10
Jun
2011
Yet Another Stunning Empirical Refutation of Keynesianism?
If I had to summarize in five words my critique of Keynesianism, it would be, “Spending doesn’t create real income.” (Then, after the standing ovation, if people wanted an encore, I would say, “Production does.”)
I admit I just glanced at it, but I do believe Daniel Kuehn unwittingly provided empirical confirmation on his blog. (Check my comments.)
Dr. Murphy, can you give one of your typically clear explanations of what this means, because I can’t get what’s being said in the blog posts.
Why isn’t spending always equal to expenditure (money spent is money earned), why is the alleged discrepancy between GDP(E) and GDP(I) important, what is GDP(E) that separates it from GDP(I), and how does this refute Keynesianism?
Major Freedom, see my responses to the nutty Irishman below.
I apologize in advance if I am asking too much, but I’m still not getting what’s going on.
Given MF’s propensity for explanatory lucidity, I feel very much in good company in not getting it, either.
‘splain plz?
And, whatever happened to CF?
Spending increased in relation to income (note the correlation of GDP (E) in the graph’s left side). This should mean that unemployment should be much lower, but that it isn’t. At least, that is how I am reading it.
Oh, just to be specific, we are all looking at the period after 2006. Well, at least that is my interpretation. I don’t know if that is what Dr. Murphy had in mind, but that is what I think he has in mind. He was a little vague, but I am pretty sure this is the “sticking” point of the disparity.
Come on Bob, forget about Keynesianism that has already been eviscerated before its inception. That’s small potatoes. Focus on providing empirical evidence against, say, gravitational theory. You can do it!
Thanks for thoroughly refuting Bob Murphy’s assertion, MamMoTh. Good thing you aren’t one those too-numerous smart-ass commenters with nothing to offer.
Something about Mercury’s orbit always struck me as suspicious. I’m working on it.
NASA has evidence it’s been distorted by Mercury’s government interventions.
I would start with Newtonian tidal theory before you tackle the Mercury orbit problem, the math is a little easier because you don’t have to calculate for the observer effect. Just sayin’…
MamMoTh, how many $100 bills could we stack from here to Mercury? And more important: How could the Treasury possibly afford such an experiment?
Don’t they have computers with internet over there to mark up and down numbers? If not we could send them Al Gore to re-invent it and we are done.
77 million km / 157 mm = 490 445 859 873 banknotes
Piece of cake
We’ve officially gone retrograde…
When, where, how? I think that is more of a case of the “Friday funnies” than anything else. Just a little geek humor.
If the MMTers can abolish the law of scarcity, they should be able to abolish the law of gravity too.
I think Austrians should help us with that one, we can work together to attain ultimate freedom!
“Spending doesn’t create real income.”
OK, Austrians sometimes take this as an a priori truth, but it certainly is not. Let’s say tomorrow, half the people in the country join a monastery and take a vow of poverty. First expenditures would crash, then income would. So in that case, a drop in expenditures would indeed create lower real income.
So then the matter is empirical: in the real economy, what leads what? Stating these things as if they are obviously true is only going to please those who want to believe them already, but not convince anyone else.
So in that case, a drop in expenditures would indeed create lower real income.
How do you figure? They stopped producing at their previous jobs, which is why real income dropped.
In order to separate the two possible causes, we need an experiment where only one cause changes. So instead of them all joining a monastery, instead, they keep their original jobs, but decide to hoard all their income. In that setting, prices could fall to move the accumulating inventory, wages could fall, etc. etc., and we could end up in a new equilibrium with lower P and W and the original GDP.
Now you can say in the real world that wouldn’t happen, OK, but the basic point here is that your monastery example doesn’t even try to grapple with what I’m saying. Can’t you think back to what the Old Gene would have said, before hitting “Reply”? 🙂
I think to be fair in Gene’s example real income would come down for a little while, while prices adjust to the new total stock of money, even assuming quick reequibliration of 2-3 days.
Even assuming that no money was taken out of the economy so there is no change in its aggregate stock (i.e the monks just gave it their relatives) there is still the fact that a large amount of economic actors were taken out of both the labor and consumer market. As a result, some products would now be more costly to produce than others, and other products in less than demand compared to others, than was the case before the monks took their vow of poverty.
I think both these demand effects – arising from losing a bunch of consuming economic actors – and the supply effects – arising from the loss of a bunch of producing economic actors – would contribute to the need for much entrepreneurial restructuring across the board leading to a period of unease.
Just imagine that those who join the monastery were unemployed, retired, rentiers (and public servants!). That’s probably half the population who were producing nothing, and stop spending their income. Then you get Gene’s point.
No, you don’t get Gene’s point, unless you assume prices don’t move. Per your new scenario, the people actually producing stuff every period are still going to work, it’s just that half the customers dropped out. If prices adjusted in the right way, real income wouldn’t change at all.
In the real world, the switch wouldn’t be perfect, obviously. But to the extent that real income actually did change, it would always be accompanied by a fall in actual production too.
Ok, I assume prices don’t move. I am realistic after all.
Dude, there’s a sale on coconuts right now at the grocery store. Apparently some fool in the Caribbean was trying to net export.
Time to short coconuts you think?
Bob, the division of labor is limited by the extent of the market.
I would think that the first thing that would crash is the labor market, and then productivity. Expenditures would have to be dependent upon what these monastery-joining people did with the money that they held, did they keep it, did they destroy it, did they bequeath it, etc? Though I do not have the literature in front of me at the moment, I think that it would be better to look at historical data of periods when large populations perished, then we could look at the actual data.
Eh, darn it. You beat me to it, Bob.
Incidentally Gene, it’s funny you write these things:
OK, Austrians sometimes take this as an a priori truth, but it certainly is not…So then the matter is empirical: in the real economy, what leads what? Stating these things as if they are obviously true is only going to please those who want to believe them already, but not convince anyone else.
The whole point of this post is: Daniel told us what Keynesian theory predicts, then he pointed to a chart which he (erroneously) thought confirmed the prediction, yet it turned out (unless I made a bonehead mistake) that the chart said the exact OPPOSITE of what Daniel derived from Keynesian theory. So, does that matter? Or is Keynesianism a priori too?
I would worry more if I had a good reason to think that having expenditures in excess of income would move WITH unemployment (I know why it might be a prelude to unemployment – that’s the Austrian theory – but I don’t know why it would move with it).
Am I wrong to scratch my head over that?
It certainly doesn’t say what I had initially thought it said – I’ll definitely concede that.
I think Bob’s five words really need a sixth added at the beginning: “Government”.
The problem with your scenario I would suggest is that it assumes a measure of real income that excludes non-monetary sources of income. If the individuals voluntarily joined the monastery, presumably they did so ion the presumption that they would be better off (not necessarily financially but overall).
No it doesn’t need that qualifier David. If I go out and spend $1000 to buy a used car, that act in and of itself didn’t make society get richer. I am not contributing to total output when I spend the money. I contributed earlier when I produced to earn the money, and the person who made the car certainly contributed, and the used car dealer is contributing services, etc.
If everybody decided to cut their expenditures in half–even people in the private sector–in principle prices could go down 50% and we’d have the same real output. The standard of living wouldn’t change.
If everybody doesn’t to produce half as much stuff, then real income and real output would necessarily fall in half.
I get the point that production has to precede consumption and production is what makes us better off but the act of exchange itself makes both parties better off and helps to direct production and investment. Isn’t the problem with government spending that it ultimately misdirects resources not that its spending per se? If left in the hands of individuals, the resources would also be spent – either as consumption expenditures or investment expenditures – as long as there was monetary equilibrium.
“If the individuals voluntarily joined the monastery, presumably they did so ion the presumption that they would be better off (not necessarily financially but overall).”
And what does that have to do with the level of economic activity?
Well…
1) The choice between different types of work and between work, leisure, religious contemplation, etc. are definitely economic decisions.
2) Not all economic activity or real income is captured by current measures of income. You suggested that joining a monastery would cause a fall in real income. I am not sure one can say that if the decision is voluntary. It’s really the same point that has been made in response to Tyler Cowen’s stagnation argument – some stuff is either much cheaper or free.
Don’t take it personally, Gene is a numbers man. He hops around like a crazed leprechaun when the number rise.
1) Of course.
2) But we’re discussing measured income, aren’t we?
FWIW, it’s Keynsian-based (and quasi-monetarist) policy that hiccups when people do things like this, not Austrian-based policy.
And, it makes a huge difference whether income is being spent in exchange for “stuff people want” vs. income being spend to purchase the “service” of “receiving a government check”.
My six words:
Only voluntary exchange creates real income.
Only voluntary exchange creates real income.
You can’t exchange what hasn’t been produced.
But isn’t it the potential for voluntary exchange that creates the incentive for production of a surplus and for the division of labour and which provides the basis for valuation of production?
I would think that in origin it is the surplus that creates the incentive to exchange. That in times past people produced things, found that they had more than they needed, then found other people in the same situation, and exchange was born.
That may have been the case at the origin but presumably it’s been a rather long time since people produced a surplus without anticipating the opportunity for exchange.
Yes, that is true, but I am looking at it from a particular perspective, and I guess that I have to be more clear to present my case.
Exchange exists in the individual when he subjectively measures his values, labor, time, etc. So, yes it is true that autistic exchange may precede production. However, surplus production in a world of autistic exchange can easily be referred to as savings. Now, when it comes to interpersonal exchange, it is clear that the surplus production (savings) precedes exchange between actors. That the exchange, whether it be sale, lend, or rent, is only initiated if both parties see a profit in such action, value the other side of the exchange more than what they have to give in exchange, etc. They have many options with what to do with their surplus production, not all of which involves exchange (e.g. leisure), but it still remains that their production preceded interpersonal exchange.
At least, that is the way I interpret it.
No question that you are right that production precedes interpersonal exchange. However, what I am suggesting is that in most cases, in a modern economy with division of labour, the expectation of voluntary exchange precedes and directs production.
I hope everyone can agree that a producer will refrain from producing X (beyond his own consumption needs) if he has no expectation of exchanging X for something he values more. Thus, the expectation of exchange is indeed a prerequisite for production.
Well, I would hope that everybody produces something. But, I was merely making a point with regard to the origins of production, and that exchange necessarily follows production. However, in a more complex economy, where there is an already great and existent capital structure, then one can engage in production merely for the exchange of the product of such, just so long as the scarcity of resources allows (i.e. there is no artificial increase of the goods in question).
However, when one is talking of the difference or importance of production, savings, exchange, and the like, one cannot put the cart before the horse. Exchange between actors, at its origin, can only exist due to production, or more specifically, savings and/or surplus production. Without savings/production in the sense that I have described, then interpersonal exchange is impossible.
We are today looking at a capital structure and economy that has been built up over many generations, and it is sustained by servicing of the dynamic that brought it about. If it were to devolve to nothing, the truths that have made it possible are no different than the truths that make it sustainable today, that certain orders of precedence must be in place in order to sustain such a system; I won’t get into the wasting of capital seen in recent accounts.
If all of the sudden every current economic good vanished from existence, though we were completely aware of the prior state of affairs (say, June 2011), in order to begin the process of reaching that “2011” stage, there are certain steps that must be attained first. We could not merely make “2011” conditions present themselves based upon our prior knowledge of the state of affairs of 2011. We would have to proceed in a fashion that recognized the scarcity of resources, and the valuations thereof, and began to build from the foundation of individual valuations and autistic exchange/production, to interpersonal exchanges and production, etc.
You could not build our present foundation of the capital structure and the goods thereof based merely on the knowledge that such had existed prior; to attempt to do so would end in disaster. There must be particular stages of development before subsequent stages are even viable.
Just because you know every single component that is required to make a modern computer work does not mean, absent the current structure of production, that you could make it happen. It just means that you understand the concepts of how such a thing would work, but you are limited by scarcity, as well as the current formation of society, the individual valuations in a world of scarcity, the specialized knowledge of the division of labor, etc.
The modern economy is not only dependent upon the cooperation of peoples, it is dependent upon the most valued use of resources at its command. It does not matter how much you know something, it matters how much those in the market wish to value your knowledge, or the product thereof.
To add to my earlier reply, there was lots of production in the USSR, it was just that they produced the wrong stuff. They produced the wrong stuff because they didn’t have voluntary exchange. In fact, they were probably using resources to destroy value rather than create it.
So if someone forces me to work his farm, the food produced is not real? When later he gives me some of it, it won’t fill me up?
Production and income are not the same thing.
GDP is a measure of value-added. Without voluntary exchange, one has no reliable market valuation and therefore no way of knowing whether there will be value-added rather than value destroyed.
Right, David, you have no reliable market valuation. That does not mean the production didn’t have value.
By what force does this person use to make you work on his farm? And, by what measure do you produce? Does your “fill” depend upon production? I say that you just use force to counter force, then you aren’t working on his farm.
Just saw all this – and Bob’s great comments on my blog.
I would say this – it certainly doesn’t “refute” Keynesianism, and I feel just fine saying that because I never said it “proves” Keynesianism. Bob definitely reads the graph right.
So what is going on here? I’m not entirely sure, but Gene makes a good suggestion on my blog. I’m a little curious what the logic is for how expenditures in excess of income would cause unemployment otherwise. After all – no Austrian, RBC, or other non-Keynesian theory that I’m aware of suggests anything like that. Usually the expenditure in excess of income is said to be the source of the bubble – not what you see during a period of unemployment.
I think we’re probably seeing a symptom of the downturn here. Modigliani’s life cycle income hypothesis at work. People consume a constant fraction of their lifetime income. So of course when income is low that means consuming out of savings or debt.
Which leaves the question of “why is income low” open for everyone to continue to fight over 🙂
“Usually the expenditure in excess of income is said to be the source of the bubble – not what you see during a period of unemployment.”
I agree, but I don’t think that a bubble must necessarily mean that unemployment must be low.
Remember, the term “bubble” is typically in reference to particular assets, and we have seen certain asset’s demand rising precipitously (esp. equities and treasuries). I think that we are beginning to enter the pop of this bubble just now (treasuries still have a little more juice in them, not much). Sure, that is my opinion, and you can take it for what it is worth.
“Boom” is probably a better word than “bubble”, you’re right.
Right – not necessarily. But it’s awfully weird to see that movement of unemployment with bubbles. Low unemployment doesn’t ALWAYS have to accompany bubbles – but every time in a series since 1985? That’s weird.
Well, we aren’t exactly in formerly-charted territory anymore, and I imagine that a lot of new economic theory will be produced in the next decade to attempt to explain the many things that are going on presently. I think that we are currently living through a truly historic time in economic history, where unprecedented actions have been taken, and there are many political shifts occurring, I don’t see any reason to assume that because something hasn’t happened that that means it won’t happen. To quote Frank Zappa, “Without deviation from the norm, progress is not possible.” Of course, I am thinking of this quote in terms of knowledge and theory.
Maybe we can use the following thought experiment
Suppose tomorrow everyone started to spend every dollar they earned as income on their own consumption.
What would happen?
Employment would fall to zero, because if everyone is spending money on their own consumption, then nobody is spending money on labor.
OK – but who cares?
GDP(E) is spending on everything – not consumption. Investment is an expenditure. Purchasing labor is an expenditure.
Anyone who knows my perspective on Keynesianism knows I’m strongly opposed to this understanding of Keynesianism as consumptionism (which you hear from two groups of people: people who are naive and genuinely don’t know any better, and people who don’t like Keynesianism and want to dumb it down).
Why don’t you explain your perspective on Keynsianism for us with special emphasis on the alleged crisis that requires a weakening of traditional notions of private property and contractual obligations as protections against arbitrary governmental takings of private property and wealth. Then we won’t make so many naive mistakes.
“a weakening of traditional notions of private property”
The traditional notion of private property is that it is a socially created arrangement that should be honored so long as it promotes the common good — that’s the traditional notion you’re talking about, right, Bob?
I’m joking, of course: what Bob means by “the traditional notion of private property” is “a radical new notion of private property that has only emerged over the last several hundred years.”
I’m calling BS on that one, Gene. The “socially created” part doesn’t sound right to me at all.
My point was that it is not spending qua spending, or expenditures qua expenditures, that generates employment. You said:
“I’m a little curious what the logic is for how expenditures in excess of income would cause unemployment otherwise”
I just gave an example of how expenditures would be present, but not expenditures for labor specifically, that’s all.
Yes, GDP(E) is expenditures “on everything”, but if there are no expenditures for labor, but expenditures for other things, then GDP(E) would be positive, and yet employment would be zero.
Understood, but this isn’t really about your particular understanding, correct or otherwise. When Keynes wrote of the paradox of thrift, i.e. savings being too high, and the marginal propensity to consume being too low, such that money “leaks out of the economy,” as causes for unemployment, one cannot help but interpret this as an argument that it is consumption spending and only consumption spending that generates employment.
Of course Keynes contradicted himself on many occasions, so one could also point to him making statements that investment demand is also a part of aggregate demand.
savings include profits
Only if they’re reinvested.
Daniel, Major Freedom, et al.:
I don’t want to make a bigger deal out of this than it warrants, but since it seems all of you are for once in agreement–namely, “I have no clue what Bob is talking about!”–I will try to clarify one last time.
Here is something Daniel wrote above:
I would worry more if I had a good reason to think that having expenditures in excess of income would move WITH unemployment (I know why it might be a prelude to unemployment – that’s the Austrian theory – but I don’t know why it would move with it).
Am I wrong to scratch my head over that?
Daniel, if you don’t see why it would “move WITH unemployment,” then I have to ask why you initially thought it was a “fantastic graphic”? Clearly, you thought it was fantastic because the two series moved in lockstep. When (you believed) expenditures were way way above income, then unemployment was very low. As (what you thought were) expenditures started dropping relative to income, unemployment rose. And in the periods of the highest unemployment, that’s precisely when (what you thought was) the difference between income and expenditures was the highest. So that’s why it was a “fantastic graphic.”
So, if it was a fantastic graphic when you thought it was consistent with the Keynesian theory, why are you scratching your head now, at my suggestion that the fact that it is the opposite of what you said the Keynesian theory implies, is therefore a problem for Keynesianism?
* * *
If you’re asking me to explain the graph, after 30 seconds of thought I say: It’s not that one of these variables drives the other, but rather they are both driven by changes in real output (i.e. “production” as I said in the original post). When the boom collapses under its own weight because of capital misallocation, then unemployment goes up and income drops. Expenditures start to drop too, but after a lag because of the life-cycle effect (and I also think because of government spending distorting the statistics, but I don’t know enough about the data collection to say if that’s actually a big thing). That’s why the Keynesian focus on boosting expenditures to fix real output is utterly absurd (if I’m right).
Shoot, I was looking at the graph as if boosting of government expenditures was the prime part of it, that I was seeing the boosting of expenditures given a steady (or more probably, decreasing) income; well, at least that is the way that I explained it to Mr. Hull at the top of the page.
If I had my druthers, I would say that it is more likely a combination of both; but, I also don’t have the data setting before me, so that is merely my own speculation.
re: “So, if it was a fantastic graphic when you thought it was consistent with the Keynesian theory, why are you scratching your head now, at my suggestion that the fact that it is the opposite of what you said the Keynesian theory implies, is therefore a problem for Keynesianism? ”
Because it’s a problem for every theory I’m aware of – which is why I ask what theory does predict excess expenditures driving unemployment.
What seems to be the most reasonable conclusion is – it’s not driving unemployment, unemployment is driving this. You seem to have come to the same conclusion as I did with the life cycle effect.
We had a correlation that I confused. I thought it said A is correlated with X. We have a theory that says A causes X. So that seemed interesting. It turns out it says that B is correlated with X. We don’t have a theory of B causing X to match up to the observed correlation, so it seems time to start thinking about X causing B.
If you are saying what I think that you are saying, primarily that X is unemployment, that A is income, and that B is expenditure, then obviously X is not causing B.
Ok, maybe I am confused, But, then again you are coming out with these As, Bs and Xs, and what not, can you explain the ABX correlations that you’re speaking of? I know that your question was directed at Bob Murphy, but it would help if you cut out the BS and put it into English. Inquiring minds want to know.
Well, to be more specific, my inquiring mind wants to know.
🙂
Sorry –
Ya, so I thought at first it said that GDP(I)-GDP(E) was correlated with unemployment. That was interesting because there’s a good theoretical reason to expect to see that. We have a theoretical causal mechanism that gives some interpretive legs to the observed correlation.
Turns out GDP(E)-GDP(I) is correlated with unemployment. The thing is, I’m aware of no real theory that suggests this. If I was aware it would be easier to say “this suggests a real problem for Keynesianism”. But since that doesn’t make sense by anyone’s theory, I’m more inclined to say (as Bob seems to be inclined to say) “maybe we should start looking at whether there’s any reason to believe unemployment causes GDP(E)-GDP(I)”
Franco Modigiliani provides a pretty widely accepted reason why we would expect that.
It’s also worth taking a look at Nick Rowe’s point on my blog – he thinks it’s all pretty uninterpretable. I’m not quite sure I’m convinced of that – clearly GDP(I) and GDP(E) are very closely related, but I could see how one would slightly lead the other in the actual collection of the data. And that lead could help distinguish the source of GDP fluctuations (ie – a supply or demand side phenomenon).
I promise this is the last time I’ll repeat the point, but I want to make sure everyone gets it.
DK wrote:
Ya, so I thought at first it said that GDP(I)-GDP(E) was correlated with unemployment. That was interesting because there’s a good theoretical reason to expect to see that. We have a theoretical causal mechanism that gives some interpretive legs to the observed correlation.
Turns out GDP(E)-GDP(I) is correlated with unemployment. The thing is, I’m aware of no real theory that suggests this. If I was aware it would be easier to say “this suggests a real problem for Keynesianism”.
OK, so again: You said that Keynesian theory predicts the data would say one thing. You didn’t say this, but I assume you would agree, that Austrian theory is agnostic on that point; it does not predict the data would say that same thing, at least in the sense that if you had asked me beforehand, that I would have guessed the chart would look a certain way. So, if the data conformed to the Keynesian prediction, that would be a feather in John Maynard’s cap. (You didn’t say that explicitly, I grant you. But the big knock against the Austrians is that they aren’t “scientific.” If you’re saying that the ability to predict movements in economic data shouldn’t matter for the validity of an economic theory, OK, I am just surprised if you are willing to say that.)
Ah, alas, it turns out the data say the opposite of what you told us Keynesian theory would predict. And now you are saying, this has no bearing on the validity of Keynesian theory vis-a-vis Austrian theory, because the latter is agnostic on this point?
How can this be? If the data turned out one way, it would help Keynesian theory, but if it turns out to be the opposite, it’s a tie?
I understand your point, but I think it’s based on an odd understanding of the situation. I can’t do it justice in the comments, but I wrote this:
http://factsandotherstubbornthings.blogspot.com/2011/06/bob-murphy-sees-economic-science-very.html
In a sense what you say is right about me, but I think you’re misunderstanding the fact that that is how science is done. We collect consistencies and corroborations. We try to explain inconsistencies. Inconsistencies aren’t really a mark against a theory unless a rival theory can explain a lot of observations that are inconsistent with your initial theory. That’s how science progresses.
You have a very deductionist view of this – which makes sense, of course. Lots of Austrians are deductionist. Inconsistency is treated very differently in science than it is in logic.
“Why don’t you explain your perspective on Keynsianism for us with special emphasis on the alleged crisis that requires a weakening of traditional notions of private property and contractual obligations as protections against arbitrary governmental takings of private property and wealth. Then we won’t make so many naive mistakes”
Bob Roddis – why don’t you actually read Daniel’s blog to understand his position, instead of sarcastically asking him to explain something. The absurd reduction of Keynesianism to one of pure consumptionism has been something pushed not only by critics but even advocates – like Robert Skidelsky, who has a video on youtube called “its all about the spending”
In fact, the big thing I got from Keynes General Theory is that there are LIMITS to the ability of consumption (specifically, chapter 8, book 3) to negate downturns or to act as a prime force in a recovery (Keynes assumes that MPC tends not to not wildely fluctuate and thus, simply giving more unemployment insurance is not a means of recovery.
Danny Jacobs wrote:
Bob Roddis – why don’t you actually read Daniel’s blog to understand his position, instead of sarcastically asking him to explain something. The absurd reduction of Keynesianism to one of pure consumptionism has been something pushed not only by critics but even advocates – like Robert Skidelsky, who has a video on youtube called “its all about the spending”
That’s a little bit of a weird U-turn that your chastisement of Bob Roddis took there, Danny, don’t you think? You are getting mad at him for not reading Keynesians carefully, and then admit in the next breath that some Keynesians are pushing the very thing that Daniel said nobody but a critic would accuse Keynesians of believing.
[S]ome Keynesians are pushing the very thing that Daniel said nobody but a critic would accuse Keynesians of believing.
Like Baron Robert Skidelsky as mentioned. Who just happens to be the famous biographer of Lord Keynes.
Skidelsky’s second volume of his three-volume biography of John Maynard Keynes, The Economist as Saviour, 1920-1937, won the Wolfson History Prize in 1992.[3] The third volume, Fighting for Britain, 1937-1946, won the Duff Cooper Prize in 2000, the Samuel Johnson Prize for non-fiction writing in 2000, the James Tait Black Memorial Prize for biography in 2001, the Arthur Ross Book Award for international relations in 2002, and the Lionel Gelber Prize for International Relations.[3]
It’s incomprehensible that anyone could fail to understand the obvious truth, simplicity and clarity that is Keynesianism. I mean really.
re: “the very thing that Daniel said nobody but a critic would accuse Keynesians of believing.”
Nobody but a critic?
No, I didn’t say that Bob. I specifically named two groups of people: those who don’t know any better and critics.
Robert Skidelsky is a historian and he falls into the Post Keynesian camp – two positions that have traditionally given far too much weight to the consumptionism perspective.
I better microwave me some popcorn for this one. Oh, wait, you’re back-peddleing, forget it.
When Bob says I said something and I point out to him I never said that, I’m not sure that counts as “backpeddling”.
I don’t want to expend the effort looking for a needle in a haystack. Why don’t you explain it or provide a link to the explanation? I’ve never seen DK admit that he is claiming that there is a crisis that demands statist intervention and he seems to deny he’s even a statist. So, where’s the fire?
I’ve never claimed that Keynesianism was based upon “consumptionism”. I’ve always said it was a hoax to artificially lower the wages and prices of people whom the elite deems too dumb to set their own prices and wages. And it allows the surreptitious theft of purchasing power by the elite to fund wars and to generally swipe the wealth of average people without them realizing what is happening.
Mr. Hayek: He called it the general theory. In fact, he knew precisely that it was not a general theory, but it was an argument to persuade government in the 1930s to do particular things.
Mr. Buckley: It was an ad hoc….
Mr. Hayek: It was entirely ad hoc. He was one of the most fascinating men I knew, but the personal magnetism of this man not only persuaded the younger generation of economists. And If I had been a much younger man and a student, I probably would have been swept off my feet as were most of the people.
Mr. Buckley: Like Nixon.
Mr. Hayek: No, no. (laughter).
********
Mr. Hayek: You’re perfectly right, but I’d like to add one thing. You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you’re doing good to the people in general. The politicians didn’t want to hear anything more than that – to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.
http://hayekcenter.org/?p=2701
I personally recorded that in 1977 and I’ve never seen or heard anyone even attempt a refutation. Ever.
Go for it. I’m all ears.
I don’t mean to get in between things here, but as far as I have been able to gather, Mr. Roddis does read Mr. Kuehn’s blog, and he does comment on the same. In fact, I also read Mr. Kuehn’s blog, though I do not comment.
However, all of that aside, I must ask you: how much of Keynes’ ‘General Theory’ do most supposed “Keynesians” subscribe to? While we can get into a debate of what Keynes actually meant in this or that chapter, it has little relevance to the modern economists that are self-described “Keynesians” (esp. those that are responsible for policy).
I have no animosity against Mr. Kuehn, and I hope that he feels the same; but, I would not necessarily describe him as a proto-Keynesian. Nor, would I describe myself as a proto-Austrian (I am more of a Rothbardian than a Mengerian or Misesian). However, I find that the largest distinction between theory rests in the theory of State intervention vs that of market valuation, which is the real separation between Keynesianism and Austrianism (Proto or otherwise).
Personally, I think that the largest divide between the two schools rests with Say’s law. That Keynesians think that money is neutral, that it has no direct consequence to prices, and that increasing the supply of money is beneficial. Austrians tend to see this as a discoordination in the price structure, that it only serves to disrupt the allocations of goods, and that it does not allow for the market clearing of prices and goods.
If you would care to take my 2¢, then I would say that the largest perspective that Mr. Roddis is attempting to get out of Mr. Kuehn is that dealing with monetary considerations. Because, no matter if you are a neo or prote Keynesian (or, Austrian), it all comes back to the perspective of the school’s thought on money. Of course, there are other issues, but I feel that this is the primary issue.
eh, I shouldn’t have said that about Say’s law, we all know the sticky wage theory. Oh well, I was thinking one thing, and typed another. It happens.
Dr. Murphy your quest is futile, no matter how many pieces of contradictory evidence you stack up. Nothing will refute Keynesianism. Even when a chart means the opposite of what Keyensians took it to mean and waved around when they thought it meant the opposite of what it means.
Because Keynesian theory is non-falsifiable.
“That’s a little bit of a weird U-turn that your chastisement of Bob Roddis took there, Danny, don’t you think? You are getting mad at him for not reading Keynesians carefully, and then admit in the next breath that some Keynesians are pushing the very thing that Daniel said nobody but a critic would accuse Keynesians of believing.”
I’m confused by what your point is and honestly, it seems like almost being tu quoque; could you elaborate – does this negate my comment about, because I have critiqued people (more so pundits on the left), who claim to advocate ideas of Keynes – but actually, misrepresent his position (i.e MSNBC arguing UI is necessary on the basis of getting working class families to consume more)? I also believe I was criticizing him for not reading moreso Daniel – who I understand to have a more complicated position than simply “Keynesian” (although I know he has referred to himself as such and honestly, I am not the person to label him). Also, Kuehn did mention naïve, of which – maybe he will disagree with me – I consider several left pundits, IMHO. I think I was trying to point out that I agree with Kuehn – idk.
Um, Keynes does not consider money neutral at all (that would be the classical dichotomy) or that increasing money supply is always beneficial (certainly not under full employment – im just going by the word, not if full employment is possible or not). But, Joe I do agree with your point that you make about questioning how much of the General Theory do people actually ascribe to – good point. I will also agree that Say’s law plays a prominent role However, I do think it has relevance to some extent because if people explain a policy as being, let’s say, based on an argument of Keynes but they misrepresent the position and if the policy fails, then often the entire philosophy is thrown out/considered discredited ,etc based on a faulty interpretation. I am sure several Austrians can point to something like how liberals use the Interwar (between WW1 and WW2) gold exchange as representative of the gold standard – despite Rothbard very concisely pointing out how Britain used coercive power to insulate itself from the market during this period. But I am sure someone one this blog will find a way to show how even a misinterpretation is still a representation of Keynes ideology or something blah blah blah
For Bob Roddis:
Congrats on recording this personally – What is there to refute? Since Hayek claimed Keynes thought of the “General Theory” ad hoc, then it must be so? I am getting tired of these arguments basing Keynes success on him having a “magnetic personality” – what does this imply, that Hayek went unnoticed because he was boring (of which, I would disagree with you)? It is ridiculous. As for the spending, tons of candidates run all the time (and are running now) on a balanced budget vote.
FDR also ran on a balanced budget, which is really funny.
Ah yes, one must love campaign promises… I prefer to pay much more attention to actual actions. But, hey… That’s just me…
🙂
The gist of the interview was not Keynes’ personal magnetism but that the purpose of the general theory was to use inflation to lower British wages without the victims knowing what hit them. That’s still the major Keynesian theme of Krugman and/or Dean Baker and/or Yglesias whether they are talking about wages, exports or debt. Like all defenders of Keynes, you sidestepped the issue which was the sidestepping by Keynesians of basic issues for three decades since the Hayek recording which specifically arose here due to DK’s sidestepping of basic Keynesian issues. What else is new?
Ok, I had to go to the link to hear the part about the wages – you put up a part on the transcript dealing with the same old BS about his personality and politicians like to hear things, etc. Same ad hominems that you always do, on every blog. WHAT ELSE IS NEW. I actually responded to what you wrote.
Secondly, the idea that Keynes thinks any sort of downturn happens purely because of sticky wages IS WRONG. Flexible wages can be just as bad, because they can give the expectations that wages will continue to fall, leading to a deflationary spiral (see Lativa right now).
all of this is just ad hominem – WHAT ELSE IS NEW
And I don’t understand what needs to be refuted still – because Hayek says the General Theory was ad hoc, then it must be so?? YOU STILL SIDESTEP THIS. To be honest, it unfortunately appears that Hayek is making the same mistake that others have about Keynes blaming “sticky” wages for depressions, when he flatly says “the contention that the unemployment which characterises a depression is due to a refusal by labour to accept a reduction of money-wages is not clearly supported by the facts” in the first chapter. That seems to be what your argument is coming down – either that or this conspiracy theory that wealth is being confiscated for wars – despite such policies also being used in the 20th century in relatively peaceful countries like Denmark, Sweden, etc.
Whether Keynes intended his theory specifically and solely to “cure” high British wages in the 1930s is somewhat irrelevant since the theory makes no sense and its implementation is the cause of the very unemployment it claims it can cure.
Because Keynesians are statists and Keynesianism is a statist policy to be inflicted upon its victims at the point of a gun, they have the burden of proof to show that a) unemployment is a problem caused by laissez faire; and b) that said unemployment can be cured by statist Keynesian policies.
Both a and b are demonstrably false.
Is it ironic that you have still sidestepped me? After explicitly posting this elaborate self-recorded quote of Hayek claiming Keynes thought up the General theory as an ad hoc explanation for a policy of inflating away worker’s wages, I both a) demonstrated that is inconsistent with Keyne’s position b ) queried why Hayek claiming Keyne’s believed this, made it even believably true (question is still up).
Realizing you didn’t know what you were talking about, you SIDESTEPPED the issue by claiming such a thing was irrelevant and then just jumped to another postulate that it “just doesn’t make sense” and blah blah recovery. WAY TO GO BOB
The “Keynesians are statists” is just your weird way of framing the issue. You always do this on every blog. I thought Kuehn actually handled this issue a few months back.
“since the theory makes no sense”
The sure mark of someone who hasn’t even tried to get Keynes at the intro to macro level. The theory makes perfect sense. The issue between Keynes and Hayek is entirely empirical.
based on the 20th century, maybe candidates should run on a “huge budget deficit” platform. assuming they lie at the same rate, then someone should come along who actually balances a budget
I think is probably my last post on this topic, unless someone posts something showing genuine confusion that I feel only I can clear up. (And even then, I might still leave you twisting in the wind. We’ll see.)
Daniel, the Austrians do not agree that changes in expenditure are the causal force in the labor market. When there’s high unemployment, for example, we do not think the way to help is for the government to step up to the plate and spend more. Surely you agree with me on this.
OK, as your post illustrated, the “big picture” of Keynesianism is that it does think expenditures are a big deal. (You have to worry about other stuff too, I grant you, but changes in expenditures are key.)
So, how could we possibly referee the dispute, besides making appeals to property rights etc. that you and Gene Callahan think is a bogus move? Wouldn’t one way of refereeing, be to look at the data and see if it conforms to predictions made by the Keynesian model, that are not made by the Austrian approach?
More generally, what kind of event would occur, to make you doubt the Keynesian focus on expenditures as the explanation for big swings in employment? How could there be any event better than this one, where the data literally say the exact opposite of what you yourself thought Keynesian theory would predict?
You can say now, “Oh, it turns out it’s life-cycle hypothesis.” But then, aren’t you thus admitting that a Friedmanite rational expectations approach, has more explanatory power than the Keynesian approach?
Last point: You seem to be saying, “Oh, the Keynesian theory is still right, it’s just that unemployment is driving expenditures.” But no, that’s the opposite of what Keynesian theory says. If changes in unemployment are what drive expenditures during the business cycle, then Krugman et al. are wrong for saying we need the gov’t to boost spending to maintain aggregate demand.
OK I’m done.
1. I agree on the Austrians. The point is, though, the Austrians can’t explain what the graph ACTUALLY said any better than Keynesians can.
2. re: “Wouldn’t one way of refereeing, be to look at the data and see if it conforms to predictions made by the Keynesian model, that are not made by the Austrian approach?”
Kuhn says this is not how science progresses. I agree with him. How do we arbitrate anything if neither the Keynesians nor the Austrians expect what is ACTUALLY observed???
3. re: “More generally, what kind of event would occur, to make you doubt the Keynesian focus on expenditures as the explanation for big swings in employment?”
I’m not sure Keynesianism is falsifiable. I’m not sure any interesting theory of a complex system is falsifiable. But I think you’re overstating how I’ve reacted to this. This did raise doubts in my mind about how I had conceived Keynesianism. It did reinforce for me that lots of things are going on. It’s like stagflation – that didn’t “disprove” Keynesianism so much as it raised doubts about theories as they existed – and theories improved. The Keynesian paradigm still stands up well. When we run into an inconsistency that the Keynesian paradigm can’t explain, but another can – then we’re going to move on from Keynesianism.
3. re: “You can say now, “Oh, it turns out it’s life-cycle hypothesis.” But then, aren’t you thus admitting that a Friedmanite rational expectations approach, has more explanatory power than the Keynesian approach? “
I don’t understand why these are strict alternatives. Plus I think of this as a Modigliani thing and he’s certainly Keynesian. But sure – Friedman is good too. I’m happy to admit that.
4. re: “But no, that’s the opposite of what Keynesian theory says. If changes in unemployment are what drive expenditures during the business cycle, then Krugman et al. are wrong for saying we need the gov’t to boost spending to maintain aggregate demand.”
OK – this is just wrong. You don’t even have to invoke life cycle theory to realize this. Just look at a Keynesian cross and do a little algebra. These variables are jointly determined. Now, you do need to invoke life cycle consumption to explain why expenditures can exceed incomes (at the micro level).
I have more thoughts here: http://factsandotherstubbornthings.blogspot.com/2011/06/bob-murphy-sees-economic-science-very.html
1. I agree on the Austrians. The point is, though, the Austrians can’t explain what the graph ACTUALLY said any better than Keynesians can.
Aaaaaghhhh! (That’s the sound of me gagging in frustration.) I think we can, Daniel, because the graph doesn’t contradict a central “prediction” of our theory.
It would be like tomorrow, if physicists discovered turtles running at 2.3c. Newton comes along and says, “Huh I wouldn’t have guessed yesterday that we’d be seeing that today, but I can explain it in retrospect.”
In contrast, Einstein would have to say, “What the hell?!”
Not the perfect analogy, I grant you, but my time is about to expire on this topic…
Mine time is about to expire too, but I’m amazed that (1.) this even turned into a Keynesians vs. Austrians thing again – Austrians had nothing to do with it, (2.) you’re patting Austrians on the back for not being able to explain a phenomenon that Keynesians can’t explain either, and (3.) you keep pushing this even though I’ve said a million times by now that I was wrong and that I needed to re-evaluate my position – and the way I re-evaluated my position turns out to be the same conclusion YOU eventually came around to!!!! Even when I do a mea culpa and a complete about face, you still end up being upset about something! I was wrong. I thought about it. I came up with something that I think seems right, and I abandoned the clearly wrong view. So… why are we still talking about this?
Also on that Newton-Einstein example…
If Newton’s solution to the 2.3c conundrum was entirely consistent with general relativity and general relativity was still able to explain many other things better than Newton’s theory, then Einstein has no reason to say “what the hell”. He has reason to say “good idea on the 2.3c thing, Newton – and relativity still seems to work”.
The life cycle hypothesis thing came to mind immediately as soon as you pointed that out – I mentioned it in my response on my blog. Big deal. Modigliani was a Keynesian. Friedman wasn’t a Keynesian, but he would certainly share my concerns about money demand. So I’m not sure what you’re so excited about. This isn’t exactly Newton turning over Einstein here. I’m not sure why we should take this as a “refutation”. As I said on my blog, refutations are pretty hard to come by. We just all understand the data better thanks to sharpness on your part and ignorance on my part. I’m not sure this has any implications for Keynesian macroeconomics or Austrianism.
Whereas Mises’ assertion of a priori knowledge relates primarily to basic issues regarding the nature of human existence (ignorant acting man, subjective value), the Keynesians make the bold a priori assertion that the elites are smarter than the rabble and are entitled to rule them:
To develop a way out, Keynes presented a fourth class of society. Unlike the robotic and ignorant consumers, this group is described as full of free will, activism, and knowledge of economic affairs. And unlike the hapless investors, they are not irrational folk, subject to mood swings and animal spirits; on the contrary, they are supremely rational as well as knowledgeable, able to plan best for society in the present as well as in the future.
This class, this deus ex machina external to the market, is of course the state apparatus, as headed by its natural ruling elite and guided by the modern, scientific version of Platonic philosopher kings. In short, government leaders, guided firmly and wisely by Keynesian economists and social scientists (naturally headed by the great man himself), would save the day. In the politics and sociology of The General Theory, all the threads of Keynes’s life and thought are neatly tied up.
And so the state, led by its Keynesian mentors, is to run the economy, to control the consumers by adjusting taxes and lowering the rate of interest toward zero, and, in particular, to engage in “a somewhat comprehensive socialisation of investment.” Keynes contended that this would not mean total state Socialism, pointing out that:
“it is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. (Keynes 1936: p. 378)”
Yes, let the state control investment completely, its amount and rate of return in addition to the rate of interest; then Keynes would allow private individuals to retain formal ownership so that, within the overall matrix of state control and dominion, they could still retain “a wide field for the exercise of private initiative and responsibility.” As Hazlitt puts it,:
“Investment is a key decision in the operation of any economic system. And government investment is a form of socialism. Only confusion of thought, or deliberate duplicity, would deny this. For socialism, as any dictionary would tell the Keynesians, means the ownership and control of the means of production by government. Under the system proposed by Keynes, the government would control all investment in the means of production and would own the part it had itself directly invested. It is at best mere muddleheadedness, therefore, to present the Keynesian nostrums as a free enterprise or “individualistic” alternative to socialism. (Hazlitt [1959] 1973: p. 388; cf. Brunner 1987: pp. 30, 38)”
There was a system that had become prominent and fashionable in Europe during the 1920s and 1930s that was precisely marked by this desired Keynesian feature: private OWNERSHIP, subject to comprehensive government CONTROL and planning. This was, of course, fascism.
http://mises.org/daily/3845
Please explain how “the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them”. Also, explain from where this alleged right to control comes?
Bob, your long quote is a bit like quoting Stalin to get an idea of what Trotsky really thought.
But at least reading what Staling thought of Trotsky would be somewhat interesting.
A Picture Is Worth a Thousand Words:
http://blog.independent.org/2011/06/01/a-picture-is-worth-a-thousand-words/
HAYEK:Now notice several things. Keynes was a genius, but a genius who spent only a fraction of his time on economics – one of the busiest men I ever knew. But he knew very little economics except particularly the Cambridge tradition, and he was much more concerned to influence policy at a particular moment than develop a true theory. In fact, the last time I talked to him was after the war. I knew him very well. When I asked him wasn’t he getting alarmed about what his pupils who swallowed all this theory were doing after the war when the danger was clearly inflation, his answer was:
“Oh, don’t mind. My theory was frightfully important in the 1930s. Then, we needed an expansion to correct a situation. Do trust me. If this theory becomes dangerous, I’m going to turn public opinion around like this”.
Six month later, he was dead. And as usual, what happened is that the very doctrine – pupils of this man did apply to completely different situation a theory which was designed to influence policy in a particular situation.
Seems relevant:
http://catallaxyfiles.com/2011/06/09/y-cigx-m/
A nice primer on those newfangled notions of the efficacy of generic spending. This clearly eviscerates those silly traditional notions of thrift and hard work.