Landsburg 1, Krugman 0
[UPDATE below.]
I have made my bones attacking Steve Landsburg’s arguments in the past (here, here, and here). So the present post isn’t simply, “I like free market guys and hate Paul Krugman.”
I am supposed to be preparing for a debate that will occur in a few hours so I need to keep this brief. Go read Landsburg’s post on a journalist’s silly recommendations for tax policy. The stipulated facts (which I haven’t verified) are that some rich guy is sitting on $84 million and he literally doesn’t spend any of it; he just drives around his fleet of cars. (I guess he must buy gasoline once in a while.) So the journalist wants the government to tax that guy.
Landsburg says that we don’t even need to worry about whether it is fair or unfair to go ahead and tax the guy out of his fortune, because it’s impossible:
Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But [the rich heir], by [the journalist’s] account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.
Ah, says [the journalist] — but there’s still that $84 million in the bank. Surely we can tax that, no? That, right there, is the heart of [her] confusion. She thinks that green pieces of paper, or a series of zeroes and ones in a bank computer, can somehow help supply the government’s demand for actual goods and services. It can’t.
OK we all see what Landsburg is driving at, I hope. It’s true, if you want to do the Bizarro World of the Liquidity Trap where the laws of economics become inverted, then Landsburg’s argument falls apart. (That’s not surprising, since Landsburg is basing his arguments on the laws of economics.)
Now enter Paul Krugman:
Brad DeLong and Noah Smith have some fun with a bizarre post by Steve Landsburg — even more bizarrely endorsed by Alex Tabarrok — in which Landsburg asserts that you can’t tax a man if you can’t persuade him to reduce his consumption.
There are multiple things wrong with this claim, but the most fundamental, I think, is that it represents a remarkable misunderstanding of the reasons why we have taxes in the first place. They don’t primarily exist as a way to induce lower private consumption, although they may sometimes have that effect; they are there to ensure government solvency.
Consider first the taxes raised by, say, the state of New Jersey. Chris Christie doesn’t tax me because he wants to reduce my consumption; he taxes me because NJ needs money to pay its bills. It’s true that in the short run, if we ignore the legal restrictions on state borrowing, he can spend more than the state takes in in taxes; but over the longer run the state must, one way or another, collect enough revenue to pay for its spending.
Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)
So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.
Congratulations, Dr. Krugman: You are doing EXACTLY what the MMT people do. They say the government can’t ever go insolvent because it can print money. You (quite correctly) point out that green pieces of paper aren’t really the issue, and that without real resources to facilitate things, the printing press would just lead to rising prices.
This of course is exactly what Landsburg is saying. Suppose there were thousands of people like the heir, who had a trillion dollars in paper currency sitting in their basements where it had been “idle” for years. Now the government has a huge budget deficit, and has two choices: It can either run the printing press and create $1 trillion in new currency, or it can seize the $1 trillion that (by hypothesis) would have stayed in the hoards for at least the next 50 years.
Apparently Krugman thinks the first option would cause price inflation and would just be a trick in terms of maintaining solvency, whereas the second option would be perfectly fine.
And you have to love this concluding paragraph from Krugman:
Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.
Exactly, I hear you brother! And I for one am really annoyed at all these economists running around, trying to write pop books and appear on TV, acting as if this is all a big show. Can’t we just have economists who write journal articles and stop making wiseacre remarks about everything? Why, I even hear that there’s some guy calling himself a “standup economist.” Man that kind of showboating annoys me.
UPDATE: I want to clarify that I’m not even endorsing Landsburg’s argument in the grand scheme. In particular, it worries me that he is committing the same mistake as people who say Bernanke’s money-creation will only affect the economy “once it leaks out into the system.”
So in my example, you could argue that the trillion dollars in currency sitting in people’s basements was exactly the equilibrium amount of purchasing power they wanted to hold, and so when the government seizes it, they will bust their buns creating another trillion dollars’ worth of output, in order to replenish their hoards. Hence, the government really just seized their output.
But that’s not the kind of argument Krugman was giving. Instead, he was focusing on solvency, on the fact that the government needs to come up with green pieces of paper to pay its bills. And that is exactly the position of the MMTers, and why they think taxes are superfluous for the purposes of solvency.
Final note: I haven’t read DeLong or the others yet. If they are making the subtle point about cash balances serving a purpose too, and being able to influence production behavior, then I may side with them over Landsburg. My narrow point in this post is that Krugman totally fell on his face when trying to show how dumb Landsburg is, and then he doubled down with the hilarious line about PhDs not seeing how it all fits together.
“if you want to do the Bizarro World of the Liquidity Trap where the laws of economics become inverted…”
Sputter, sputter, sputter… do you just say that to keep the faithful in line, or did you never take macro? Look, there’s nothing “bizarro” or “against the laws of economics” in Keynesian models. They are either empirically right or wrong, but they make perfect sense. I just explained the basic Keynesian view to a class of mildly interested freshmen, and it made perfect sense to all of them. (I also, by the way, explained objections to it.)
Well Gene you don’t leave me with good choices. But for what it’s worth, I had in mind this type of thing:
Right now the world economy is in a nosedive, and understanding what I call “depression economics” — the weird world you get into when even a zero interest rate isn’t low enough, and a messed-up financial system is dragging down the real economy — is essential if we’re going to avoid the worst.
The key thing, when you’re in a situation like this, is realizing that normal rules don’t apply. Ordinarily we’d welcome an increase in private saving; right now we’re living in a world subject to the “paradox of thrift,” in which private virtue is public vice. Normally we want to be careful that public funds are spent wisely; right now the crucial thing is that they be spent fast. (John Maynard Keynes once suggested burying bottles of cash in coal mines and letting the private sector dig them up — not as a real proposal, but as a way of emphasizing the priority of supporting demand.)
The big test for the next few months will be whether policymakers here and abroad can wrap their minds around this Alice-in-Wonderland world. If they can’t, nobody knows how deep the rabbit hole goes.
“Sputter, sputter, sputter… do you just say that to keep the faithful in line, or did you never take macro? Look, there’s nothing “bizarro” or “against the laws of economics” in Keynesian models.”
I’m not sure what you’re getting at here. I’m guessing that Bob would argue that the models are wrong. Someone could just as easily say, “It makes perfect sense that the Sun revolves around the Earth, I mean, It really looks like it does. Now that may be right, and that may be wrong, but it made sense to a group of state-educated kids, the majority of which know very little about the world and are just trying to remember what I tell them so they can get a good grade.”
Yes, Andrew, personal insults to my students are what are called for here.
Bob is saying that “the laws of economics” don’t apply in Keynesian models. I assume he means microeconomic laws — it would make no sense to complain of Keynes’ macroeconomic model differs from Say’s, for instance! Bob is making a claim akin to “Global warming theories contradict the laws of physics!”
But that is wrong to claim about the Keynesian models.
The “paradox of thrift,” for instance, does not involve any contradictions of fundamental microeconomic laws. One can tell a perfectly coherent story in which all actors act so as to maximize their utility, but the paradox of thrift occurs. It is essentially a tragedy of the commons type of story.
Does that situation happen in fact? That is a different question. Having shown that, say, a global warming model is consistent with the (known) laws of physics, we can then ask, “But is that how things really work in the atmosphere?” We can reject the model without claiming that it “inverts” the laws of physics.
Yes, Andrew, personal insults to my students are what are called for here.
But you had no problem insulting me personally.
Gene Callahan seems to be very bitter in his posts. Someone at mises institute has done him wrong. He plays victim all the time. I pity him.
By “bitter,” sandre, I suppose you mean, “No longer agreeing with me,” right?
You figure it out. Here is a tool.
http://www.merriam-webster.com/dictionary/bitter
No, sandre, I asked what YOU meant by it.
It’s funny how I never heard a single libertarian call me “bitter” when I agreed with them.
I disagree with Daniel Kuehn all the time. On this blog & on Cafe Hayek. I have never used bitter to describe DK’s comments. Could it be because you are actually bitter? Yes
You may want to look this up
http://www.merriam-webster.com/dictionary/denial
Yes, sandre, and the reason is easy to discern: Daniel Kuehn was never a prominent libertarian. You do not have a desperate need to dismiss his change of heart as some sort of “emotional upheaval” due to being “bitter” at the Mises Institute.
Daniel Kuehn was never a prominent libertarian.
Neither are you.
That is not the reason sandre is calling you bitter. I can discern why she is calling you bitter. It’s because you are bitter.
Yes, I am not. But I was once.
Gene,
I know you only from your comments on this blog. I had guessed that you probably had some association with MI in the past, from your comments here of course. I thought you were still a libertarian, but probably not an anarchist. I’m a minarchist. Your falling out with libertarianism is news to me.
You are too quick to attribute motives. Think a little harder before accusing some one of lying, or ad hominem. Bitterness doesn’t make you a devil. It just means that you might have some issues to deal with. Given the right circumstances, any one of us could become bitter.
My comment is not based on a single comment you wrote on this blog. Just from being a casual observer here. I could very well be wrong. I’m open to that idea. I’ll be reading your comments from time to time. My hope is that you’ll prove me wrong.
“He plays victim all the time.”
I just looked over every blog post I wrote in March and April, over 50 posts, and I can’t find one in which I remotely claim to be a victim of anything. And yet you say I do it ALL THE TIME.
That is called “lying,” sandre. Here’s a tool to help you figure it out:
http://www.merriam-webster.com/dictionary/lying
I don’t read your blog. My exposure to your comments is through this blog -Free Advice. What you are doing is not quite lying as much as being in denial.
http://www.merriam-webster.com/dictionary/denial
So, where here have I “played the victim”? Since I do it “all the time,” you must have plenty of examples, right?
And sandre, this one may help explain your “diagnosis”:
http://www.merriam-webster.com/dictionary/ad%20hominem
“Gene Callahan? No, you needn’t pay any attention to his arguments against libertarianism… he’s BITTER!”
And sandre, this one may help explain your “diagnosis”:
http://www.merriam-webster.com/dictionary/ad%20hominem
ad hominem is not committed when someone calls you bitter.
“Gene Callahan? No, you needn’t pay any attention to his arguments against libertarianism… he’s BITTER!”
She never claimed that your arguments should be dismissed BECAUSE you’re a bitter person. She is dismissing your arguments on your blog because what you say here is enough to dismiss your arguments. The dismissal follows from your statements, not your person.
You should know better than a bunch of state imprisoned kids, taught by Gene to boot!
No, I don’t think I did. I challenged you making this sort of statement, when you must know better. That shows proper respect for your intellect, and proper disrespect for the cheap shot at Keynes.
Gene,
It, in fact, can contradict economic law, depending on what economic law you think is correct. Keynes believed there was an inevitable tendency for disequilibrium between savings and investment; the Austrians do not. If Keynes is wrong then there’s no paradox of thrift.
Btw, the causality behind the concept of a liquidity trap is somewhat suspect, especially when the theory is applied to the present recession (well, Krugman’s theory of liquidity trap, not Keynes’s). There could be other reasons, besides intertemporal expectations of inflation/deflation, that have resulted in a fall in private lending (including monetary policy, heightened uncertainty [which is closer to Keynes’s original ‘model’], et cetera).
“It, in fact, can contradict economic law, depending on what economic law you think is correct. Keynes believed there was an inevitable tendency for disequilibrium between savings and investment; the Austrians do not.”
Jonathan, I think that this is the correct view, but it makes my point, unless you think there is an economic law saying something like “The market for loanable funds is ALWAYS in equilibrium.” Only surely no Austrian thinks that!
So then it becomes an empirical matter: how much does disequilibrium in the market for loanable funds matter? Keynes answers “A lot,” Austrians “Not so much.”
And this is what I was saying: it is an empirical, and not a logical, dispute.
Oops. Meant to say “AND surely no Austrian thinks that!”
And this is what I was saying: it is an empirical, and not a logical, dispute.
Wrong, it is logical.
Austrians don’t hold that any discrepancy, persistent or in passing, between saving and investment is a problem not because they believe savings and investment will always exactly match. They just don’t consider any discrepancy a problem at all, because if funds saved is greater than funds invested, then this is just the same thing as saying people are holding more cash.
Austrians argue that the alleged discrepancy between money saved and money invested is not actually a discrepancy at all. The fact that you even realize that Austrians say it doesn’t matter is precisely what should make you realize that it is a logical question, not an empirical one. Is it logical to claim that holding more cash is inherently destructive? Austrians argue no, because it is a result of voluntary action, hence it is meant to increase utility. If someone holds more cash but the result is not to their liking, then they will adapt and hold less cash. There is nothing inherently wrong with holding less or more cash. It depends on the individual.
If you want to refer to economic laws, then you should realize that there is no such thing as equilibrium in the economy. Equilibrium is a mental concept only. The economy is constantly in flux. No economist, let alone an Austrian, can claim that the economy is in ever in equilibrium, or that the market for loanable funds is ever in equilibrium.
The point is not whether or not the market for loanable funds can be in equilibrium or not, it’s whether or not an individual should be labeled as committing economic destruction by the mere act of holding more cash. If people want to hold more cash, then there is nothing to it that requires a response of resentment or hostility and “Well we’ll tax you then!” or “Well, we’ll counterfeit more of that money and do what you are “supposed” to be doing!”
The economy is a place where the individual can pursue his self-interest. It is not a place where the individual has to be coerced into participating in in a way that is contrary to his own desires. If he wants to offer goods or services and hoard his earnings, then he isn’t harming anyone. If lots of people do that, then they are not harming anyone either. It is wrong to claim that an economy MUST be a certain level of productivity or else people have to be coerced and manipulated via taxation or inflation in order to get them to behave in a way that is in agreement with politicians or you Keynesian wannabe economic dictators.
Captain_Freedom, you are my hero.
Couldn’t agree more in what you wrote in this post.
The “paradox of thrift,” for instance, does not involve any contradictions of fundamental microeconomic laws. One can tell a perfectly coherent story in which all actors act so as to maximize their utility, but the paradox of thrift occurs. It is essentially a tragedy of the commons type of story.
The paradox of thrift is an ancient myth. What you perceive as “perfectly coherent” in fact contains some major flaws.
The paradox of thrift rests on the notion that the aggregate demand for goods as such consists of nothing but the demand for consumer goods. This is wrong. The demand for capital goods is also a demand for goods. Revenues are earned by selling capital goods no less than consumer goods.
More importantly, the paradox of thrift also commits the same basic economic error, repeated time and time again throughout the ages, namely, a confusion between wealth and riches. It confuses money as wealth and thus considers a reduction in money or spending as equivalent to a reduction in wealth. But a reduction in money and spending does not mean a reduction in wealth, because money is primarily a means of exchange.
As long as the ratio between consumption spending and investment in capital goods remains unchanged, then it doesn’t matter even if everyone hoarded more money. Real production can carry on as before and it can continue to grow.
Now, importantly, if the economy is controlled by central bankers and the banking system engages in credit expansion over time, and the real economy grows over time on a basis of fractional reserve banking, then the paradox of thrift appears to be vindicated, for it is possible that a reduction in money and spending will lead to reduced productivity. This occurs when a reduction in aggregate demand leads fractional reserve loans to default and thus deflation sets in, which then reduces aggregate demand further, and so on, and all the investments made on the basis of credit expansion have to be liquidated, unemployment sets in, and a reduction in productivity result. Be that as it may, this does not entitle one to claim that it was the reduction in money and spending as such that caused the reduction in wealth later on. It means that the initial periods of investments made in the credit expansion economy were unsustainable and there would have been a future reduction in production anyway even if money and spending did not fall. This is because investments made in a credit expansion economy require accelerating inflation in order to be sustained. If aggregate demand merely stays constant, or rises only somewhat over time that is not enough, then a correction (recession) will set in regardless.
The actual fall in money and spending that we see only quickens the pace at which the correction occurs. It can’t be said to be the cause for the correction. It is much like a car driving towards a cliff, with broken brakes and a broken steering wheel, and is certain to go over the cliff due to its speed and distance from the cliff edge, but then all of a sudden there is a huge gust of wind that drastically increases the car’s speed, and it goes over the cliff sooner than expected.
Keynesians believe that the fact that the car was moving at all means the car must be doing OK, but then they suddenly become surprised and frightened when a gust of wind occurs, and soon after the car goes over the cliff, and so they blame the wind as the reason the car went over. The Austrians say no, the reason the car went over the cliff is because in the past, the brakes and steering wheel malfunctioned.
NeoKeynesians concede the substance of the criticisms against the paradox of thrift, which is why they have totally switched gears once more, and now claim “sticky prices” prevents prices from adjusting like the Austrians say they will adjust. Their reasons for sticky prices are vague, non-committed, and essentially it is just taken for granted, as if there is something inherent in people that prevents them from adjusting prices downward. These neoKeynesians are so clueless because they never ask and they never give an adequate explanation for why people are more than willing to raise prices, but are reluctant to reduce prices. They of course don’t look to far into this because if they did, we wouldn’t have the problem of downward sticky prices at all. We would have a problem of government, via labor market regulations and welfare, which reduces price mobility in wages, and more importantly, inflation of the money supply, which makes people psychologically disposed to expecting higher prices of goods and services over time, which makes them predisposed to not reducing their asking prices even when the new “tighter” monetary conditions call for it.
If we had a free market, and prices for everything gradually fell over time, then people would be psychologically prepared to accept lower prices, because they aren’t expecting higher prices in the future.
So to blame depressions on the stickiness of prices, which is unexplained, the stickiness of which generates an inability of prices to adapt downward to the new conditions of aggregate demand, the demand of which is generated by people’s paradox of thrift, the reasons of which are also unexplained, all the Keynesians have succeeded in doing is the creation of an obstacle course of the absurd, hoping that should anyone dig deeper through each subsequent layer, they will eventually get bumped off by one or another diversion before they give up and accept what the witchdoctor Keynesians are claiming. All to justify state control of the market. That’s all Keynesian economics is. How to justify the state taxing and spending and inflating.
You should read Hayek’s “The ‘Paradox’ of Saving.” He refutes the paradox of thrift quite handily.
“The paradox of thrift rests on the notion that the aggregate demand for goods as such consists of nothing but the demand for consumer goods.”
BOING!!!! (Pause. Gene putting eyes back in socket.) In first year macro you learn that AD consists of C plus II. Do you know what II stands for, Captain?
BING BOING BOONG BLONG BIFF BAM POW! Ba na na na na na na BATMAN!
I said THE PARADOX OF THRIFT rests on that notion Mr. I Can’t Read English Because I’m Too Busy Trying To Be Bitter. I did not say that the concept of aggregate demand rests on that notion.
Wow. Someone needs to get their head examined.
Yes, I know what you said Captain, and it is flat out wrong. The model that shows AD consisting of C + II is the model my textbook uses to ILLUSTRATE the paradox of thrift. The paradox of thrift in no way relies upon or implies that capital goods spending is not part of aggregate demand.
Slightly OT: Would it be more appropriate to call it the “Paradox of Risk Aversion” instead of the “Paradox of Thrift”, since thrifty actions (like time deposits) don’t necessarily trigger it?
The arguments seems to be arguing, not “Thrift destroys abundance” but “Extreme aversion to risk (of not having money) justifies itself”.
The model that shows AD consisting of C + II is the model my textbook uses to ILLUSTRATE the paradox of thrift.
That is NOT the paradox of thrift as it was propounded by Keynes. Keynes claimed that merely not consuming, via a lower marginal propensity to consume, is when the “paradox” takes place.
What you are talking about are Keynes’ followers and their interpretation of what it means to be “thrifty” and what it means to “not consume.”
Keynes: “But even in that case it is necessary to allow for the possibility of these provisions being offset by new investment in other directions as well as by increased expenditure on consumption.”
Hmm, so Keynes saw that “new investment” OR “increased expenditure on consumption” might balance out increased thriftiness. (He was *criticizing* an under-consumption theory in this passage, by the way.)
Ah, I know: you probably were talking about John RUDOLPH Keynes, your plumber, and not John MAYNARD Keynes! It’s HIS paradox of thrift that sees aggregate demand as consisting only of consumption.
Captain Trips: “Keynesians believe…”
Captain Trips: “You’re flat out wrong because I wasn’t referring to Keynes’ followers. I was referring to Keynes’ writings.”
So I guess “Keynesians” refers to some other group of people than “Keynes’ followers,” because the Captain certainly was NOT referring to “Keynes’ followers.”
Captain, buddy, don’t worry, I’m done now. You’re safe as long as you don’t say anything else.
Keynes: “But even in that case it is necessary to allow for the possibility of these provisions being offset by new investment in other directions as well as by increased expenditure on consumption.”
That is not saying what you believe it is saying. The full quote, including the part that explains what this is exactly referring to, is:
“Since the war there has been a spate of heretical theories of under-consumption, of which those of
Major Douglas are the most famous. The strength of Major Douglas’s advocacy has, of course, largely
depended on orthodoxy having no valid reply to much of his destructive criticism. On the other hand,
the detail of his diagnosis, in particular the so-called A + B theorem, includes much mere mystification.
If Major Douglas had limited his B-items to the financial provisions made by entrepreneurs to which no
current expenditure on replacements and renewals corresponds, he would be nearer the truth. But even
in that case it is necessary to allow for the possibility of these provisions being offset by new investment
in other directions as well as by increased expenditure on consumption.”
In other words, the “possibility” Keynes is referring to is not the possibility of capital goods spending offsetting consumer goods spending, thus seemingly proving your point. Keynes is referring to capital goods spending and consumer goods spending that offsets the fall in capital goods spending made by other entrepreneurs.
To show how you are clearly confused, here are some other quotes that are not stripped from context, that show it is drops in consumption spending that ipso facto are responsible for economic calamity:
“Mr Hobson laid too much emphasis (especially in his later books) on under-consumption leading to over-investment, in the sense of profitable investment, instead of explaining that a relatively weak propensity to consume helps to cause unemployment by requiring and not receiving the accompaniment of a compensating volume of new investment, which, even if it may sometimes occur temporarily through errors of optimism, is in general prevented from happening at all by the prospective profit falling below the standard set by the rate of interest.”
In other words, Keynes claims that the more people want to save, and the less they want to consume, unemployment rises because there is allegedly only so much room for profitable investment in the economy. Here, Keynes is criticizing Hobson for his theory on under-consumption, which is that under-consumption causes unemployment by generating over-investment. Keynes says over-investment cannot happen because there is allegedly not enough room for enough profitable investment if consumption spending falls. In other words, it is the fall in consumption that is primarily responsible for unemployment (and depression).
It is NOT, contrary to your out of context interpretation, a fall in spending as such. It is a fall in a specific type of spending, namely consumption spending. THAT’S why Keynes even worried about the marginal propensity to consume.
The following quote reinforces my position and shows why exactly Keynes was so worried about a fall in consumption spending:
“Perhaps it will help to rebut the crude conclusion that a reduction in money-wages will increase employment “because it reduces the cost of production”, if we follow up the
course of events on the hypothesis most favourable to this view, namely that at the outset entrepreneurs expect the reduction in money-wages to have this effect. It is indeed not unlikely that the individual entrepreneur, seeing his
own costs reduced, will overlook at the outset the repercussions on the demand for his product and will act on the assumption that he will be able to sell at a profit a larger output than before. If, then, entrepreneurs generally act on this expectation, will they in fact succeed in increasing their profits? Only if the community’s marginal propensity to consume is equal to unity, so that there is no gap between the increment of income and the increment of consumption [i.e., there is no additional saving]; or if there is an increase in investment, corresponding to the gap between the increment
of income and the increment of consumption, which will only occur if the schedule of marginal efficiencies of
capital has increased relatively to the rate of interest [i.e., either the mec schedule must somehow move to the right, which there is allegedly no reason for its doing, or the rate of interest must fall, which it can’t do, if it is already at 2
percent]. Thus the proceeds realised from the increased output will disappoint the entrepreneurs and employment will fall back again to its previous figure, unless the marginal
propensity to consume is equal to unity [i.e., there is no additional saving] or the reduction in money-wages has had the effect of increasing the schedule of marginal efficiencies of capital relatively to the rate of interest and hence the amount of investment [Keynes means the amount of investment that is profitable—i.e., yields 2 percent or more]. For if entrepreneurs offer employment on a scale which, if they could sell their output at the expected price, would provide the public with incomes out of which they would save more than the amount of current investment, entrepreneurs are bound to make a loss equal to the difference; and this will be the case absolutely irrespective of the level of money wages.”
That italicized portion is Keynes clearly claiming that only if people spent all additional income on consumption will unemployment be avoided.
Keynes is also claiming, as we’ve already seen elsewhere, that more investment spending is not capable of replacing the fall in consumption spending, because there is allegedly room for only so much profitable investment (due to the alleged effects of the declining marginal efficiency of capital), after which there will allegedly be losses “equal to the difference.”
That is why consumption spending has to be encouraged and that is why the government has to engage in budget deficits, so that the extra, unprofitable savings can find a profitable investment outlet. Deficits increase consumption and according to Keynes, can overcome the free market’s self-destructive habit of saving too much and consuming too little. Only if the marginal propensity to consume is equal to unity (meaning people should not save and consume 100% of their income) will there be enough profitable investment. Since the people won’t consume enough, then by golly, the government should spending money, so that the evil savings can find a profitable investment.
I’ve already shown why Keynes’ explanations on the reasons for his marginal efficiency of capital doctrine are fallacious, so I won’t repeat it here.
It’s clear that you don’t understand Keynes, you don’t understand what he wrote, and now it seems you don’t even know how to read the English language and correctly comprehend Keynes’ writings.
Captain Trips: “Keynesians believe…”
Captain Trips: “You’re flat out wrong because I wasn’t referring to Keynes’ followers. I was referring to Keynes’ writings.”
So I guess “Keynesians” refers to some other group of people than “Keynes’ followers,” because the Captain certainly was NOT referring to “Keynes’ followers.”
Captain, buddy, don’t worry, I’m done now. You’re safe as long as you don’t say anything else.
Keynesians are those who adhere to what Keynes actually wrote. Those you are talking about are neoKeynesians and New Keynesians and Omega Keynesians and Funny Keynesians and Schizo Keynesians.
You are tripping on about what Keynesian economics is about, when it is not Keynesian economics, but what Keynes’ followers believe that Keynes did not (according to his writings).
You keep confusing “Keynesian models” for “Keynes’ writings.” The two are separate.
Oh boy. I told you I’d stop humiliating you as long as you stayed quiet. But:
“or if there is an increase in investment, corresponding to the gap between the increment
of income and the increment of consumption”
So right in the very quote you use to “prove” your point, we see that Keynes understood very well that investment spending is part of aggregate demand. So your own quote disproves your ridiculous contention. Now just stop embarrassing yourself!
Oh boy. I told you I’d stop humiliating you as long as you stayed quiet.
Only in your mind. You just hope that I stay quiet so that I stop humiliating you.
“or if there is an increase in investment, corresponding to the gap between the increment
of income and the increment of consumption”
So right in the very quote you use to “prove” your point, we see that Keynes understood very well that investment spending is part of aggregate demand.
Huh? I never claimed that Keynes held that the only demand was consumer demand. I said that the paradox of thrift implies that only consumer demand earns revenues and profits.
So your own quote disproves your ridiculous contention. Now just stop embarrassing yourself!
Yeah more straw man!
And, even though we were initially talking about Krugman and you insisted we were, then we weren’t, then we were talking about Keynes, the quote you offer is THE EXACT SAME SITUATION as the model in the macro textbook I am teaching from: if there is additional savings, BUT NO ADDITIONAL INVESTMENT, then the paradox of thrift kicks in. THE SAME. And both Keynes passage and the model recognize that capital goods spending is part of aggregate demand.
And, even though we were initially talking about Krugman and you insisted we were, then we weren’t, then we were talking about Keynes, the quote you offer is THE EXACT SAME SITUATION as the model in the macro textbook I am teaching from: if there is additional savings, BUT NO ADDITIONAL INVESTMENT, then the paradox of thrift kicks in.
No, that is not the paradox of thrift. That is simply cash hoarding. Your textbook misunderstands the paradox of thrift.
Hey, guess what, Captain? Roger Garrison not only misunderstands Keynes, he misunderstands him in the exact same way I do! See here:
http://www.auburn.edu/~garriro/macro.htm
Wow, it is a drop in investment spending that starts the Keynesian cycle going! Why does the Mises Institute even employ this guy, when he doesn’t even understand his own specialty of macroeconomics?
Hey, guess what, Captain? Roger Garrison not only misunderstands Keynes, he misunderstands him in the exact same way I do!
Nope. Garrison is not espousing the paradox of thrift in those (excellent) powerpoint slides. He is relating how the interest rate effect overcomes the income effect when consumption falls.
You’re confused.
“You should read Hayek’s “The ‘Paradox’ of Saving.” He refutes the paradox of thrift quite handily.”
Hmmm. And perhaps you should note that Hayek’s article was written seven years before the General Theory, and so does not address it at all.
And perhaps you should note that Keynes’ General Theory was written before Hazlitt’s response to that. And then we should note that Hazlitt wrote that before neoKeynesians responded to those arguments. Then we should note that neoKeynesians wrote before they got a response, etc, etc.
Or we could just take the paradox of thrift as it is propounded, the response as it was propounded, and make a conclusion about the paradox of thrift, and not evade it and sputter on about future writings!
But, Hayek certainly was not responding to the Keynesian paradox of thrift in his 1929 book!
No not to Keynes’s actual book. I am talking about the idea of the paradox of thrift. The ideas in Hayek’s essay can be used to counter the ideas of the paradox of thrift.
captain_freedom, could you give me some references to this analysis of the paradoix of freedom?
Also, do you have a blog we can follow?
(“The paradox of thrift rests on the notion that the aggregate demand for goods as such consists of nothing but the demand for consumer goods. This is wrong. The demand for capital goods is also a demand for goods.”)
Maurizio, you only need to consult any entry-level macro textbook to learn that the statement by CF that you quote is nonsense — demand for capital goods absolutely is considered a part of aggregate demand in Keynesian models.
Or you can just improve your reading comprehension and realize my statement was about the paradox, not aggregate demand as such.
But don’t let that get in the way of your antagonism.
I realized what you were saying right from the start, Captain. And it’s flat out wrong.
No Gene, it’s correct. You’re flat out wrong because I wasn’t referring to Keynes’ followers. I was referring to Keynes’ writings.
“No not to Keynes’s actual book. I am talking about the idea of the paradox of thrift.”
“I was referring to Keynes’ writings.”
So, when it’s noted that Hayek was not addressing Keynes, you complain that you were referring to the general idea of the paradox of thrift, and NOT to Keynes’s writing. But when I note that my macro textbook very explicitly includes investment in its “paradox of thrift” model of AD, then I’m an idiot for not understanding that you were NOT referring to the general idea of the paradox of thrift, but to Keynes’ particular writings!
I see.
And let’s check Keynes’s “actual writings”:
“…mere abstinence is not enough by itself to build cities or drain fens. … If Enterprise is afoot, wealth accumulates whatever may be happening to Thrift; and if Enterprise is asleep, wealth decays whatever Thrift may be doing. Thus, Thrift may be the handmaiden of Enterprise. But equally she may not. And, perhaps, even usually she is not.”
What do you know! Keynes recognized that aggregate demand was made up of consumption AND investment. Right in his statement of the paradox of thrift. (I suppose now you will complain that I used the wrong BOOK of Keynes’s, or perhaps that you were not talking about Keynes AT ALL.)
So, when it’s noted that Hayek was not addressing Keynes, you complain that you were referring to the general idea of the paradox of thrift, and NOT to Keynes’s writing.
No, when it’s noted that Hayek wrote the paradox of savings before the general theory, that doesn’t mean Hayek’s essay cannot be used as a refutation of the paradox of thrift as Keynes interpreted it. I am not talking about Keynes’ followers.
But when I note that my macro textbook very explicitly includes investment in its “paradox of thrift” model of AD, then I’m an idiot for not understanding that you were NOT referring to the general idea of the paradox of thrift, but to Keynes’ particular writings!
The paradox of thrift as you treat it in your macro economics textbook is not the paradox of thrift. You are referring to cash hoarding, and its alleged destructive effects. Cash hoarding is not an act of thriftiness. Increasing thriftiness is reducing one’s consumption.
You are doing exactly what almost every Keynesian does, namely you conflate saving and thriftiness with hoarding.
If someone originally consumes half their net worth and invests the other half, and then decides to instead sell off and hoard the proceeds of half of their original investment, and yet they continue to consume half their net worth, then they are NOT becoming any more thrifty than before. They are simply changing the make up of their investment. But according to your fallacious treatment of the paradox of thrift, this individual is becoming more thrifty. His actions are now affecting aggregate demand. If more people do what he does, then the paradox of thrift allegedly comes to the fore.
But that is all wrong. The paradox of thrift originally referred to people consuming less and saving more. (And no, don’t confuse saving for hoarding yet again!)
And let’s check Keynes’s “actual writings”:
“…mere abstinence is not enough by itself to build cities or drain fens. … If Enterprise is afoot, wealth accumulates whatever may be happening to Thrift; and if Enterprise is asleep, wealth decays whatever Thrift may be doing. Thus, Thrift may be the handmaiden of Enterprise. But equally she may not. And, perhaps, even usually she is not.”
This quote actually helps my case because here Keynes is writing that thriftiness is the act of not consuming, like I said above.
Thriftiness is had when people consume less. If people do not invest, then of course cities cannot be built. That is trivial.
What do you know! Keynes recognized that aggregate demand was made up of consumption AND investment.
That doesn’t follow from the quote you just cited. That is you hoping he knows because you need that for your neoKeynesian models to be based on Keynes.
Right in his statement of the paradox of thrift.
What? Where? You did not cite a quote of Keynes’ interpretation of the paradox of thrift. You just cited a quote that says if people don’t engage in economic activity, cities won’t get built. Well duh. That if people don’t consume, then investments won’t be profitable. Well duh, but people will always consume SOMETHING, which means it is a moot point. Keynes is just once again referring to his fallacious belief that if consumption is too low, then there is allegedly only so much room for profitable investment which savings will always be greater and thus “leak” out of the economy.
You can’t even quote relevant quotes!
“The paradox of thrift as you treat it in your macro economics textbook is not the paradox of thrift.”
This is not “my” book in the sense of one I wrote. It is simply a standard macro text. But I guess prominent, respected macroeconomists do not even know the terms of their own profession!
This is not “my” book in the sense of one I wrote. It is simply a standard macro text. But I guess prominent, respected macroeconomists do not even know the terms of their own profession!
I didn’t claim it was your as in you wrote it. I said your as in the textbook you use in your class.
But don’t let that stop you from grasping at anything, ANYTHING that can serve to refute a single thing I say to you.
“If someone originally consumes half their net worth and invests the other half, and then decides to instead sell off and hoard the proceeds of half of their original investment, and yet they continue to consume half their net worth, then they are NOT becoming any more thrifty than before.”
Exactly right. As Keynes would have recognized. And as the macro textbooks recognize. You are dealing with a “paradox of thrift” of your own invention, my friend.
Exactly right. As Keynes would have recognized. And as the macro textbooks recognize.
But that action above reduces aggregate demand, the alleged motivating factor that establishes when people are “thrifty” and when they are not. You even echoed that sentiment when you suggested that if people save more but investment does not rise by as much (cash hoarding) that is allegedly when the “paradox of thrift” doctrine kicks in. Now you are completely contradicting yourself.
You are dealing with a “paradox of thrift” of your own invention, my friend.
Nope, the paradox of thrift relates to a situation when enough people attempt to consume less. Saving more cash instead of holding investments is not being thrifty, and yet that is when the paradox allegedly arises.
Sorry, you’re completely wrong.
“Yes, Andrew, personal insults to my students are what are called for here.”
“Sputter, sputter, sputter… do you just say that to keep the faithful in line, or did you never take macro?”
As I noted on your blog a few days ago, you can be snide and chide other people for doing it – but you can’t expect us not to point it out.
Callahan is like a cantankerous Johnny Carson.
He can’t take it when others dish it to him, but he has no problems dishing it to others, along with constant sarcasm and bitterness.
I don’t think he’s capable of maturity or tactfulness.
Captain Freedom, of whom I was recently asked by a fellow blogger, “What do you think? This guy is about 13?”, is now sitting in judgment on the maturity of others.
Hey look, let’s refer to some random person’s comment that I agree with and give it truth value.
Bob, I understand your main point was about Krugman, but maybe you can answer this basic-economics question relating to the scenario that Landsburg wrote about. What if, instead of hoarding $84 million in the bank or $84 million in cash in his basement, the heir had $84 million of computers, machines, building materials, and other capital goods stored in a warehouse that he didn’t want anyone else to have and which was just going to go to waste? If the government seized those capital goods and allocated them to government offices and road-construction subcontractors and other uses that would produce economic output (wealth), wouldn’t it be true that the heir is consuming no less (unless thinking about his glorious warehouse counts as consumption), the government (or the beneficiaries of its property seizure) are producing more output for consumption, and no one else has to consume less?
Maybe that misses the point because in order for the heir to have accumulated those $84 million worth of capital goods, someone else had to consume less in the past? I don’t know…free-marketeers are quick to remind everyone that economic activity produces new and additional wealth (as opposed to the socialist view that rich people become rich by taking part of the “pie” from someone else), so would the heir’s hypothetical purchase of all that equipment really reduce the production or consumption of anyone else?
I hope this makes sense and doesn’t show my ignorance. If it does, then I guess I won’t be too upset because, at least, Krugman’s derision of economics Ph.D.s doesn’t apply to me, because I am a long way from ever getting a Ph.D. in economics.
“They say the government can’t ever go insolvent because it can print money.”
Actually, this is not what MMT’ers say. Not even close. It’s what people who do not bother to understand the operational realities of the monetary system of a country like the US like to say, and what they want to hear. But that’s not what MMT’ers say. May I suggest educating yourself on the operational realities of the monetary system with the following articles. I would suggest reading these blogs, and the links embedded in these blogs, very carefully before criticizing MMT, as it’s very clear you do not understand MMT, Fed operations, or the workings of the United States monetary system..
http://bilbo.economicoutlook.net/blog/?p=5762
http://bilbo.economicoutlook.net/blog/?p=2905
http://bilbo.economicoutlook.net/blog/?p=332
http://bilbo.economicoutlook.net/blog/?p=10554
Maybe the issue is you do not understand the definition of insolvency? When an entity has assets greater than liabilities, then they are deemed insolvent. Could you explain how this scenario can exist in the United States?
“You (quite correctly) point out that green pieces of paper aren’t really the issue, and that without real resources to facilitate things”
What MMT’ers say is there is no financial or operation constrain on a sovereign government that is the monopoly issuer of a non convertible currency to put real resources to work to facilitate higher employment. The ability of a sovereign government to put real resources to productive uses goes beyond just creating green pieces of paper. This is probably a difficult concept to grasp for someone who feels strongly about the benefits of a fixed currency. There is exactly zero constrain on a sovereign government (like the US) putting idle resources to work in a productive fashion in one area of the economy while excesses in other areas are being written off.
“the printing press would just lead to rising prices”
Again, it’s not about the printing press. It’s about putting real resources to work beyond the productive capacity of the economy. And sorry, the printing press alone does not raise prices. In a few years when your inflation expectations are not realized, we’ll be chatting about disinflation or even deflation on this blog…or you’ll be claiming inflation it’s just a few years away again. I know, it’s always just a few years away…
“And that is exactly the position of the MMTers, and why they think taxes are superfluous for the purposes of solvency.”
Once again, false. MMT’ers recognize taxes for what they are, a means to regulate aggregate demand. If you want to get more funds into the hands of folks that have a higher propensity to consume, tax them less than others. You want resources to flow to speculative markets, 3rd homes, stock markets, etc, then tax those with a lower propensity to consume less.
Lastly, the Landsburg article is based on the neo-liberal myth that the US government is required to tax before it can spend. This, of course, is illigocal (how can the government tax currency, before issuing the currency?), and fails to recognize the true role of taxes in the US economy, and that’s to create value to the currency (we all must settle our tax liabilities in USD) and to regulate aggregate demand (i.e. inflation).
Actually, this is not what MMT’ers say. Not even close.
What are you talking about? That’s exactly what you are saying. That’s not ALL you are saying, but you are saying it, unless you’re quibbling over the differences between printing paper and issuing electronic reserves.
http://consultingbyrpm.com/blog/2011/04/landsburg-1-krugman-0.html
What Bob said. I’m confused here — you say that MMTers DON’T DON’T DON’T EVER F’ING SAY THAT “the government can’t ever go insolvent because it can print money.”
… and then you go on to say exactly that. Among other things, you say:
“When an entity has assets greater than liabilities, then they are deemed insolvent. Could you explain how this scenario can exist in the United States?”
Alright, so the US can’t have liabilities greater than assets because it can print up everything it needs to pay the liabilities, is what you’re saying. Fine. So the accusation is 100% correct.
You seem to be unable to distinguish between:
a) “MMTers believe X” and
b) “MMTers believe X, and X is a defensible, non-demented idea.”
You were accused of a), and you respond as if proving b) would invalidate that accusation. You are wrong.
It’s okay though, on global warming issues, I had to work VERY hard to keep Bob from entangling two arguments that “the other side” makes. But now that you know, you can cut it out, m’k?
(And if we’re lucky, maybe Steven_E._Landsburg will understand the difference between “The government can’t reduce Mr. Kendrick’s choice set via taxation” and “People other than Mr. Kendrick will suffer the most from a tax on him.” I’m not holding my breath here…)
Silas wrote:
“And if we’re lucky, maybe Steven_E._Landsburg will understand the difference between “The government can’t reduce Mr. Kendrick’s choice set via taxation” and “People other than Mr. Kendrick will suffer the most from a tax on him.” I’m not holding my breath here…)”
Actually I’m not “getting” that. Those two seem to be pretty close to me. I agree they are saying different things, but can they ever be different? Or more specifically, doesn’t the first imply the second, if we assume that a tax has to be borne by somebody? I think that’s all Landsburg is saying.
To repeat, everyone, I was actually none too keen on Landsburg’s original commentary. I think he had a perfectly defensible point, but he went overboard by saying, “It it impossible to tax an idle rich man” (not an exact quote). I think he should have just said, “Taxing an idle rich man won’t achieve the results that the journalist thinks.”
The first implies the second, but my point was that the second doesn’t imply the first. Landsburg proved the second, then equated it with the first.
Yes, other people will suffer most of the tax burden, but the tax still contract’s Kendrick’s choice set. Interestingly, i made a similar point here, and everyone seems to think it summarized the disagreement well.
What MMT’ers say is there is no financial or operation constrain on a sovereign government that is the monopoly issuer of a non convertible currency to put real resources to work to facilitate higher employment.
What’s the difference between that statement and the statement
“They [MMT’ers] say the government can’t ever go insolvent because it can print money.”
They are saying the exact same thing. To say that a government can’t ever go insolvent because they can print money, is the exact same thing as saying there are no financial constraints on a sovereign government that is the monopoly issuer of a non convertible currency!
You’re arguing over semantics. You just dressed up the exact same argument in MMT language and pretended it is saying something different.
“What MMT’ers say is there is no financial or operation constrain on a sovereign government that is the monopoly issuer of a non convertible currency to put real resources to work to facilitate higher employment.”
Not trying to be snarky but I’m curious whether you think a country with a huge current account deficit in the midst of a currency collapse would be constrained at all? Am I corrent in thinking that neither of these conditions would be possible in the ideal MMT world?
“In a few years when your inflation expectations are not realized, we’ll be chatting about disinflation or even deflation on this blog…or you’ll be claiming inflation it’s just a few years away again. I know, it’s always just a few years away…”
Maybe, by some measures we have borderline dis-inflation right now, but to be fair I’ve been hearing that deflation is right around the corner for some time now too and for the last 50yrs the Core-PCE deflator has never been negative y/y. (although it has gotten close)
As it stands current annualized m/m CPI is about 600bp over the M2 own rate (y/y CPI is about 250 bp over) and almost 500bp over the 5yr note yield so all those people saving money and on non-indexed fixed incomes are hoping you’re correct.
MMTers seem to believe their marvelous, unlimited government can use its unlimited powers to solve the alleged problem of unemployment. To explain their basic concepts, here is a quote from “Modern Monetary Theory—A Primer on the Operational Realities of the Monetary System” by Scott Fullwiler, Associate Professor of Economics at Wartburg College:
Having said that, MMT’ers are keenly aware that governments can and do write laws that their treasuries’ erations be legally bound in certain ways. For instance, the Fed is constrained by law to only purchase Treasury securities in the “open market,” is thereby forbidden from directly lending or providing overdrafts to the Treasury. In other words, “specific” cases can and do differ from the “general” case MMT’ers describe for a sovereign currency issuer under flexible exchange rates in the sense that self-imposed constraints specify particular operations.
http://tinyurl.com/3tdadas
In this context, libertarians are quite aware that states are not operationally constrained from deeming infants and toddlers as idle resources. Further, in this context, libertarians are quite aware that states are not OPERATIONALLY constrained from using gasoline soaked live infants and toddlers as a source of fuel.
In addition to being oblivious to the non-aggression principle (NAP), MMTers are oblivious as to where Austrian analysis would apply to their schemes. Austrian analysis would be applied AFTER we understand what exactly it is that the state is doing. If the state is indeed doing “operationally” what the MMTers say it is, Austrian analysis would demonstrate that these MMT schemes impair and distort the pricing process, and thus distort prices, investment and the capital structure. MMTers have no understanding whatsoever of when Austrian analysis would apply and no understanding whatsoever of what Austrians even mean by “the pricing process”.
“Debating” with MMTers is futile. Regardless, they will meticulously avoid understanding the essential basic concepts of the NAP and the pricing process.
Look, there’s nothing “bizarro” or “against the laws of economics” in Keynesian models.
Wrong. There are many doctrines in Keynesianism that are against the laws of economics and bizarre.
For example, to name just a few:
1. The contradiction between the marginal efficiency of capital doctrine and the multiplier doctrine. When the marginal efficiency of capital doctrine is espoused, the claim is that the effect of more net investment is a reduction in the rate of profit. But when they espouse the multiplier doctrine, the effect of more net investment is an increase in aggregate demand (which is allegedly equal to net investment plus consumption), by generating a diminishing series of additional consumption spending that is in total a multiple of the initial net investment . This of course leads to the conclusion that the increase in aggregate demand must lead to an increase in the rate of profit. Thus the two doctrines contradict one another even though they are both held to be true in Keynesianism.
2. The confusion between saving and cash “hoarding.” Keynesianism’s marginal propensity to consume doctrine implies that money not spent on consumption is money that allegedly “leaks” out the economy, and allegedly requires government budget deficits that can raise the rate of profit back up and thus “fix” the “problem” of people not consuming enough. Apparently, if anyone reduces their consumption spending and increases their demand for labor and/or capital goods, the marginal propensity to consume doctrine tells us that the economy is at least being threatened and requires government solution, when in reality the economy is just being energized with new production, the only source of economic growth.
3. Cash “hoarding” is treated in Keynesianism as being detrimental to the economy, and that calls for government action to “fix.” In reality of course, money is money because it provides a store of value. In trade, money functions primarily as a medium of exchange. Money stored underneath someone’s mattress provides a benefit to the hoarder at no detriment to anyone else (because they chose to hoard voluntarily, which requires someone else to dishoard), and from an outside observer’s perspective we can infer that the reason they hoarded cash is for them to reduce risk, or enable them to smooth their consumption over time in the face of volatile earnings, or whatever. When it comes to other people’s perspective, for example Keynesian economists and politicians, they are not harmed by the individual who hoards. All that happens is that the remaining money in circulation becomes more valuable. Rude and greedy Keynesian and government grubbers see someone store a sum of cash and “does nothing” for the economy, perceive an opportunity to take that money, or else punish the hoarder by printing money, reducing his purchasing power, and doing what he refuses to do, which is mobilize as much money in the economy as possible. This mentality is the result of not thinking properly in the macro scale. In the micro scale, yes, it does follow that taking his money and spending it, or inflating the money supply and then using new money that does what his money should have done if only his marginal propensity to consume was higher, does benefit others who get to spend that money. But in the aggregate, it doesn’t help the economy at all. It hurts his interests and others gain at his expense, and everyone else who holds any money at all who do not receive the newly created money first. Those politicians and Keynesians who want to mobilize resources could always have done so by just utilizing whatever money exists that is not in that man’s vault. But that is more difficult to do. Earning money by production is more difficult for the politicians and Keynesian economists. That is why they seek to print money or tax people’s money. Of course they could only do such immoral acts by demonizing the hoarders. By demonizing the hoarders, by making people believe they are harming the economy, even though they are not hurting anyone at all, it makes it appeared as justified to steal people’s money and/or counterfeit money. It makes it appear that taxing and printing are benevolent solutions to evil problems taking place in the free market process. But it’s only to justify the government acquiring money by violence.
4. The marginal efficiency of capital doctrine is all by itself entirely fallacious. The reasons Keynes initially propounded for the marginal efficiency of capital was to counter the classical economist’s argument that falling wages and falling prices can cure depressions. His first reason given is that as more net investment took place to offset the additional saving accompanying the additional employment, the prices of capital assets would allegedly rise. This first reason completely contradicts the classical economist’s context. Keynes wrote: “If there is an increased investment in any given type of capital during any period of time, the marginal efficiency of that type of capital will diminish as the investment in it is increased, partly because the prospective yield will fall as the supply of that type of capital is increased, and partly because, as a rule, pressure on the facilities for producing that type of capital will cause its supply price to increase…” Keynes assumes rising prices in order to show that falling wage rates and prices cannot cure depressions! He totally ignores the fact that falling wage rates and prices means falling unit costs of production, not rising costs of production as he presumes in the marginal efficiency of capital doctrine. Keynes is committing the error of confusing a rise in the quantity of a good demanded as a response to a fall in price, with a rise in the demand for the good. The “pressure on the facilities for producing that type of capital” is in response to falling prices of those capital goods, and that pressure will only be sustained as long as the prices are low or falling. The second reason given was his belief that because a rise in net investment leads to more capacity, and because more capacity leads to higher productivity, and because higher productivity leads to lower selling prices of products, it will allegedly lead to falling profitability. But lower prices founded upon lower unit costs do not reduce profitability. This is why Keynesians cannot see anything positive in falling prices, and why they treat all falling prices as deflationary and in need of “fixing” by government. The third reason Keynes gave was a very crude reference to the law of diminishing returns. The truth of course is that with falling wage rates and prices, and increase in employment and output, the physical returns to capital will increase, not decrease. This is because in coming out of a depression, the supply of labor rises faster than the supply of capital goods. This increases the return to capital, it doesn’t decrease it.
There are many, many, many more bizarre and contrary to economic law claims in Keynesianism that I could show you if you want. The above are just a few.
“Apparently, if anyone reduces their consumption spending and increases their demand for labor and/or capital goods, the marginal propensity to consume doctrine tells us that the economy is at least being threatened and requires government solution…”
Captain, you just don’t understand the Keynesian model. Again, it is just flat out false that capital spending threatens the economy in any sense at all in the Keynesian model. In fact, just the opposite is the case: it was a SHORTFALL in investment spending that Keynes though got recessions going. What you are criticizing is not Keynes but a strawman that you or someone else just made up.
Gene, you just don’t understand Keynes’ actual writings. What you are calling Keynesian models are not actual Keynes’ models.
Keynes thought that it was chronic underconsumption that is responsible for depressions. He treated net investment as a threat to employment because it will allegedly decrease the rate of profit below 2% and thus generate a liquidity trap.
What you are talking about is not what Keynes wrote, but what his followers wrote who completely abandoned crucial aspects of Keynes’ actual arguments.
You don’t want me to actually have to quote Keynes himself do you? This is something you should know.
Keynes actual writings: “Practically I only differ from these schools of thought in thinking that they may lay a little too much emphasis on increased consumption at a time when there is still much social advantage to be obtained from increased investment. Theoretically, however, they are open to the criticism of neglecting the fact that there are two ways to expand output. Even if we were to decide that it would be better to increase capital more slowly and to concentrate effort on increasing consumption, we must decide this with open eyes, after well considering the alternative. I am myself impressed by the great social advantages of increasing the stock of capital until it ceases to be scarce. But this is a practical judgment, not a theoretical imperative.”
Hmm, “there is still much social advantage to be obtained from increased investment.”
“Practically I only differ from these schools of thought in thinking that they may lay a little too much emphasis on increased consumption at a time when there is still much social advantage to be obtained from increased investment. Theoretically, however, they are open to the criticism of neglecting the fact that there are two ways to expand output. Even if we were to decide that it would be better to increase capital more slowly and to concentrate effort on increasing consumption, we must decide this with open eyes, after well considering the alternative. I am myself impressed by the great social advantages of increasing the stock of capital until it ceases to be scarce. But this is a practical judgment, not a theoretical imperative.”
Hmm, “there is still much social advantage to be obtained from increased investment.”
In theory yes, but Keynes incorrectly believed that in practice, without enough consumption spending, there is not enough room in the economy for all the society’s savings.
Nobody, not me or anyone, ever claimed that Keynes held that investment was an evil.
“Keynes thought that it was chronic underconsumption that is responsible for depressions.”
Hmm, let’s actually quote Keynes, shall we?
“The later stages of the boom are characterised by optimistic expectations as to the future yield of capital-goods sufficiently strong to offset their growing abundance and their rising costs of production and, probably, a rise in the rate of interest also. It is of the nature of organised investment markets, under the influence of purchasers largely ignorant of what they are buying and of speculators who are more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of the future yield of capital-assets, that, when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and even catastrophic force. Moreover, the dismay and uncertainty as to the future which accompanies a collapse in the marginal efficiency of capital naturally precipitates a sharp increase in liquidity-preference — and hence a rise in the rate of interest. Thus the fact that a collapse in the marginal efficiency of capital tends to be associated with a rise in the rate of interest may seriously aggravate the decline in investment.”
I don’t see “chronic under-consumption” anywhere in there, do you? It is swings in investors animal spirits that create depressions, not “chronic underconsumption.”
Hmm, let’s actually quote Keynes, shall we?
And again be just as incorrectly interpreted, or as irrelevant as your previous quotations? OK.
“The later stages of the boom are characterised by optimistic expectations as to the future yield of capital-goods sufficiently strong to offset their growing abundance and their rising costs of production and, probably, a rise in the rate of interest also. It is of the nature of organised investment markets, under the influence of purchasers largely ignorant of what they are buying and of speculators who are more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of the future yield of capital-assets, that, when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and even catastrophic force. Moreover, the dismay and uncertainty as to the future which accompanies a collapse in the marginal efficiency of capital naturally precipitates a sharp increase in liquidity-preference — and hence a rise in the rate of interest. Thus the fact that a collapse in the marginal efficiency of capital tends to be associated with a rise in the rate of interest may seriously aggravate the decline in investment.”
I don’t see “chronic under-consumption” anywhere in there, do you?
Why is it necessary that you see an explicit reference to under-consumption in the later stages of a boom and during a collapse?
I said depressions, which are prolonged periods of economic decline. I didn’t say later stages of booms and collapses.
If you knew Keynes more than you claim to know, then you would have known that the under-consumption doctrine is implicitly contained in Keynes’ marginal efficiency of capital doctrine. So when he says in that quote
“The later stages of the boom are characterised by optimistic expectations as to the future yield of capital-goods sufficiently strong to offset their growing abundance and their rising costs of production…”
What he has in mind is that consumption spending is not as great as it has to be to make all the investments in the economy profitable.
Here, Keynes is just committing the same “general overproduction causes depressions” myth, founded upon an alleged inability of capital to be profitable, which is founded upon a dearth of consumption spending.
It is swings in investors animal spirits that create depressions, not “chronic underconsumption.”
COLLAPSES are in his view due to “animal spirits.” But I said depressions. His discussion on depressions are explained using chronic under-consumption, but not in those exact words. My quote from Keynes above about falling wage rates allegedly NOT being able to cure unemployment and hence depression shows that Keynes believes it is ultimately under-consumption in the face of alleged unprofitable savings that will prevent an economy from recovering.
The question on the table was NOT whether Keynes thought under-consumption was possible and was a problem. Yes, of course he thought that! And of course he thought that stimulating consumption was a good way out of a depression. But what CAUSED the depression was a drop in investment spending. You can’t get a “cycle” out of something that is chronic!
Your original silly claim, that set this going, is that Keynes did not recognize investment spending as part of aggregate demand. (Or was it that he did recognize as such, except he forgot it part of demand once he started talking about the paradox of thrift, he suddenly forgot it was part of aggregate demand?) What you’ve done ever since then, once you realized that claim was undefendable, is to shift the grounds of the argument as fast as you can. No, I wasn’t talking about Keynes, but the general idea! No, not the general idea, but Keynes! No, not Keynesians, but the followers of Keynes are who I mean! Well, of course the models in your textbook include intended investment, but that’s Keynes’ followers, not Keynes! Oh, you’ve found Keynes saying the exact same thing? Well, you”re all wrong, because you’ve all confused hoarding and saving!
Look, try reading an entry level macro textbook, and we can talk again when you have some idea of what you are talking about, OK?
Sorry, that was supposed to say: “Or was it that he did recognize it as such, except once he started talking about the paradox of thrift, he suddenly forgot it was part of aggregate demand?” Got a phone call half way through!
The question on the table was NOT whether Keynes thought under-consumption was possible and was a problem.
But what CAUSED the depression was a drop in investment spending.
No, that’s what causes the initial collapse in his view. DEPRESSIONS, the prolonged periods of economic decline, are caused by under-consumption, because Keynes held that even if prices and wages fell, it won’t enable full room of investment for all savings (and completely contradicting that context in the meantime, as I showed above).
Your original silly claim, that set this going, is that Keynes did not recognize investment spending as part of aggregate demand.
No, my non-silly, historically verified argument was that the paradox of thrift doctrine, and Keynes’ marginal propensity to consume doctrine, implicitly holds that consumption spending is the only spending that generates revenues and earns profits.
Your silly, esoteric, red herring claim was that I allegedly claimed that Keynes the man did not recognize capital goods and investment spending as a source of demand in aggregate demand. This whole nonsensical misunderstanding you have been suffering from the whole time is a result of you knee jerking in attempting to defend Keynes from criticism, and so you have to set up a particular defense against an argument nobody ever made, to make it seem in your mind that Keynesian economics is defended.
You haven’t at all refuted a single argument I made above in the posts that also contain quotes from Keynes. You seem to not understand the meaning of why Keynes held that the marginal propensity to consume had to be held at unity or else unemployment will result. You seem to not understand what the implications are of believing that there is not enough room in the economy to soak up and attract the totality of society’s savings. You keep bouncing back and forth between what Keynes wrote (which is when you completely misquote him, or interpret his quotes as something they are not) and what Keynes’ followers wrote. Your constant confusion was then blamed on me.
(Or was it that he did recognize as such, except he forgot it part of demand once he started talking about the paradox of thrift, he suddenly forgot it was part of aggregate demand?)
Bingo. That’s what Keynes constantly did in his writings. He would argue one thing, suggest one thing, but then in another section he would contradict himself, or contradict and ignore the context of the economic arguments is attempting to criticize (see my other posts here for why he is contradicting the context when he presumes a rise in the prices of capital assets in order to argue against the ability of a fall in prices to cure depressions).
What you’ve done ever since then, once you realized that claim was undefendable, is to shift the grounds of the argument as fast as you can.
No, I have not once shifted any argument I have made. It’s your mind that keeps darting back and forth as your head spins in trying to defend your fallacious claims about what Keynes actually wrote.
No, I wasn’t talking about Keynes, but the general idea! No, not the general idea, but Keynes!
If you were able to keep up with my arguments, then you would have easily known when I was referring to Keynes’ writings, his follower’s writings, abstract ideas such as the paradox of thrift, and your own fallacies that are constantly exposed.
No, not Keynesians, but the followers of Keynes are who I mean!
No, Keynesian followers are who I am trying to get you to understand YOU mean when you make claims as to “Keynesian models.”
Well, of course the models in your textbook include intended investment, but that’s Keynes’ followers, not Keynes!
Precisely.
Oh, you’ve found Keynes saying the exact same thing?
You did not find Keynes saying the exact same thing. You found Keynes saying something that I clearly showed is not related to what you think it is related to.
Well, you”re all wrong, because you’ve all confused hoarding and saving!
You have confused the two, just like Keynes did.
John: Your example is directly to the point. If the govt can confiscate $84 million worth of machinery that is not now and will not ever be used, that’s one thinng. If it can confiscate 84 million green pieces of paper, that’s something entirely different. If it uses the green pieces of paper to buy machinery, someone else somewhere must end up with less machinery (or less of something else that is constructed from the same resources from which machines are made).
In other words, you are exactly right when you say
LIf the government seized those capital goods and allocated them to government offices and road-construction subcontractors and other uses that would produce economic output (wealth), wouldn’t it be true that the heir is consuming no less (unless thinking about his glorious warehouse counts as consumption), the government (or the beneficiaries of its property seizure) are producing more output for consumption, and no one else has to consume less?
John I agree with Steve.
Steve if you’re still reading, maybe you should dig up that old post where you talked about rich people “withdrawing” goods from society when they spend their money? I.e. you made the point that the conventional wisdom on “hoarding” has it backwards: If there were an idiot who worked his butt off his whole life just to pile up cash, and then he never spent it in retirement (or gave it to his heirs to spend), that would be a boon to everybody else. He would be making us all relatively poorer the moment he began spending that money.
Okay, now read the two comments (at the original site) by Silas Barta, (“100% true, and 100% tunnel-visioned.”), and tell us if you feel the need to declare “Barta 1, Landsburg DQ (cheated again)”. I do.
Thanks! 🙂
1. Kudos to Gene for dragging the blogging community kicking and screaming out of this tendency to be dismissive and condescending towards ideas you don’t happen to agree with.
2. This whole thing over the Landsburg post hasn’t been especially interesting. I don’t think Krugman dismisses the basics of tax incidence – he’s offered no indication that he disagrees with that. And I don’t think Steve Landsburg disputes the idea that raising taxes is about paying for government, regardless of whose consumption or investment gets displaced. I don’t know if this means I think it’s Krugman 0/Landsburg 0 or Krugman 1/Landsburg 1. I’m an optimist, so I’ll go for the latter.
3. I agree strongly with AP Lerner – Krugman is making anything but an MMT point here. He specifically highlighted the constraints on money creation to finance government, and specifically noted his disagreement with MMTers on this point. How you construed this to be the same thing as MMTers is beyond me. What do you think constitutes MMT? The simple idea that having independent control of monetary policy gives states somewhat more leeway – a somewhat softer constraint? If that’s all it takes then most of the economics discipline are MMTers, and I don’t think that’s the case.
4. My biggest issue was with this line from Landsburg: “For the government to consume more goods and services, somebody else must consume fewer.”. That, of course, is nonsense. Zero-sum game economics is bad economics. Zero-sum thinking trips up conservatives and libertarians into presuming we’re always at full employment, and it trips up leftists into thinking that we can’t grow the pie through innovation and the division of labor. That sentence was the only real issue I had with Landsburg’s post. Sometimes it’s the case that government crowds out, sometimes it’s not the case. It’s not the sort of thing people should go around assuming.
I agree with you on 4, it’s just that it’s a more complex and less obvious error to make compared to the other issues Landsburg raised.
To elaborate, spending money needn’t contract anyone’s consumption. For a canonical example:
“Wow, I found this $1 million I had forgotten about. Hey widget-maker, I’d like to but in an order for a million widgets.”
Oh really! Well, I better tool up for large-scale production. … Yes, Mrs. Smith? Oh, have I got a deal for you today … I can offer half price on widgets since I’m tooling up for a big order…
Yes and no. It was probably just a throw-away line on his part, but that error is the root of a deep misunderstandign of what’s going on in the economy right now.
Keynes talked about this with Say’s Law – he noted that none of the classical economists were dense enough to come out and say Say’s Law as he had put it. But the involuntary tendency to think in a zero-sum way like this still creeps in.
This is why Smith and Keynes are really the two greatest economists we’ve got: they both fought against zero-sum thinking.
Stupid question: how had Keynes put Say’s law?
And do you consider my tooling-up-for-widgets a valid counterexample, demonstrating Keynes’s anti-Say point, or is that a different phenomenon?
Keynes summarized it as “supply creates its own demand.”
When he actually goes to define Say’s law, he says: “that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output,” i.e., all levels of output are equilibrium levels.
Yeah Silas sorry I didn’t actually look it up. Gene if Keynes didn’t literally summarize it as “supply creates its own demand” then please correct me.
For sure though Silas, that’s how 99% of modern economists THINK of Say’s Law, if they know what it is at all. They think Say meant that it was impossible for there to be general overproduction, because ultimately the baker “demands” meat by supplying bread, etc. So if the baker doubles his output of bread, well then he simultaneously doubles how much he can be demanded from others in trade.
So once you introduce the realities of monetary exchange you realize Say was looking at a special case when there isn’t an excess demand for money. If there’s an excess demand for money, oops then there can be an excess supply of everything else and that’s what we recognize as a modern depression.
(To repeat, I am saying 99% of modern economists, to the extent that they know anything of “Say’s Law” at all, would probably give some version of the above, and would think this is what Keynes demonstrated about the deficiency of Say in the GT.)
In any case, you guys inspired me to read up on Say’s Law … I learned how fundamental it is as a point of departure, and what exactly I have to refute to speak in a language Keynesians (and perhaps even quasi-monetarists) can understand. I also corrected my previous misconception that “supply creates its own demand” dates from Say … embarrassing, I know.
DK wrote:
I agree strongly with AP Lerner – Krugman is making anything but an MMT point here. He specifically highlighted the constraints on money creation to finance government, and specifically noted his disagreement with MMTers on this point. How you construed this to be the same thing as MMTers is beyond me.
Oh man. I know Daniel, that’s why I am so exasperated. Krugman uses one line of argument to say why the MMTers are wrong, and then he proceeds to take the opposite position in his disagreement with Landsburg. So you don’t disprove my point, by explaining that Krugman was disagreeing explicitly with the MMTers.
Landsburg was saying (paraphrasing), “Sure, the government could raise $84 million in green pieces of paper by seizing it from this rich guy, but once it started spending that money, prices would go up since this rich guy’s consumption wouldn’t drop. So other people in the system must see their own consumption go down, if the government is going to obtain goodies when it spends that money.”
Then to blow that up, Krugman says (paraphrasing), “This isn’t about real resources, this is about the government coming up with $84 million in green pieces of paper to be able to pay the $84 million bill that is due from the military contractors.”
OK now switch to the MMTer debate. I claim they say, “Uncle Sam can’t possibly go broke. Any bill that he has, he can just create more legal tender money. Duh.”
To which Krugman responds, “Sure, technically the government can pay all of its nominal obligations in newly printed money, but you can’t ignore real resources. That will just push up inflation.”
So IF you stipulate my framing of he said-he said above, do you see why I’m accusing Krugman of his patented flip-my-position-on-an-issue-to-always-ridicule-the-opponent-of-the-day? Maybe you want to disagree with my characterization of the various viewpoints (like AP Lerner did), but if my paraphrasing is correct above, then I think Krugman is obviously engaging in yet more Kontradiction–which is not to be confused with an outright contradiction.
‘My biggest issue was with this line from Landsburg: “For the government to consume more goods and services, somebody else must consume fewer.”’
He clarifies that in his comments: He says, sure, if there is unused capacity, the government might put it to use, but it can do that whether it taxes anyone or not. (It can just print money.)
Isn’t there always some level of unused capacity though? Leaving aside the moral issue of expropriaiting someone’s wealth, wouldn’t it be benefitial to use the taxed money and direct it towards under-utilized resources rather than increased gov borrowing that is monetized by the fed? The former could be directed to areas where there is slack (not pushing up prices-paid by consumers while aiding employment and real wages). Direct monetization(and thereby increased public debt) – although giving the gov. more money to spend/invest in the same areas – would have more adverse side-effects: on inflation expectations, prices of non-discretionary items(food, energy etc) as speculative money flows there, and future public debt obligations that could affect demand and inflation, or the perception of demand and inflation, going foward.
Oh – thanks for pointing that out. I hadn’t read through those.