I started by titling this "Matt Yglesias is making things less clear, not more clear", but that didn't seem entirely fair.Anyway - he writes a good post, ostensibly in opposition to Steve Horwitz , without really addressing Horwitz's point. That, unfortunately, reinforces Horwitz's implicit claim that Keynesians are consumption-mongers. The charge that Horwitz is "extremely foolish" was uncalled for, but then again I'm sure Horwitz has had worse thrown at him.
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Yglesias walks into precisely the same trap I outline here: assuming that "consumption" is the same as "demand". It's not. Firms "demand" labor and firms "demand" capital goods. None of this is "consumption". "Demand" in a monetary economy is simply "when somebody wants to give another person money in exchange for something else". Yglesias is right to trumpet loudly that what we face is a demand problem. But he jumbles that up with Horwitz's talk about consumption. I think this consumption line needs to be firmly put to rest. Nobody should mistake the babbling of a journalist or a politician for the Keynesian position. Consumption may or may not be depressed - it probably is a little depressed - but the real concern is investment demand.
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Names don't come to mind now, but I have heard some "crude Keynesians" argue that we should stimulate consumption (especially in weekly news magazines such as Newsweek and Time). It just reaffirms my belief that everyone should read The General Theory at least twice in their lifetime. Of course, I'm being a hypocrite, since I've only read parts of it. But, I'll get to it in a while. ;) Nevertheless, the heterogeneity of the Keynesian school makes it difficult to trace a single cohesive, comprehensive theory.
ReplyDeleteI can think of one name: Paul Krugman. He's made points about consumption a lot more than I think he should. DeLong is usually much better at keeping it on the investment side of things.
ReplyDeleteI get more frustrated when people act like it's a consumption story than I do with people who from a policy perspective talk about boosting consumption. Consumption probably is depressed to a certain extent. Households probably are saving due to increased liquidity preference. That's probably out there, and there's certainly nothing wrong from a humanitarian perspective with sending money towards consumers at a time like this. But I think that's all a little besides the point of the Keynesian story.
Anyway, ya... ever since I've been noticing people failing to make this demand/consumption distinction I've been grating my teeth about every other day at something that I notice Krugman saying about "consumption". He does it a lot.
Nevertheless, the heterogeneity of the Keynesian school makes it difficult to trace a single cohesive, comprehensive theory.
ReplyDeleteThis is certainly true - but I think it's probably less a problem here. All the disparate branches of Keynesianism can lead you to wage rigidities or to liquidity preference or to a handful of other things as the issue. But only bad instruction on the part of teachers can confuse "demand" and "consumption" which are very, very different concepts.
Of course you're right about consumption and demand being different. But, aren't they the same in the long run? The whole point of production is (eventually) consumption. Investment in buildings and machines for production is about serving the expected consumption of tomorrow.
ReplyDeleteNo, I'm wrong. There's also demand in the form of military spending (and investment in capital for producing military goods), and most people don't really think of themselves as 'consuming' the bombing of foreign infrastructure or the killing of enemy combatants.
Perhaps true, but even if it were true in the long run we're all dead.
ReplyDeleteIn the short run there are important differences that lead to very meaningful dynamics.
I say "perhaps true" because there's a thread in Keynes that identifies a nearly pathological desire for money for its own sake. Essentially this gives us liquidity preference, but if we were to think about it more broadly it opens the door to talking about demand for money that isn't consumption oriented at all - not even in some final, extended-derived-demand analysis like you're talking about.
I should note - I don't think liquidity preference has to be pathological like this. Liquidity preference can be a very rational, if deleterious, reaction. But I certainly wouldn't discount the possibility of this demand for money for its own sake.
ReplyDeleteRobert,
ReplyDeleteI would think of it this way. Let's say that aggregate nominal expenditure is $1,000 and nominal aggregate spending is $1,000. Now, let's say that 60% is saved and 40% is used for consumption. The entire point of production is consumption, but only to allow more consumption without having to increase the proportion of nominal expenditure that is allotted to that end.
So, even if ultimately the point of production is consumption, it doesn't mean we need to consume more in terms of proportion of income.
Daniel,
The way I see liquidity preference is as savings held outside the traditional loan market. I think Selgin developed a good theory explaining how a free banking system could cope with these types of savings.
Mises and Rothbard considered demand for money to be time-neutral, but I don't seem to agree. It might just be ignorance of Mises's and Rothbard's arguments, so I definitely wouldn't say that my opinion is absolute.
"Yglesias walks into precisely the same trap I outline here: assuming that "consumption" is the same as "demand". It's not. Firms "demand" labor and firms "demand" capital goods. None of this is "consumption". "Demand" in a monetary economy is simply "when somebody wants to give another person money in exchange for something else"."
ReplyDeleteThese distinctions you make are important but I think I'm still confused. Maybe you can help me out.
You explain demand in a monetary economy. But what is consumption in a monetary economy? When someone wants to give another person money in exchange for a good they plan to quickly consume, like an apple? (ie. consumption is a specific sort of demand for nondurable items)
What is demand in a non-monetary economy? When someone wants to give someone good x,y, or z in exchange for good a, b, or c?
Lastly, what is consumption in a non-monetary economy? When someone wants to give someone any good a to y in exchange for good z they wish to quickly consume?
Ya, I think all those are right. Of course consumption can be strange to talk about for certain goods (is a house an investment or is it a series of services that you consume?). But I think your definition works fine.
ReplyDeleteI think you also describe demand in a non-monetary economy. The problem with that is demand is indistinguishable from supply in that circumstance... which obviously changes things entirely. In essence, "Say's Law" as its come to be defined is in effect. Any goods not able to be sold are investment (ie - inventory).
I suppose your final point about non-monetary consumption follows.
I don't think consumption has everything to do with the idea of a "sale". Not all barter is a means to consumption. Consumption, specifically, is the consumption of goods to satiate present desires. Investment is the consumption (or use) of goods to produce goods that will satiate your desire down the road. They both require exchange, so exchange isn't what sets consumption and investment apart.
ReplyDeleteJonathan -
ReplyDeleteNo, I agree. Sorry if that was confusing. I was definitely trying to say that exchange is more than just consumption. "Demand" is any situation where a person wants to exchange money for goods and services. In other words - "demand" is much, much broader than just consumption.
What Robert was getting at that I'd certainly agree with is some sense of "derived demand" - that investment or labor or some other input is still demanded with the goal of some ultimate consumption in mind. In other words, current demand can be both consumption and investment, but current investment demand is still done to enable future consumption demand.
Thanks Daniel. That clarifies things a bit. You've given your definition of demand - any situation where a person wants to exchange money for goods/services. Maybe I've missed it here or in previous posts, but what is your definition of consumption? Sorry for being pedantic.
ReplyDelete