrian libertarians start out from where they tend to be hostile to those ideas. I had to abandon nearly everything I had always thought to be right to become a libertarian, and most libertarians I run into tell a similar story. I rarely, if ever, meet a republican or democrat that became one after starting out vehemently opposed to the ideas they now embrace.
Why not?
Ok, this is a great point Blackadder. But it’s not the right point to answer Bob. It’s a great point if you are arguing Austrianism is wrong, but not if you are arguing why Keynesianism triumphed.
Bryan Caplan, in particular, does NOT understand basic Austrian concepts. In particular, he attributes entrepreneurs with the ability to magically decipher the exact extent of central bank interest rate manipulation and know the proper market rate despite it. He declares that entrepreneurs essentially ARE NOT OMNISCIENT and this somehow refutes the Austrian analysis of the business cycle(!!!), because we somehow believe they should be.
“That you weren’t able to persuade Tullock is a thousand times more damning than the fact someone like Krugman disagrees with you.”
Even smart people that have no preexisting anti-Austrian bias can be wrong sometimes.
“Meanwhile, along came the Keynesians, who were model-oriented, and who basically said “Push this button”– increase G, and all will be well”
I know that Keynesians are different from Keynes so I used the “scientific” method of looking for the math word with Adobe Acrobat searcher in the GT, and I found this:
“The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error. It is a great fault of symbolic pseudo-mathematical methods of formalising a system of economic analysis, such as we shall set down in section vi of this chapter, that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep ‘at the back of our heads’ the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials ‘at the back’ of several pages of algebra which assume that they all vanish. TOO LARGE A PROPORTION OF RECENT ‘MATHEMATICAL’ ECONOMICS ARE MERELY CONCOCTIONS, AS IMPRECISE AS THE INITIAL ASSUMPTIONS THEY REST ON, WHICH ALLOW THE AUTHOR TO LOSE SIGHT OF THE COMPLEXITIES AND INTERDEPENDENCIES OF THE REAL WORLD IN A MAZE OF PRETENTIOUS AND UNHELPFUL SYMBOLS.”
Source: http://gutenberg.net.au/ebooks03/0300071h/chap21.html
Isn’t that nice?
In February 2005, Richard Parker, a liberal economist and a Keynesian sycophant of John Kenneth Galbraith, wrote an article in the Boston Globe titled, The Pragmatist and the Utopian, in which he blamed Milton Friedman and the free market advocates for every economic misfortune since the 80’s. Parker’s criticism is that in no way is the country safer, requires less effort, or achieved more equality than it had 25 years ago. I don’t know if I agree, but note, each of these goals is reflected by a characteristic human value. Safety is important to the cowards, lazy people think life should be easy, and egalitarianism is of course is about irresponsibility (equality of outcome). Cowardice, lazy, and irresponsible are Parker’s most important human values. If you build a system that aggrandizes the cowards, the lazy, and the irresponsible are you in any way surprised you end up with Zimbabwe or worse? How do you explain to the ignorant and superstitious that the only way to safer, easier, and more egalitarian is though a society with LESS safety, LESS easy, and LESS egalitarian? AS the only way the body grows stronger is through the stress of exercise, the only way society grows stronger is though courage, personal responsibility, and a sense of tolerance and cooperation of its members. The Republicans find it impossible to explain this concept; even Milton Friedman in his Free To Choose 1979 found it challenging. I no longer try. So what is the role of government? Is it to make our lives safer, easier, and more egalitarian or is it to ”secure the Blessings of Liberty to ourselves and our Posterity”?
I have to admit, the importance of the debate between Austrian economics and Keynesian economics escapes me.
“Except for that last sentence–the part about Keynesianism “work”ing–Krugman’s narrative fits almost exactly the (allegedly) self-serving Austrian version.”
You’re saying that except for the overwhelming *empirical* confirmation of Keynesian theory, Krugman’s loose and simplified passage fits the Austrian self-delusional myths about why they were relegated to the fringes of economics after 1945 — a truly bizarre NON-observation.
I hereby declare that there is no overwhelming empirical confirmation of Keynesian theroy.
There, I can do science too! Wheeeeeeeeeeeee
Didn’t stagflation empirically falsify Keynesianism. And what about all those failed Krugman predictions? I’ve never seen any supposedly scientific Keynesian offer a way to falsify his hypothesis. It’s always a cop out where they blame their poor results on too little stimulus by the government or they claim that their poor result was actually a good result because it would have been so much worse had the government not did what it did. And, of course, they produce shoddy models based on faulty assumptions as their proof. Keynesianism has failed every test it has had other than become a justification for government and those that control it to steal more resources from its citizens, which is an empirically supported claim, ironic as it may be.
“Didn’t stagflation empirically falsify Keynesianism. “
It discredited some models in the neoclassical version of Keynes’s theory. But Keynes’s model in the “General Theory” is perfectly capable of predicting rising unemployment and rising inflation.
As for “ways “to falsify” Keynesian theories, of course there are.
If government stimulus never resulted in rising private sector investment and consumption in every case observed, then that would strongly contradict and falsify Keynesian theory.
Well it doesn’t have anything to do with neoclassicism. There was nothing especially neoclassical about the falsification of the original Philips Curve. The problem was the specification of expectations.
Wow, this two comment exchange here made this thread for me. I rarely see this level of discourse from the Keynesian side. It’s so “inside baseball.”
“The problem was the specification of expectations.” That’s a magnificent sentence. I wish I knew what it meant.
“It discredited some models in the neoclassical version of Keynes’s theory. But Keynes’s model in the “General Theory” is perfectly capable of predicting rising unemployment and rising inflation.”
Explain, quoting the General Theory.
“If government stimulus never resulted in rising private sector investment and consumption in every case observed, then that would strongly contradict and falsify Keynesian theory.”
Even if private investment and consumption did not increase, Keynesianism holds that there wasn’t enough spending and inflation from the government, because the population’s demand for money holding was greater than originally thought. It doesn’t refute the theory itself. It just refutes an incorrect prediction from someone who believes in the overall theory.
“As for “ways “to falsify” Keynesian theories, of course there are.
If government stimulus never resulted in rising private sector investment and consumption in every case observed, then that would strongly contradict and falsify Keynesian theory.”
Wrong. This ignores what would have happened otherwise. You may “always” have increases in economic activity in every case, but ABSENT of stimulus could have had a larger increase. Your logic ignores this obvious conclusion. Sad.
That is like saying that if there is 0 percent change in CPI YoY, then monetary policy has no effect on inflation. Also an absurd notion because it ignores the natural rate of deflation that would have occurred otherwise.
“But Keynes’s model in the “General Theory” is perfectly capable of predicting rising unemployment and rising inflation.”
Which model? He had like twelve. Kept switching back and forth between inconsistent definitions of terms.
LK, using your own criteria:
1) There is also an overwhelming *empirical* confirmation of Neoclassical theory then.
2) “fits the Austrian self-delusional myths about why they were relegated to the fringes of economics after 1945” This is weird coming from a guy who supports an “heterodox” school which presumably is also out of the mainstream. Either you also are in the “fringes of economics” or you are part of the mainstream. You also are “relegated to the fringes of economics” unless you want to admit that you are part of the same mainstream that “relegated to the fringes of economics” the Austrians.
(1) ” There is also an overwhelming *empirical* confirmation of Neoclassical theory then”
it depends what type of neoclassical theory you mean. Some New Keynesian theories do indeed describe reality better than New Classical or monetarist ones.
But empirical evidence shows that representative agent models are a grossly unrealistic way of modeling an economy.Tendencies to general equilibrium are discredited by empirical evidence.
Administered prices discredit neoclassical price theory. The existence of endogenous money makes some types of neoclassical monetary and banking theory untenable. And the list goes on.
(2) ““fits the Austrian self-delusional myths about why they were relegated to the fringes of economics after 1945” This is weird coming from a guy who supports an “heterodox” school which presumably is also out of the mainstream”
It is not “weird” at all. Post Keynesians do not attribute their heterodox status to self serving myths, like the Austrians.
(1) Dodge.
(2) Dodge.
LK
“Some New Keynesian theories do indeed describe reality better than New Classical or monetarist ones.”
Probably. But there are also some New Classical theories that describe reality better than New Keynesians. There is a lot of empirical works that fits with the theories of Lucas, Prescott, Sargent, etc. As well as some Monetarist’s ones.
And I can say that there is an overwhelming *empirical* confirmation of ABCT by Keeler, Mulligan, Anker, Whittle, Bismans, Carilli and Dempster, Young, Sechrest, Bocutoğlu, Butos, Murphy, Wainhouse, Helmersson and Selleby, Weber, Montgomery, Hoffmann, Lewin and Ravier, Ismail, Davidson, Håkon Bjerkenes, Ragnarsson and the criticism of Block, Barnett II and Murphy for example.
“Administered prices discredit neoclassical price theory.”
That is not true.
Neoclassicals Stigler and Kindahl in 1970 completely destroyed Means’ thesis empirically. Means replied in 1972 and S and K responded and destroyed him again (1973). After and before that, there was a lot of evidence against and in favor.
And here is an amazing admission by the Post Keynesian Malcolm Sawyer: “There is a considerable amount of CONFLICTING and mainly American evidence on the ‘administered price’ controversy.” The Economics of Industries and Firms, p. 104
Even an important Post Keynesian had to admit that **there is NO concluding evidence of administered price theory at all**. If you come with, say, 10 papers “proving” it, I can show you 10 papers denying it.
“The existence of endogenous money makes some types of neoclassical monetary and banking theory untenable.”
Not even Krugman completely accepts the idea of endogenous money, as his debate with Keen demonstrated. And he gave a lot of evidence in his favor.
“Post Keynesians do not attribute their heterodox status to self serving myths, like the Austrians.”
A lot of Post Keynesians have the easy scape of saying that they are being “bastardized” when somebody shows without any doubt that they are wrong. And that is not a “mythological” way of escape?
(1) Stigler and Kindahl (1970) is nothing but a caricature of Gardiner Means’ thesis. It refuted nothing, because it attacked a straw man.
(2) You selectively quote Malcolm Sawyer from The Economics of Industries and Firms (1981) p. 104, yet in the same book (in the next few pages) he adduces many other empirical studies supporting administered prices, and there is no doubt at all that Malcolm Sawyer now thinks that the empirical evidence overwhelmingly supports the administered prices.
(3) You say
“an important Post Keynesian had to admit that **there is NO concluding evidence of administered price theory at all**.”
Yet you can give NO name and NO citation. Who said it and when and where?
(3) The empirical evidence for administered prices was anyway well documented before Means and has been overwhelming documented since Means’s time:
Hall, R. L. and C. J. Hitch. 1939. “Price Theory and Business Behaviour,” Oxford Economic Papers 2: 12–45.
Andrews, P. W. S. 1949 “A Reconsideration of the Theory of the Individual Business,” Oxford Economic Papers n.s. 1.1: 54–89.
Andrews, P. W. S. 1949a. Manufacturing Business. Macmillan, London.
Andrews, P.W.S. 1964. On Competition in Economic Theory. Macmillan, London.
Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.
Lee, F. S. and Downward, P. M. 1999. “Re-Testing Gardiner Means’ Evidence on Administered Prices,” Journal of Economics Issues 33.4: 861–886.
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Northamption, Ma.
Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.
Greenslade, Jennifer V. and Miles Parker. 2012. “New Insights into Price-Setting Behaviour in the UK: Introduction and Survey Results,” Economic Journal 122.558: F1–F15.
Hall, S., Walsh, M. and A. Yates. 2000. “Are UK Companies’
Prices Sticky?,” Oxford Economic Papers 52.3: 425–446.
Also, the most important empirical studies have always been just straightforward surveys of business people and asking them how they set prices.
E.g., the findings of the Oxford Economists’ Research Group (OERG) in the 1930s, confirmed by numerous studies since then:
“For several years a group of economists in Oxford have been studying problems connected with the trade cycle. …. and among other matters in the questionnaire were inquiries about the policy adopted in fixing the prices and the output of products.” (Hall and Hitch 1939: 12).
An overwhelming majority of the entrepreneurs thought that a price based on full average cost (including a conventional allowance for profit) was the ‘right’ price, the one which ‘ought’ to be charged. In some cases this meant computing the full cost of a ‘given’ commodity, and charging a price equal to cost.”
(Hall and Hitch 1939: 18–19).
“Stigler and Kindahl (1970) is nothing but a caricature of Gardiner Means’ thesis. It refuted nothing, because it attacked a straw man.”
I read SK’s book and the answer they gave to Means, SK are very fair using Means’ own concepts. So your claim is totally debatable, but not necessarily true.
“You selectively quote Malcolm Sawyer”
Totally FALSE.
Just ONE LINE after that confession I quoted, he EVEN developed a lot of difficulties of that theory:
”Results reported by one author often display considerable differences between time periods, indicating that results are sensitive to the time period examined. THERE ARE PROBLEMS of identifying periods of rising demand and periods of falling demand. Investigators often cover a relatively small number of prices and CONFLICTING RESULTS may reflect differences in sample selection or data availability. THERE ARE DIFFICULTIES of allocating industries into those with market-dominated prices and those with administered prices, and differences in results may reflect differences in the allocation of industries between the two groups. THERE ARE DIFFICULTIES of construction of price indices, well-illustrated by the study of Stigler and Kindahl (1970). Finally, THERE HAS BEEN CONSIDERABLE CONFUSION AND DISAGREEMENT OVER WHAT THE ‘ADMINISTERED PRICE’ THESIS WAS. The confusion over the ‘administered price’ thesis has arisen in two dimensions. First, is the basic dichotomy between high-concentration and low-concentration industries, or between industries which exhibit infrequent price changes and those with frequent price changes? Second, which are the relevant movements in prices claimed to be administered? Some have focused on their absolute movement, some on their movement relative to other prices, and other relative to costs…. Much of this evidence is further discussed by Lustgarten (1975b), who concludes that the ADMINISTERED PRICE THESIS HAS MANY INTERPRETATIONS and that the evidence is generally not in accord with his interpretation of the thesis.”
The theory is not even clear enough to avoid confusions. It has many contradictory interpretations, that’s a bad theory, at least for me. My quotation of Sawyer means what I said it means.
And here is Kamerschen and Park (1999) recognizing difficulties:
Numerous studies tested statistically the administered-price hypothesis, or the relationship between industry structure and firms’ pricing behaviour. But THE HYPOTHESIS REMAINS CONFUSING AND CONTROVERSIAL. The confusion has arisen largely because of inadequacies of the empirical research. The controversies are mostly because of methodological rather than theoretical differences. However, THE MAIN DIFFICULTY IN RESOLVING THE CONTROVERSIES IS THE LACK OF COGENT THEORY EXPLAINING WHY AND HOW FIRMS WITH DIFFERENT MARKET STRUCTURE SHOW DIFFERENT PRICING BEHAVIOURS. Statistical research that is not based on the convincing theory is seldom persuasive.
“The Administered-Price Hypothesis Revisited”
“he adduces many other empirical studies supporting administered prices”
And others CONTRADCITING IT!:
Wilder, Williams and Singh (1977) … the coefficient on the concentration ratio was negative on 12 occasions, of which three coefficients were statistically significant for zero. THE AUTHORS INTERPRET THIS RESULT AS CONTRADICTING THE ‘ADMINISTERED PRICE THESIS’.
Phlips (1969) … For Belgium, concentration generally had a negative effect on the price ratio, and this effect is often statistically significant. But for France and the Netherlands, the effect of concentration is found to be non-significant. Phlips concludes that FOR BELGIUM THAT THERE IS ‘NO SUPPORT WHATSOEVER FOR THE ADMINISTRATIVE INFLATION HYPOTHESIS’.
“ there is no doubt at all that Malcolm Sawyer now thinks that the empirical evidence overwhelmingly supports the administered prices.”
That did not refute his own confession that there is no conclusive evidence and the fact that there is good evidence against the theory.
“Yet you can give NO name and NO citation. Who said it and when and where?”
Not true. I was referring to Sawyer and I gave the citation.
The empirical evidence against AP is documented even before SK (1970).
Kamerschen-Park: “As a first major econometric test of administered-inflation, DePodwin and Selden (D and S, 1963) regressed an index of price changes on four- and eight-firm sellers’ concentration ratios for 322 US five-digit Standard Industrial Classification (SIC) industries for 1953-1959. THEY ARGUED THAT THEIR CORRELATION ANALYSES WERE ADEQUATE EVIDENCE TO ‘PUT THE ADMINISTRATIVE INFLATION HYPOTHESIS TO REST’”
(1) Stigler and Kindahl completely misunderstand Mean’s thesis. They thought administered prices were prices that NEVER change — something Means never said at all.
(2) the ambiguous studies that you cite stem from mere examination of price movements over the business cycle. In some cases those studies were ambiguous.
Yet the fundamental research confirming the existence of administered prices, as I noted, is direct surveys of businesses asking them how they set prices.
The evidence of these studies — some of which I cited above — is overwhelming. You refute NONE of them.
3) You say
“an important Post Keynesian had to admit that **there is NO concluding evidence of administered price theory at all**.”
Sawyer made NO such statement. You are mistaken or lying.
Who said it and when and where? Or did you just invent it?
[[For some reason I can’t reply LK’s comment, maybe it’s a “signal” to end this dicussion 😛 So I will give my last response in my own comment]]
LK
1) SK in their last reply had identified the enormous and fatal problems of that “theory”
Kamerschen-Park: “S and K (1973) replied that ‘industrial prices are administered by Dr. Means’, and that if there is no well-defined set of criteria and the periodicity of the trade cycle is subject to different interpretations, Means’ hypothesis becomes indeed difficult to refute or confirm. Sand K concluded that their work undermined the most fundamental proposition of the administered-price thesis. The two contradictory inferences from the same sample of price changes ILLUSTRATED DRAMATICALLY THE METHODOLOGICAL PROBLEMS INVOLVED IN TESTING THE ADMINISTERED-PRICE HYPOTHESIS.”
2) I can give you a LONG list of papers of all authors I already mentioned above that empirically and overwhelmingly confirms ABCT and that you didn’t refute. They are also “fundamental”. So using your own criteria, if I accept your claim of “overwhelming” evidence in favor of AP then you must accept the validity of ABCT.
Like it or not, S and K and others gave a great blow to your theory. The problems are identified even by Sawyer and Kamerschen-Park.
3)“Sawyer made NO such statement. You are mistaken or lying.”
Very wrong.
Here goes again. *Starting* a section called “Summary of Evidence” (p. 104) about administered prices, in the first line, Sawyer clearly says:
“There is a considerable amount of CONFLICTING and mainly American evidence on the ‘administered price’ controversy.”
Conflicting = A state of DISHARMONY between INCOMPATIBLE or ANTITHETICAL persons, ideas, or interests; a CLASH. CONTRADICTORY.
So he clearly is saying: There is evidence saying *Yes* and there is also evidence saying *No*. That is NOT conclusive evidence. If you have pieces of good evidence saying “this thing exists” and you have other pieces of good evidence saying “this thing does not exist”, then all you can say is “we don’t know”. No conclusive. That’s exactly what “conflicting/contradictory evidence” means.
Like it or not, he said that. Unlike you, Sawyer is honest enough to admit it. And you have committed the same mistake two times in two comments.
Sawyer never said that “the empirical evidence overwhelmingly supports the administered prices” in the book I cited. He cleraly said CONFLICTING evidence. So you accused me of making Sawyer say what he never said and now you are the one who is doing that.
You like to use Austrians against other Austrians, but you become a simple denialist when someone uses a post keynesian against you. It is really fun to use your own methods against you. 3:D
(1) Stigler and Kindahl never refuted the existence of administered prices, for the fundamental evidence for their existence is simply well sampled direct surveys of businesses: and now a vast number of such surveys, hundreds that have been done since the 1930s.
Businesses are asked: “how do you set your prices?”, and — depending on the country — somewhere between 50% and 70% reply: by calculating costs of production per product and then adding a profit mark-up.
It is absurd beyond words to believe anyone has EVER refuted this evidence.
You point to Stigler and Kindahl, but — as I said — they set up a straw man and just invented ideas that they attributed to Means.
Next Stigler and Kindahl simply dispute the interpretation of data about price movements during the business cycle, an indirect form of evidence for administered prices anyway, and data which had NEVER been the direct empirical evidence for administered prices.
(2) As for Saywer, he too points in the few pages you cite to some ambiguous studies about price movements during the business cycle, but there is no doubt he accepts that the *direct* evidence for administered prices is overwhelming.
(3) Finally, just take one study:
Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.
They found, when asking firms directly or citing earlier direct studies, that about 50% to 65% of firms throughout the Eurozone natios surveyed reported that they set prices directly as administered prices.
Let’s see if you can refute this huge study in your desperate war against empirical reality.
Keynesianism isn’t empirical. It’s a priori.
No matter what happens, Keynesian theory cannot be falsified because if the the economy turns out different than expected after more government spending and inflation, we’ll see from Keynesians the excuse that there wasn’t enough spending and inflation. If the economy recovers, then we’ll see from Keynesians that it wasn’t despite the spending and inflation, but rather because of the spending and inflation.
Calling WWII an “overwhelming empirical confirmation” is exaggerated. It’s not just Austrians and Chicago school economists who dispute this belief.
I have in mind much more than WWII:
(1) the successful use of stimulus by Japan, New Zealand and Germany *before* WWII.
(2) the post-1945 boom — the golden Age of Capitalism — when Keynesian demand management was conducted sucessfully in virtually every Western nation.
Post hoc ergo propter hoc.
Enough said.
“The problem of induction is particularly acute”
“The past is not a reliable guide to predicting the future for non-ergodic systems such as whole economies”
Your words
“When Paul Samuelson published Foundations of Economic Analysis in 1947, the chairman of Harvard’s economics department tried to limit the print run to 500, grudgingly accepted a run of 750, and ordered the mathematical type broken up immediately.”
The implication being I guess that he was trying to suppress Samuelson’s ideas? Rather than, more likely, trying to avoid printing too many copies and ending up with a lot nobody wanted to buy.
I realize you guys are more libertarian than conservative, but if anyone here has at least read William F Buckley’s God and Man at Yale they would know that the Economics department at Yale was overwhelmingly Keynesian and used overwhelmingly Keynesian texts, during the exact period during which it is insinuated that Samuelson couldn’t get enough copies of his text published.
It seems exceedingly unlikely to me that this wasn’t more or less representative of the situation in the Ivy League in the immediate post War period, and thus the academic situation.
Meanwhile the economic situation must have been proving quite troublesome, rather than providing empirical verification of Keynesian ideas, Samuelson’s apocalyptic predictions of the impact of the post War draw down of Government were basically 180 degrees opposite reality.
It’s an interesting pattern actually. Keynesians basically never make correct a priori predictions, only post hoc analyses to explain away why they were wrong. Doesn’t really seem like a useful or even remotely scientific model at all.
“Samuelson’s apocalyptic predictions of the impact of the post War draw down of Government were basically 180 degrees opposite reality.”
Wrong. Libertarians just do not read what Samuelson said:
http://socialdemocracy21stcentury.blogspot.com/2013/01/paul-samuelson-on-post-1945-boom.html
It’s noon. Have you published your daily re-definition of “Hyperinflation” and “Austerity” yet?
Ah, so now we are doing “No, you just didn’t *understand!*” or “I never said that!”
“When this war comes to an end, more than one out of every two workers will depend directly or indirectly upon military orders. We shall have some 10 million service men to throw on the labor market. We shall have to face a difficult reconversion period during which current goods cannot be produced and layoffs may be great. Nor will the technical necessity for reconversion necessarily generate much investment outlay in the critical period under discussion whatever its later potentialities. The final conclusion to be drawn from our experience at the end of the last war is inescapable–were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.”
From Paul Samuelson, “Full Employment after the War,” in S.E. Harris, ed., Postwar Economic Problems, 1943.
Keynesians have offered post hoc explanations of this wrong prediction but pretending the wrong prediction didn’t happen is just wrong.
The entire Keynesian world view is wrong-headed and false. Further, the market does not fail and the economic problems we see are in fact caused by the price distortions of funny money. The Austrian world view is based upon undeniable empirical evidence of voluntary exchange, subjective value and economic calculation. Those concepts disappear in the Keynesian fog of obfuscation and lies. The concept of “demand management” is garbage and was contrived to obliterate the concept of private property. One’s supply of stuff to trade amounts to what he/she has to employ for purposes of “demand”. Employing the government to manage “demand” is thus nonsense. Instead, it amounts to employing the government to steal and shift purchasing power from oblivious victims which leads only to more of the problems that then allegedly require further Keynesian “cures”.
Regarding the issue of “pent up demand” allegedly having been put forth as possibly offsetting the impact of post war demobilization, you’ll be hard pressed to find any Keynesian who, not post hoc but a priori expected that factor to more than offset the negative impacts they expected from demobilization, and more importantly it’s not really what happened. If people are chomping at the bit to buy things just waiting for rationing to end so they can buy them, they should do so immediately and then that demand should disappear and there should be a contraction-again, using Keynesian reasoning. That’s not what happened. Additionally if people had been saving up money during the war and then drew from those savings to purchase no longer rationed goods, the savings rate should have been negative, but it wasn’t. It was positive-that is, people continued to draw on their income, albeit more of it, rather than saved up money, to purchase goods.
The fact of the matter is that the a priori predictions of Keynesians-and many besides just Samuelson-were wrong, and the post hoc explanations why they were wrong are inadequate.
“If people are chomping at the bit to buy things just waiting for rationing to end so they can buy them, they should do so immediately and then that demand should disappear and there should be a contraction-again, using Keynesian reasoning,”
That is a non sequitur. I know no Keynesian who thinks any such thing.
On the savings rate, it fell after the war and a positive savings rate overall does not mean that many people did in fact dissave. In fact, lower-income groups from 1945 through 1948 did dissave. Also, corporate dissavings were used to finance investment.
Yes it was in fact lower, no you cannot claim it is somehow relevant that some people drew on savings, when you have a theory that is based on aggregates and that is not what happened in aggregate.
Whether or not you know of any Keynesian capable of applying their own theory doesn’t mean that’s not how it works.
But I think you’ll find that is exactly what Keynesians at the time expected, at most, from the “pent up demand” following the war.
Saying that investment spending picked up in reaction to Government scaling back is definitely not helping your case.
They can’t teach Austrian economics in public school because it’s based on Biblical axioms. Maybe they could teach it in theology class along with creationism.
Yes, especially the “thou shall not steal” and “thou shall not kill” bits.
Rather the opposite…… Your higher power (the government) will save you. Just donate to church (pay taxes and buy bonds) and pray (support politicians). Surrender to god’s will (the will of our elected officials).
They can’t teach Austrian economics in public school because it’s based on Biblical axioms.
Smart take.
Give LK an opportunity and he will commit the post hoc ergo propter hoc fallacy. Here is the latest edition.
LK – You are absolutely the best when it comes to dealing in fallacies.
http://www.ithinkwell.org/wp-content/uploads/2012/12/correlation-does-not-imply-causation.png
Keynesians could give a hoot about truth or accuracy.
What I don’t understand is why Bob spends so much time reading about what Krugman has said. Most Austrians already believe he’s not worthy enough as far as his economic thinking is concerned, then why bother? Is he a bigger or easier target or is there some reason for the attempts to refute him? Is it because most mainstream ideals are Keynesian and he is the most ardent proponent of it?
Raja
Error should be corrected, doubly so when error echoes loudly through the halls of Government and Academic Institutions. Sure Bob could ignore Krugman. But doing so wouldn’t make anyone else ignore Krugman.
It’s probably a lot better to do as Bob does, than to make Hayek’s mistake where Keynes was concerned.
Someday the US debt holders will realize they are being scammed.
Someday the US dollar holders will realize their paper is worthless.
Someday enough people will simply lose the will to produce and to organize.
Someday the takers will eat each other…
In the case of China and Japan they certainly already realize they are being scammed, they have known it for some years. Japan is still an occupied nation, so there’s not a whole lot they can do right now… and China had a lot of modernizing and technology transfer to catch up on so in their own way they got something out of it.
Obviously not, but they will become more strategic about how they go about it. They may well turn to crime and stealth if those things make better profit than honest dealing.
Japan is occupied? Please. That word has a very specific meaning and yours isn’t it.
Didn’t read all127 comments but one important point is that Keynesianism appeals to those who want to control others and that is why it is popular with government officials/sociopaths.
Krugman admitted his Fatal Conceit in that quote about what drew him to econ.
Do you have a link for this or the quote?
He’s written numerous times about how Asimov’s fictional science of psychohistory inspired him to become an economist. Whether that means he wants to control people is another story, but here’s a quote that discusses his motivation to go into economics:
web.mit.edu/krugman/www/incidents.html
“Admittedly, there were those science fiction novels. Indeed, they may have been what made me go into economics. Those who read the stuff may be aware of the classic Foundation trilogy by Isaac Asimov. It is one of the few science fiction series that deals with social scientists — the “psychohistorians”, who use their understanding of the mathematics of society to save civilization as the Galactic Empire collapses. I loved Foundation, and in my early teens my secret fantasy was to become a psychohistorian. Unfortunately, there’s no such thing (yet). I was and am fascinated by history, but the craft of history is far better at the what and the when than the why, and I eventually wanted more. As for social sciences other than economics, I am interested in their subjects but cannot get excited about their methods — the power of economic models to show how plausible assumptions yield surprising conclusions, to distill clear insights from seemingly murky issues, has no counterpart yet in political science or sociology. Someday there will exist a unified social science of the kind that Asimov imagined, but for the time being economics is as close to psychohistory as you can get.”
Incidentally, Newt Gingrich’s career was also inspired by Asimov’s idea of psychohistory. Since psychohistory didn’t exist, Gingrich became a historian. (Becoming a politician came later.)
Thanks!
Holy crap that was bone chilling.
Are you being sarcastic?
No, totally sincere.
Why do you think it’s bone-chilling for Krugman to want to study a science that explains the beheavior of society at large, and upon finding out that there is no such universal social science, to go to the closest thing available?
Okay, I see the problem, I didn’t specify the part I found so creepy. It’s the *concept* of the “psychohistorian” which is visceral level.
The way you have described what Krugman wanted to do sounds innocuous enough, but it’s not quite the same thing as the concept of the “psychohistorian” and I don’t believe it is quite what Krugman said he wanted to do, or at least implied he wanted to do.
It’s not all that different to behavioural economics, or for that matter applied psychology in marketing.
If you can guess a person’s motives better than the person can understand themselves then you have an advantage. The basic theory of Capitalism is that all advantages and disadvantages get converted to their monetary equivalent.
What exactly do you find creepy? Krugman is referring to Isaac Asimov’s concept of psychohistory, which is about explaining the large-scale behavior of society. Have you read Asimov’s Foundation series?
I have not read the series, but unless Krugman is mis-characterizing the nature of the “psychohistorian” I don’t think my reaction would be any different. But there is a difference between the things you are talking about and the way Krugman has described the “psychohistorian.”
I’m not going to help you see the difference, it’s better if you discover it for yourself.
I really don’t see what you’re referring to. Are you talking about “understanding of the mathematics of society to save civilization as the Galactic Empire collapses”? What’s objectionable about that? Psychohistory is a social science that used mathematics to allow you to understand the large-scale behavior of society, and in the series, society is collapsing, so psychohistorians see that and take steps to preserve the essence of society.
I should add that it’s meant to be analogous to how the monks of the Cathelic Church tried to preserve the knowledge and culture of the Greeks and Romans while the Roman Empire was collapsing.
“What’s objectionable about that? ”
There is no such thing as the “mathematics of society”, and that Krugman was and is deluded enough to think that any such thing exists is a bit disturbing….
It hink this is not that hard.
As Rick Hull notes he (and Andrew and I guess I agree) think that this quote shows Krugman’s Fatal Conceit.
He thinks he has it all worked out. He dreams of himself being a “psychohistorian”. He knows the “math of society” and can predict where it is going and can and should be able (himself or people like him) to steer to a certain extent he deems useful by means of special powers granted by government the economy/people to rescue them from themselves. He knows what’s good for people better than they do. He wants to manipulate people, raising or lowering their inflation expectation, wants to induce them to spend/invest, reduce real wages while keeping their nominal wages up, fake alien invasions, in other words he wants to game their “animal spirits”.
He thinks he knows what interest rates should be, what price inflation numbers should be, what deficits (only for the sake of having deficits to stimulate!) should be, because he has the econometric models that give all the answers needed to know. These are all things that affect the market pricing process. And it should be obvious that for people who think the basis, the methods of this approach are fatally flawed, that it chills their bones, since it is them he is trying to steer, it is really literally their bones that Krugman tries to control, at least to a certain extent.
It feels like being a marionette.
Yes, I would say we do in fact agree.
Source?
Keynes hiimself wasn’t at all model oriented. To believe this particular conspiracy theory you have to believe Keynes was 100% wrong in his belief that over time the power of ideas is much more powerful than vested particular interests.
The General Theory is peppered with “functions”. Functions are models.
Keynes was very much model oriented.
BTW, your second sentence is a non-sequitur.