Krugman on Keynes
Well this was an obvious thing I had to watch, since I’m currently teaching a class on the two fellows. Anyway, if you want to spend 50 minutes (or even just 30 minutes, really, since that alone will give you a good taste) learning what the big fuss is about Keynesian economics, I think Krugman does a good job in this lecture celebrating the 75th anniversary of the General Theory. Some quick remarks:
(1) Is Krugman usually this jumpy/nervous in public talks? I don’t remember him being like this when I saw him at NYU’s Stern School, back in the early 2000s talking about Japan.
(2) Around the 9:00 mark, Krugman quite explicitly says that the General Theory is about people not spending enough. As obvious as that might seem to some people, I point it out because I’m pretty sure our resident Keynes-defender has complained that this is a strawman erected by Rush Limbaugh.
(3) In the same area, Krugman puts up a slide from the General Theory, going over just the stuff I was asking about last week. Great economists think alike. (BTW Daniel Kuehn went way beyond the call of duty to try to help me out.)
(4) Somewhere in the 10:00 – 25:00 range (sorry can’t be more specific), Krugman quotes from Barro from a WSJ op ed, where Barro said (paraphrasing) “Keynes thought wages could be too high, but monetary policy can address this problem.” Krugman said something like, “This is just completely failing to understand the central Keynesian point.” But how is it? Isn’t that Krugman’s own solution for Japan (and us)? What I mean is, is Krugman here making a complicated argument involving the relative likelihood of pushing a deficit through versus getting the public to believe the Fed will allow future price inflation? Or is he saying something much more basic than that? Because I didn’t see what the problem was with the quote from Barro, whereas I did understand why Krugman would start choking on the (alleged) stupidity of John Cochrane’s quote a few minutes later in the lecture.
(5) Somewhere near the 30:00 mark, Krugman says that the policy debate over China has it all wrong. Rather than having us over a barrel, the Chinese have an unloaded water pistol pointed at our heads. In fact, if the Chinese stopped buying our Treasury debt, Krugman says we should send them a thank you card.
Now this part confused me too. Krugman had just gotten through the demonstration that equilibrium, full-employment interest rates right now are negative. OK fine, and so if the Chinese didn’t buy as much of our debt, that wouldn’t make US interest rates go up, since they would still be stuck at the zero bound. But how would it help us? Is Krugman assuming that if the Chinese don’t buy our Treasury debt, instead they would use the money to start infrastructure projects? I.e., if the Chinese just started buying debt issued from Canada, that wouldn’t do anything to help, right? (I mean this from his point of view, of course.)
On 5, I think he is saying that it would force the gap between exports and imports to close. If it does, They would import more goods from the US, which would increase aggregate demand. In exchange for their goods, China can either get goods in return, sit on dollars, invest in the US, or buy U.S. government debt. If it stops buying government debt, and it isn’t looking to stockpile even more dollars, then it by definition does one of those other things, which in the AS-AD world creates jobs.
“Around the 9:00 mark, Krugman quite explicitly says that the General Theory is about people not spending enough. As obvious as that might seem to some people, I point it out because I’m pretty sure our resident Keynes-defender has complained that this is a strawman erected by Rush Limbaugh.”
Really, Bob? I mean, really? Cause what Daniel keeps saying is that viewing Keynesianism as “consumptionism” is a strawman. Which it certainly is, as I discovered once I had to teach Keynes and actually went and read him. So when Krugman says the General Theory is about people not spending enough, that refutes Daniel’s point… only if you have already accepted the strawman that for Keynes, “spending” means only “consumer spending.” Did you ever even look at Garrison’s Powerpoints, where very clearly it is investment spending that drives the Keynesian model?
Gene, these things would work a lot better if you didn’t constantly accuse me of being an idiot. Yes, I’ve looked at Garrison’s PowerPoints as you very well know.
I might be wrong, but I’m pretty sure Gene that in the past, I have said the problem in Keynesianism is that people aren’t spending enough (exact quote) and Daniel has come back and bashed me. So he was assuming that I meant “consumption spending” when (as you and Daniel and Krugman all know) that doesn’t follow.
You’re like the feminists who were protesting a Feynman talk for his “sexist” example of a cop pulling over a female driver. Feyman pointed out, “You women are just assuming my story involved a male cop, but I never said that.”
So yes, “really Gene, really.”
Also, I very specifically remember Daniel tearing into ignorant Austrian critics of Keynes who had the audacity to say that he thought people could be saving too much. Daniel said, “No Keynes thinks they are investing too little” (if memory serves). Well Krugman said we should thank the Chinese for not saving so much, so you can understand why the hick Austrians might walk away thinking, “Keynesians think too much saving can be bad.”
(BTW Daniel Kuehn, I’m mad at Gene not at you. I don’t mind if you [in my opinion] “correct” Austrians on attacking a strawman that in fact has flesh and bones, what I mind is Gene asking me if I’ve ever watched a Garrison PowerPoint instead of just saying, “I disagree with you here Bob.”)
Speaking of male cops, I didn’t see Gene call you an idiot anywhere.
I see two primary problems with common understandings of Keynes. First the consumption vs. investment spending question. That’s pretty basic and we’ve outlined here exactly what’s wrong with that. Still it’s pretty pervasive. Paul Krugman has made this mistake: http://factsandotherstubbornthings.blogspot.com/2010/12/krugman-on-maddow-consumptionism-and.html
I wouldn’t be surprised at all if I’ve made that mistake. It’s still a mistake.
The second mistake that is even more commonly made is this idea that hydraulic Keynesianism and savings leaks is the primary innovation of Keynes. Why is investment more substantially effected than consumption? Shouldn’t a paradox of thrift/savings leakage model affect investment and consumption pretty comparably?
The unique contribution of Keynes was in pointing out that the interest rate is not determined in the market for loanable funds – it’s determined by liquidity preference.
I don’t know what I’ve said to you in the past – it’s quite possible I was presumptuous in interpreting you. But even when people can get the investment/consumption distinction straight they often still ignore Keynesian interest rate theory which is the real innovation.
Chapter 3 – which you were reviewing the other day – talks about how the mercantilists and the Marxists had already done what we call “hydraulic Keynesianism”. As far as Keynes was concerned, that argument had already been made. What he had to add was an interest rate theory that provided for the possibility of stable underemployment equilibria that would not necessarily be eroded by a real balances effect.
The unique contribution of Keynes was in pointing out that the interest rate is not determined in the market for loanable funds – it’s determined by liquidity preference.
If you call introducing economic fallacies a “contribution” then sure. But Austrians have already blown up the “liquidity preference” theory of interest.
The contribution of the Austrian School was in correctly pointing out that interest is determined by time preference, not liquidity preference.
Keynes contradicted himself. On the one hand, he considered the
rate of interest as determining investment, and also as being
determined by the demand for money to hold “for speculative
purposes” (liquidity preference). However, he also treated liquidity preference not as determining the rate of interest, but as being
determined by the rate of interest.
Keynes, therefore, treated interest caused not by liquidity preference, but by some unnamed and invisible force acting on other parts of the economy, which then come back and cause liquidity preference, which then manifests itself in interest.
Then further confusion was built on top of this, by Keynes fallaciously divorcing demand for money into two arbitrary headings, a “transactions demand”, supposedly determined by income, and “hoarding demand”, supposedly determined by liquidity preference. The reality is that there is only ONE demand for money, which is singular, consistent with the individual’s value scale.
Things get even worse for Keynes. Keynes never considered more than two margins decided at once. He believed that people first decide between consumption and saving (not consuming), THEN they decide between investing and hoarding. This is highly artificial and I can tell you it is not how I decide my money usage patterns. I decide how much to consume, save, and invest, all at the same time. To say that people decide to consume and save, THEN decide between investing and hoarding, as as silly as saying that people decide to hoard, THEN decide between investing and consuming, or saying that people decide how much to invest, THEN they decide between hoarding and consuming.
I decide how much to consume, invest and hoard all at once. The ratio between consumption and investing is my time preference. An increase or decrease in hoarding, as long as it does not affect the ratio of consuming and investing, has no effect whatsoever on the rate of interest.
If I have $100 and I hoard $85, consume $5, and invest $10, or if I hoard $70, consume $10, and invest $20, or if I hoard $55, consume $15, and invest $30, then in all three cases, the interest rate will be the same.
As for the whole debate on whether Keynesianism implies hyper-consumptionism, and its connection to liquidity preference, if one actually reads AND UNDERSTANDS The General Theory, then it is very clear that Keynes did in fact connect a higher liquidity preference, incorrectly, with a fall in consumption spending only. He writes:
“Perhaps it will help to rebut the crude conclusion that a
reduction in money-wages will increase employment “because
it reduces the cost of production”, if we follow up the
course of events on the hypothesis most favourable to this
view, namely that at the outset entrepreneurs expect the
reduction in money-wages to have this effect. It is indeed
not unlikely that the individual entrepreneur, seeing his
own costs reduced, will overlook at the outset the repercussions
on the demand for his product and will act on the
assumption that he will be able to sell at a profit a larger
output than before. If, then, entrepreneurs generally act on
this expectation, will they in fact succeed in increasing their
profits? Only if the community’s marginal propensity to
consume is equal to unity, so that there is no gap between
the increment of income and the increment of consumption
[that is, there is no additional saving]; or if there is an increase
in investment, corresponding to the gap between the increment
of income and the increment of consumption, which
will only occur if the schedule of marginal efficiencies of
capital has increased relatively to the rate of interest [that is, either the mec schedule must somehow move to the right,
which there is allegedly no reason, 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 [that is, there is
no additional saving] or the reduction in money-wages has
had the effect of increasing the schedule of marginal efficiencies
of capital relatively to the rate of interest and hence the amount of investment [that is, an increase
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.”
According to the savings function, people destructively insist on saving a significant portion of the additional real income corresponding to the additional output that results from additional
employment.
If they did not do so, if there were no additional savings requiring investment as employment increased, full employment might actually be achieved according to Keynes. For the rate of return on capital would then not have to fall as employment increased.
Thus, if only people were sufficiently profligate, they could be prosperous. Thankfully, however, people do save. Keynes however believed this creates the problem of having to prevent the resulting savings from being hoarded, because of the alleged decline in the rate of return on capital that results from their
being invested.
On this point, you and so many other Keynesians are completely lost on what Keynes meant. You believe that investment spending and consumption spending are interchangeable in the Keynesian framework, that as long as there is “spending”, then Keynes allegedly does not discriminate between investment “spending” and consumption “spending.” You people are completely ignoring the fact that Keynes believed the myth that there is room in the economy for only so much investment, and no more. THAT is why he was so adamant that consumption be maximized if spending is going to be stimulated by government deficits. The rate of return will allegedly continually fall as more and more capital is invested, and so consumption spending IS the core support for all things Keynesian.
Now, why in the world would Keynes believe that the MEC (marginal efficiency of capital) would RISE on account of more net investment? Well, he made yet another egregious contradiction. He writes:
“If there is an increased investment in any given type of
capital during any period of time, the marginal efficiency
of that type of capital will diminish as the investment in it
is increased, partly because the prospective yield will fall
as the supply of that type of capital is increased, and partly
because, as a rule, pressure on the facilities for producing
that type of capital will cause its supply price to increase. Thus for each type of capital we can build up a schedule, showing by how much investment in it will have to increase within the period, in order that its marginal efficiency should fall to any given figure. We can then aggregate these schedules for all the different types of capital, so as to provide a schedule relating the rate of aggregate investment to the corresponding marginal efficiency of capital in general which that rate of investment will establish. We shall
call this the investment demand-schedule; or, alternatively the schedule of the marginal efficiency of capital.”
I’ll give you a $1 if you can spot the contradiction. I’ll give you a hint. It’s when he claimed “and partly because, as a rule, pressure on the facilities for producing that type of capital will cause its supply price to increase.” Keynes put forward this whole doctrine of MEC and IS curves in order to refute the prevailing argument during his time that a fall in wage rates and prices can cure depressions. But when he advances his argument, he completely contradicts himself and presumes a rise in the prices of capital assets, not a fall in prices of capital assets.
Lower wage rates and prices of course LOWERS asset prices and unit costs. It doesn’t raise costs. Keynes thus commits a first year econ 101 class error by confusing an increase in the quantity of a good demanded that takes place in response to a lower price of the good, with an increase in the demand for the good.
The reality is that a rise in net investment is in response to, and can only take place with, lower prices of capital assets.
The response from neoKeynesians and New Keynesians to this absurdity was that prices, especially wages, are “sticky” and won’t fall. This excuse is just a refusal to challenge the people responsible for such sticky wages, namely, the government, through unemployment insurance, minimum wage laws, and other labor regulation.
Major_Freedom, I demand that you create a blog and collect these comment in it.
Seconded
Oops.
Now, why in the world would Keynes believe that the MEC (marginal efficiency of capital) would RISE on account of more net investment? Well, he made yet another egregious contradiction. He writes:
Should read
Now, why in the world would Keynes believe that the MEC (marginal efficiency of capital) would FALL on account of more net investment? Well, he made yet another egregious contradiction. He writes:
“Speaking of male cops, I didn’t see Gene call you an idiot anywhere.”
That’s right. Let me state, for the record, “I’ve known idiots, and Bob Murphy is no idiot.”
“Haven’t you even looked at Garrison’s powerpoints?” is a rhetorical flourish intended to convey, “Come on, Bob, even an Austrian like Roger agrees with Daniel that investment spending drives the Keynesian model.”
Surely the definition of “liquidity” must be something that has immediate value in the short term. For example, gold and silver are liquidiy because there is always a reliable market for them to sell into, tins of beans are liquidity because everyone needs to eat, and if all else fails they fulfill my own need to eat.
Things that are NOT liquid are the things you can neither sell nor utilise at short notice. For example, having three investment properties in a crashing property market, or being two years into a startup business that is still at the stage of tooling up a factory and has not yet made a profit, or speculatively buying technology patents for products that don’t exist yet.
All of those illiquid things, might make excellent returns… at some future date, but not now.
So “liquidity preference” is just a roundabout way of saying a preference for immediate return vs long term future return, or time preference. But when I put it that way, Keynes’ contribution doesn’t sound all that unique anymore.
“So “liquidity preference” is just a roundabout way of saying a preference for immediate return vs long term future return, or time preference.”
No, that is wrong, Tel. You are able to spend cash, but you do not get a return on it. An investment can be short-term but very illiquid (a one-year loan I make to my friend) or long-term and very liquid (a 30-year US treasury). So these are very different concepts, not merely different ways of saying the same thing.
If a man buys a tin of beans and pays cash, then I think it is kind of reasonable to presume that the beans were worth more to the man than the cash that he paid… otherwise he would just keep the cash in his pocket. All voluntary transactions work the same way, so everyone making a transaction does so in the belief they are getting a return.
Although, perhaps you don’t like my trivial example, consider how it expands to a bigger picture. Suppose a man always eats at the cafe and he gets paid in two weeks. He has enough cash available for 14 meals at the cafe. He could go in there and buy 14 meals all at once but he would be unable to eat that much, and he can’t store the hot food. Alternatively he could save his cash and eat nothing, but then he would starve.
It seems quite self evident that on the first day, buying one meal fulfulls his need to eat, so the first meal is worth more than the cash paid for it. However, on that day a second meal would be worth less than the first, and the man knows he will still need to eat tomorrow so better to hang onto what is left of the cash rather than spend it all at once.
In terms of return on investment — buying one meal a day gets him to the end of the fortnight without starving, and he can keep working his job and get paid. This is the best possible return.
Spending the cash either too soon, or too late (even when buying the exact same product) gets a lower return (days without food, falling over on the job, getting fired, etc). Thus you can get a return on holding cash (when done appropriately).
Needless to say, in a deflationary environment the returns on holding cash are massively obvious. However, there are more subtle situations, for example part of my job is the purchase of computer equipment and buying too early guarantees that whatever you buy is obsolete that much faster… the trick is to hold out as long as possible, until you do really need that equipment. Holding out too long can damage the business in other ways (people unable to do their job without the equipment they require).
If you consider a 30-year US treasury must be a long term investment, just because the bond note has a nominal 30 year due date then does buying a gold bar represent a million year long term investment?
Obviously not.
An investor buys a gold bar with the expectation of selling it at such a time as seems suitable. The point being that they can choose to sell at any time, without risking any sort of massive loss, thus the planning horizon for deferment of consumption is quite short. You could think of holding either the treasury bond or the gold bar not as one big long-term investment but as a repeated series of short-term investments (presuming markets remain liquid for those entities, and I’m not pretending there is any guarantee of that in either case).
It all comes down to how confidently the infestors can make long term predictions of future markets. If external factors are forcibly shortening the planning horizon then getting yourself comitted to a long term project becomes highly risky.
Activities such as paying down debt, and hoarding cash, gold, tinned food, etc. are the sort of things people do when they are worried about uncertainty in their future. These sort of activities do not make good returns, but they mitigate risk. Ask yourself why mitigating risk is high on many people’s priority list right now?
I don’t think that’s quite right. Liquidity is, as you describe, the ability to participate in a market. It has nothing to do with the returns you’ll earn.
After all, three investment properties are still illiquid even if the market is booming, right? They are less illiquid, perhaps, but they’re still illiquid. It has nothing to do with the returns they’ll earn.
If it were reducible to that, I think you’re right – the contribution wouldn’t have been all that substantial.
Let’s suppose you have investment option “A” which offers 5% PA return, fixed rate for 30 years and you can bail out any time you want to keeping the interest you accumulated up to the point where you jumped out. Investment option “B” offers exactly the same rate of return, over exactly the same time period, but you must sign up to go the whole 30 years, can’t sell up, can’t get anything back right until the last day.
Which do you think real-world investors would go for?
Maybe ability to liquidate does influence rates of return… presuming we are talking about the sort of investment that actually might attract investors, rather than some hypothetical investment that no one would ever voluntarily buy into.
Cause what Daniel keeps saying is that viewing Keynesianism as “consumptionism” is a strawman. Which it certainly is, as I discovered once I had to teach Keynes and actually went and read him. So when Krugman says the General Theory is about people not spending enough, that refutes Daniel’s point… only if you have already accepted the strawman that for Keynes, “spending” means only “consumer spending.”
If I had a nickel for every apologist of Keynes who claims to understand what Keynes wrote, I’d be a millionaire.
Keynesian economics is in fact the “straw man” hyper-consumerism doctrine you deny it is. Keynes believed that the economy can’t accommodate arbitrary amounts of net investment, that it is capped according to people’s real incomes and what they are willing to consume even if they have purchasing power.
Keynes wrote:
“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; 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. 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 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. 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.”
Here Keynes clearly argues that the revenues and profits, and incomes, can only be earned by selling consumer goods.
You people who try to salvage Keynesianism by claiming that by spending Keynes was fully open to investment spending satisfying “aggregate demand” clearly have no clue what you are talking about. You are almost always talking about Keynes’ interpreters, read through some third party “Coles Notes” quality text that itself was written by those who have no clue what they are talking about.
To make matters worse, like vultures, you gang up on Murphy as if HE is wrong to equate consumptionism with Keynesianism.
Personally, I see no reason why he even gives you the time of day.
I agree that the Keynesian doctrine revolves around consumption.
According to this doctrine, one reason a “slump” can occur is because for whatever reason, maybe “animal spirits” or “irrational expectations,” people just are too stupid to realize they need to spend more in order to keep the economy running at full capacity. If they don’t or cant, then government needs to step in to fill the “output gap” in order to restore the economy to full employment. As if full employment were somehow even a possible or desirable goal for that matter, but that’s a different story.
What is interesting is that during a “slump,” Keynesians say it’s bad to save, and that the government can correct a downturn by deficit spending. Which, presumably, is financed by domestic or foreign savers, or even worse, the Fed? Right?
But what I don’t get is how on one hand you can demagogue savings as bad for the economy and then turn around an advocate government deficit spending during a recession that is financed by savings, the very savings Keynesians hate right?
You think savings is bad for the economy then turn around an advocate for a policy that needs to be financed by savings, in terms of the government issuing bonds to savers who can afford them. Savings cant be bad and good at the same time.
Maybe im lost here. Maybe Kuehn can step in and help me out. Or another Austrian. Im taking Murhpys class right now and trying to get through the General Theory. Its pretty dense, but im making progress.
Major, Bob has, right here in this thread, acknowledged that Keynesianism does not equal consumptionism. So he clearly must have no idea what he is talking about either.
Bob has, right here in this thread, acknowledged that Keynesianism does not equal consumptionism.
Not quite. He actually just argued, correctly, that what he specifically said about Keynesianism does not show any conviction on his part that Keynesianism is consumptionism. That doesn’t necessarily mean he actually thinks Keynesianism is not consumptionism.
You and Kuehn have both misrepresented Keynesianism, and Bob unfortunately trusts you both when it comes to Keynesianism, so if he ends up believing that Keynesianism is not consumptionism, then you could not be in a position to say he doesn’t know what he’s talking about.
And even your own quote shows you are wrong: “or if there is an increase in investment, corresponding to the gap between the increment of income and the increment of consumption.”
So, investment spending is spending, and can make up for a drop in consumption spending.
“Here Keynes clearly argues that the revenues and profits, and incomes, can only be earned by selling consumer goods.”
I think that it is just as valid an interpretation to say that, in this passage, Keynes clearly argues that whales are mammals, since nowhere in the passage does he say anything remotely like either “interpretation.”
Of course, if what you mean is that ULTIMATELY Keynes think that profits and incomes only come from the sale of final goods, you would be right. That is Menger’s theory of imputation, after all, and I imagine Keynes did understand and agree with it.
And even your own quote shows you are wrong: “or if there is an increase in investment, corresponding to the gap between the increment of income and the increment of consumption.”
See, I KNEW that one of either you or Kuehn would try that. I didn’t say anything at first because I want to prove that you have no clue what Keynes wrote.
When he added “or if there is an increase in investment, corresponding to the gap between the increment of income and the increment of consumption” he said so only if the MEC was capable of accommodating more investment, which to Keynes means the MEC or rate of return was something greater than 2%. Since Keynes held that more net investment (even if the context is falling wage rates and prices, which is the whole reason he advanced the MEC doctrine) will make the rate of return decrease. He thus proposed “or more investment” as a contingency based on the belief that savings is not too high, that consumption is high enough, and that investment is not already too high.
That means consumption is the saving grace in Keynesianism, NOT investment. That passage you selected presupposes his own theory, which of course cannot be used to say he said something else.
On 4: His concern, I thought, was that Barro treats Keynesianism as sticky wages. I don’t think his point is about whether to use monetary policy.
On 5: I think his argument is usually associated with the trade deficit – it would weaken the dollar and increase net exports.
On 3: Spending is the problem. Consumption isn’t. But a drop in spending also isn’t the unique Keynesian contribution, which is also something I note. The real point is that interest rates are determined by the supply and demand for utility, and if investment demand drops at the same time that liquidity preference spikes (say, as a result of a financial crisis) the interest rate can be a lot higher than the interest rate that would be consistent with full employment investment levels.
*Interest rates are determined by the supply and demand for LIQUIDITY
OK Daniel, I don’t want Gene to bite my head off: You are agreeing that Krugman is being as oversimplifying here, then, as some Austrian critics are? I.e. in your view, Keynesianism really isn’t adequately described as, “Sometimes there’s not enough spending in the economy to generate full employment”?
I’d have to re-watch the video for the specific point, but if you’ll look at the link above he’s definitely dumbed it down in the past.
Granted, though, Krugman DOES get into loanable funds vs. liquidity preference in this talk. I do remember that. He just does it at a later point.
We can all luxuriate in Krugman’s wisdom from this transcript:
http://www.princeton.edu/~pkrugman/keynes_and_the_moderns.pdf
Interest rates are determined by the supply and demand for LIQUIDITY
Interest rates are determined by time preference, not liquidity preference.
and if investment demand drops at the same time that liquidity preference spikes (say, as a result of a financial crisis) the interest rate can be a lot higher than the interest rate that would be consistent with full employment investment levels.
Employment will not be affected if interest rates are higher or lower. A higher interest rate just means that consumers prefer more goods in the nearer future relative to the later future, which can accommodate full employment by labor going to producing more capital goods relative to consumer goods in the short term, which will eventually result in more of both consumer and capital goods in the longer run.
If businesses have to pay a higher interest rate on loans, then their demand for capital goods and labor will fall. As long as prices are free to fall, especially the price of labor, which would take place if wage earners are faced with the choice not of “go on the dole or take this job at lower pay” but “take this job at lower pay or take no job at all.”
Very few, if any, wage earners will choose “abstain from accepting lower pay until death due to starvation.” They will accept lower pay if the free market is able to do its job and government doesn’t prevent price corrections from taking place.
Employment will not be affected if interest rates are higher or lower. A higher interest rate just means that consumers prefer more goods in the nearer future relative to the later future, which can accommodate full employment by labor going to producing more capital goods relative to consumer goods in the short term, which will eventually result in more of both consumer and capital goods in the longer run.
Should read:
Employment will not be affected if interest rates are higher or lower. A higher interest rate just means that consumers prefer more goods in the nearer future relative to the later future, which can accommodate full employment by labor going to producing more consumer goods relative to capital goods in the short term, which will eventually result in less of both consumer and capital goods in the longer run.
Even though the following appears in “The General Theory”, I suppose one would have to be an idiot to think that it really appears there. And even if it did, you’d have to be a fool to think that this is what Keynes meant to say:
(i) Except in a socialised community where wage-policy is settled by decree, there is no means of securing uniform wage reductions for every class of labour. The result can only be brought about by a series of gradual, irregular changes, justifiable on no criterion of social justice or economic expedience, and probably completed only after wasteful and disastrous struggles, where those in the weakest bargaining position will suffer relatively to the rest. A change in the quantity of money, on the other hand, is already within the power of most governments by open-market policy or analogous measures. Having regard to human nature and our institutions, it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter. Moreover, other things being equal, a method which it is comparatively easy to apply should be deemed preferable to a method which is probably so difficult as to be impracticable…….
(ii)…..If important classes are to have their remuneration fixed in terms of money in any case, social justice and social expediency are best served if the remunerations of all factors are somewhat inflexible in terms of money. Having regard to the large groups of incomes which are comparatively inflexible in terms of money, it can only be an unjust person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter.
(iii) The method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage-unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former. “The General Theory” Pages 268-269 Chapter 19
Bob, you are not playing fair using Keynes to intepret Keynes. You must use others’ interpretations which of course are moving targets.
Reads like sticky wages to me.
Since this is the “real” point:
“The real point is that interest rates are determined by the supply and demand for utility, and if investment demand drops at the same time that liquidity preference spikes (say, as a result of a financial crisis) the interest rate can be a lot higher than the interest rate that would be consistent with full employment investment levels.”
Doesn’t this make Keynes final point – socialization of investment and interest rates held to zero a natural conclusion of his “real point”. It follows to me…I don’t agree with Keynes, but I would say that in his mind this solution he proposed is and answer to the “real point”..
Keynes solution addresses the two real points:
1. Investment does not drop below full-employment level as governemnt directs full-employment invetment levels
2. Governemnt keeps the interest rate at zero so: the interest rate cannnot be a lot higher than the interest rate that would be consistent with full employment investment levels.”
Some “real” Keynesians apparently do not approve of the apostate Krugman. That’s probably because Krugman is congenitally incapable of understanding basic Austrian School concepts. Ya think?:
Like Catholics organising a conference on Protestantism and excluding Protestants, the Cambridge organisers of a conference to ‘celebrate the 75th anniversary of the publication of Keynes’s General Theory of Employment, Interest and Money’, have excluded Keynes scholars. By contrast, most of those who will address the conference subscribe to the ‘classical’ theory that Keynes thought he had defeated.
The one name on the list that is identified with Keynes, at least in the public eye, is Professor Paul Krugman of Princeton University, who will be giving the ‘Plenary Lecture’. However, in his opening remarks to the conference, Prof. Krugman poses the question: “What am I doing here?” and modestly suggests that:
“I’m arguably not qualified to [give this talk]. I am, after all, not a Keynes scholar, nor any kind of serious intellectual historian. Nor have I spent most of my career doing macroeconomics. Until the late 1990s my contributions to that field were limited to international issues; although I kept up with macro research, I avoided getting into the frontline theoretical and empirical disputes.”
Krugman is an extremely controversial figure for Keynes scholars. He champions a mainstream interpretation of Keynes’s work known as the neo-classical synthesis, and seems to have avoided any discussion with those actually working in the field. Many fear that his adherence to a rightly discredited version of Keynes’s theory serves Keynes very badly indeed.
Qualification for participation in this event hosted by the Cambridge Faculty of Economics and Cambridge Finance appears to be complete detachment from scholarly debates about the nature of Keynes’s work. Scholars were hard pushed to recall one contribution to the Keynes literature written by any on the list of participating economists. The UK Post-Keynesian Economics Study Group, a body dedicated to the serious pursuit of these matters since 1988, with an on-line community of over 300 academics, found out about the conference by accident. “Even by the standards of the economics profession, this is staggering”, one member observed.”
http://www.debtonation.org/2011/06/cambridge-excludes-keynesians-from-conference-on-keynes/
Krugman does not need to know any Austrian Economics. He doesn’t make a living teaching Murphy on Mises.
Krugman expressly “critiques” the Austrian School often enough on his blog with his mindless and ignorant name-calling (just like you, Mam-mouth).
If you listened to or read his speech, he is implicitly attacking the Austrians by explicitly attacking the non-Keynesians. Just like you, he does not understand the Austrian evisceration of Keynes. Otherwise, he would directly and clearly make an attempt to refute the Austrian refutation of Keynes.
He makes no such attempt at that because he cannot. Just like you.
I doubt the Austrian school was even on his mind when he made this speech – implicitly or explicitly.
Krugman:
The other reason I’m here, I’d guess, is that these days I’m a very noisy, annoying public intellectual, which means among other things that I probably have a better sense than most technically competent economists of the arguments that actually drive political discourse and policy. And not only do these disputes currently involve many of the same issues Keynes grappled with 75 years ago, we are – frustratingly – retracing much of the same ground covered in the 1930s. The Treasury view is back; liquidationism is once again in full flower; we’re having to relearn the seeming paradox of liquidity preference versus loanable funds models of interest rates.
And just who are these oblivious advocates of “liquidationism”?
Ummm…. most politicians and pundits!
But wait! There’s more!
But what does the other side believe? Someone, I don’t know who at this point, sent me to this post by Robert Murphy, which is the best exposition I’ve seen yet of the Austrian view that’s sweeping the GOP — and I mean that sincerely, never mind the puerile insults aimed at yours truly.
http://krugman.blogs.nytimes.com/2011/01/19/great-leaps-backward/
Do most politicians and pundits really want to liquidate all malinvestments ASAP? Really?
Bob what are you getting at? I’m not saying Krugman has never ever ever thought about the Austrians. I’m saying that for him the Austrian school is one small part of a constellation of “liquidationists”, and I really doubt the Austrian school itself crossed his mind during this talk.
Based upon the teachings of Mises, we never know why anyone does anything or what exactly they are thinking. And we can merely guess that Krugman really does not understand Austrian theory at all. He may understand it but lies about it. So, you may be right.
Freud eviscerated Mises when he proved the ultimate end of all human action is getting laid. (I guess you have to include getting laid with oneself to take care of poor old Robinson with all his coconuts)
“Based upon the teachings of Mises, we never know why anyone does anything or what exactly they are thinking.”
Have your read any of Mises’s philosphy of history? For him (as essentially a Collingwoodian on this point) history consists in reconstructing what others were thinking through verstehen, through sympathetically entering into their thoughts.
Gene, wasn’t that merely an alternative to superimposing the cultural phenomena of one time period onto that of another? In other words, wasn’t it just an attempt to relate to the cultural norms of the time under observation/study to understand their history? While I admit that history is a very subjective science, it does make more sense to understand history in reference to the values and beliefs of the period, rather than those of today. I think Roddis was referring to current thoughts forming future action with regard to Mises’ opinion on the matter.
“Gene, wasn’t that merely an alternative to superimposing the cultural phenomena of one time period onto that of another? In other words, wasn’t it just an attempt to relate to the cultural norms of the time under observation/study to understand their history?”
No, not at all. Read _Theory and History_.
“While I admit that history is a very subjective science”
No, it is not. It is as evidence based as any science, or perhaps even more so than any science.
Lucky for me that I carry my 1978 edition of “Theory and History” in my pickup truck to allow for short readings while at Taco Bell.
Just another symptom of your delusional disorder.
http://en.wikipedia.org/wiki/Delusional_disorder
Krugman explains how each human being is unique. Some are Chapter 12ers (like Keynes) and some are Part 1ers, like Krugman (the crazies like me are Chapter 19ers):
So, who’s right about how to read the General Theory? Keynes himself weighed in, in his 1937 QJE article, and in effect declared himself a Chapter12er. But so what? Keynes was a great man, but only a man, and our goal now is not to be faithful to his original intentions, but rather to enlist his help in dealing with the world as best we can.
For what it’s worth, I’m basically a Part 1er, with a lot of Chapters 13 and 14 in there too, of which more shortly. Chapter 12 is a wonderful read, and a very useful check on the common [4] tendency of economists to assume that markets are sensible and rational. But what I’m always looking for in economics is intuition pumps – ways to think about an economic situation that let you get beyond wordplay and prejudice, that seem to grant some deeper insight. And quasi-equilibrium stories are powerful intuition pumps, in a way that deep thoughts about fundamental uncertainty are not. The trick, always, is not to take your equilibrium stories too seriously, to understand that they’re aids to insight, not Truths; given that, I don’t believe that there’s anything wrong with using equilibrium analysis.
http://www.princeton.edu/~pkrugman/keynes_and_the_moderns.pdf
That’s clear enough, right?
(1) Yeah, I’ve noted this myself. You’d think winning a Nobel would be a mega-confidence booster, but I wouldn’t know. Maybe he’s only nervous in certain circumstances depending on the audience or the subject. He could also have some kind of disorder or disease that makes us think he’s nervous. Maybe he was full of liquid courage that time you saw him.
Response to Mr. Callahan:
This was a bit of a joke, combining in what I thought way a silly manner the differences between Mises economic analysis with his historical analysis:
Liberalism … is a political doctrine. … As a political doctrine liberalism [in contrast to economic science] is not neutral with regard to values and ultimate ends sought by action. It assumes that all men or at least the majority of people are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to their valuational principles. While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness, … abundance to poverty. It teaches men how to act in accordance with these valuations. Mises, Human Action, pp. 153–54;
5. History and Humanism
Pragmatic philosophy appreciates knowledge because it gives power and makes people fit to accomplish things. From this point of view the positivists reject history as useless. We have tried to demonstrate the service that history renders to acting man in making him understand the situation in which he has to act. We have tried to provide a practical justification of history.
But there is more than this in the study of history. It not only provides knowledge indispensable to preparing political decisions. It opens the mind toward an understanding of human nature and destiny. It increases wisdom. It is the very essence of that much miss-interpreted concept, a liberal education. It is the fore-most approach to humanism, the lore of the specifically human concerns that distinguish man from other living beings.
The newborn child has inherited from his ancestors the physiological features of the species. He does not inherit the ideological characteristics of human existence, the desire for learning and knowing. What distinguishes civilized man from a barbarian must be acquired by every individual anew. Protracted strenuous exertion is needed to take possession of man’s spiritual legacy. Mises, “Theory and History” p. 293
http://mises.org/th/chapter13.asp
After all that, I conclude that Krugman was not specially “thinking” of the Austrian School in his speech because he is lazy and clueless regarding what one might even mean by the term “The Austrian School”. In his speech, he expressly stated that we are living in what “I’ve called the Dark Age of macroeconomics, in which large numbers of economists literally knew nothing of the hard-won insights of the 30s and 40s – and, of course, went into spasms of rage when their ignorance was pointed out.” What could have been a better opportunity for Krugman to explain the alleged errors of his foes who are inflicting such ill considered misery on humanity? I’ve been waiting years and years for such an explanation from Krugman. Of course, since he fails to even familiarize himself with basic Austrian concepts, he can do no such thing and we are left with this nonsense:
But economists were bound to push at the dividing line between micro and macro – which in practice has meant trying to make macro more like micro, basing more and more of it on optimization and market-clearing. And if the attempts to provide ―microfoundations fell short? Well, given human propensities, plus the law of diminishing disciples, it was probably inevitable that a substantial part of the economics profession would simply assume away the realities of the business cycle, because they didn’t fit the models.
The result was what I’ve called the Dark Age of macroeconomics, in which large numbers of economists literally knew nothing of the hard-won insights of the 30s and 40s – and, of course, went into spasms of rage when their ignorance was pointed out.
But we still cannot really know exactly what anyone is thinking or exactly why they do the things they do. I remained befuddled as to why non-Austrians are so openly hostile to Austrians like Bob Murphy while remaining so purposefully ignorant of the basis for his analysis.