Sunday, January 16, 2011


- Tim Bending inserts game theory into the real balances debate that followed the Keynesian revolution here, and suggests that game theory confirms a lot of Keynesian insights.

- Vince Cable argues that cuts by the coalition government in the UK would be backed by Keynes (himself, of course, a member of the Liberal Party). Tim Page disagrees.

- Jonathan asks about the potential influence of Marx on Keynes (well, he beats around the bush until he comes out and raises the point in the comment section). I really don't think so - he explicitly rejects Marx at so many points and I can't think of anything that's clearly derived from Marx that I have doubts about the whole idea. So do most Marxists, for that matter. An interesting discussion on the potential compatibility of Marxism and Keynesianism (which, it's important to note, seems to assume it's generally understood that they aren't compatible) is provided here, here, here, and here. I haven't read any of it yet so can't say much about the quality of the argument.

- Bruce Webb muses on an intersection between Keynes and Veblen in a discussion of a record sale of a Picasso. Does buying obscenely expensive pieces of art as an act of conspicuous consumption help put idle cash to use??? I have my doubts. It's just going to another obscenely rich collector, right? It all kind of depends on what he does with the money. Anyway, it's interesting to think about the relationship between Keynes and Veblen - in Economic Possibilities for Our Grandchildren Keynes talks about this sort of conspicuous consumption as the only consumption that is really insatiable.

- A clever imaginary conversation with Keynes is provided here by a BBC correspondent. The discussion runs the gamut - economics, homosexuality, Paul Samuelson, Bloomsbury. A good read.

- I'm a little loathe to post this, but here's Don Boudreaux with a flippant, somewhat vacuous critique of Keynes building off of a Leland Yeager paper. There's a lot that just left me scratching my head - I started a longish response in the comment section. I still don't think I did it all justice. But it's hard to do a response justice because Don doesn't really make any effort to make a critique. He spends ten paragraphs alternatively caricaturing and ridiculing the idea of effective demand - and of course when you sufficiently caricature it, the ridicule follows naturaly. Bill Woolsey has a comment too. This sort of post completely reaffirms my decision not to apply to George Mason University. If I went there I'd love to work with a guy like Peter Boettke. He occassionally acts dismissive too, but he's a good guy with good scholarly motives. The problem is, if I had to specialize at Mason I would not want to specialize in Austrian economics - I'd choose to specialize in public choice theory. And that means Don Boudreaux and Russ Roberts. And that's a non-starter. I'm not going to spend that much time and effort with people that clearly disdain where I'm coming from. Boettke doesn't agree with where I'm coming from but he at least extends respect. Anyway - rant over. The other links I provide are really interesting. Perhaps it would be too much to ask to let me rant but not let the comment section be dominated by Cafe Hayek talk. Still, I can dream right?


  1. Keynes was a member of the LIBERAL PARTY?

    It's not too shocking, but I was almost sure he would have been a Tory instead. He seemed conservative, but I mean that in the 19th centurt British sense.

    There's no way Marx would have supported Keynes. Marx was, as Brad deLong might call him, a liquidationist and believed recessions were necessary to boost industrial efficiency, while "crack-brained intervention by governments...aggravate existing crises". Marx would not have supported policies to repeal unemployment or those hurt by recession, because he believed morality, like ideology, was a substitute religion and a myth. Marxism, above all, supports industrial efficiency only.

    He was far more opposed to "bourgeois" welfare state and social democracy than he was to raw capitalism, which he saw as a quick path to socialism.

  2. I think you will enjoy this post, Prateek -

  3. Just had a question about your comment on Boudreaux's post:

    "The trickier and more interesting issue is not where Keynes takes the micro perspective of the businessman up to the macro level - it's where he doesn't: wages and savings. All confused fads in some major business concerns in the 1920s aside, to an individual businessman raising wage rates to "buy back the product" makes no sense at all. There is no guarantee your workers will buy your product, after all!

    I agree with this, but then you state:

    "But when you aggregate up it makes sense - you have a theory of effective demand, because the aggregation of all wages paid will be spent on the aggregation of all products sold. ....... But the principle in the aggregate operates differently from the principle at the micro level. It's precisely because of these fallacies of composition that you can't exclusively rely on micro level reasoning."

    This is the part I'm not particularly clear on. So I get that it doesn't make sense from an individual businessman's perspective to raise wages on the basis that it will increase demand for his product. And so the fallacy of composition claim lies in the reasoning that a lack of incentive to raise wages from an individual's perspective results in the sub-optimal outcome of wages which are too low to clear the labor market. But what I don't get is, when all businessman have reached the point at which the expected present benefit is equal to the wage, and workers are such that they wouldn't be willing to take a lower wage, why should it be that full employment is not reached? It would seem that, in so far as there is some competition, and some price flexibility, over a period of time, conditions would evolve so that the market would converge to equilibrium at full employment.

    So put shortly, what is the general defense for why there should prevail an equilibrium in which there is unemployment (if I am interpreting correctly)?

  4. Daniel, I like Keynes' comments, because the British Liberals often did seem to have an influence on politics even without being the party in power.

    The amazing discovery of classical liberals in the past 150 years has been summed up by none other than Milton Friedman himself, who said, "You don't have to elect the right people. You just have to make sure that the wrong people make the right decisions. Make it politically unprofitable for them."

    British Liberals are an equivalent of the American Socialist Party in a certain way. While liberals pushed for labour reform and free market policies by other parties, socialists pushed for welfare reforms which were adopted by Republicans and Democrats, especially Republicans. Sam Francis, an analyst, once said that Norman Thomas was the most successful American politician, because all his reforms got passed while he was still alive, and without getting elected.

    Free marketers learnt this. They knew they don't have to get elected. And they knew that market reforms will be conducted under necessity, not rhetoric. Jimmy Carter deregulated and privatized various sectors not because of ideology, but because of failure and breakdown. The free marketers merely criticised him, and he would only look stupid for not doing what was necessary.

  5. EdP -
    So I was focusing on talking about how what does not make sense for the individual businessman makes sense for the economy. I write reports on federal programs in exchange for a salary. The Urban Institute would be crazy to raise my salary in hopes that I would buy back their product because (1.) our reports are free, and (2.) I'm not going to issue an RFP for a new report with my higher salary. The point is the economy as a whole, though, will buy back the product of the economy as a whole.

    What I left out - in answer to your question - is that "the economy as a whole will buy back the product of the economy as a whole"... except when it doesn't. The alternative is that demand for liquidity will increase as a result of income, that income won't be spent on output, and income will decrease. So I talked about two areas where non-Keynesian may commit fallacies of composition: wages and savings. When you bring savings and the paradox of thrift into the picture, you get a failure of the economy as a whole to "buy back the product".

    All this (in the comment) was just to say that people are far too harsh on amateurish "high wage doctrines" and early underconsumptionist and overproductionist theories. Insofar as they were wrong they were on the right track. Keynes added the distinction between the act of saving and the act of investment, and he made the interest rate a function of the money market (not the loanable funds market) - and then the interest rate became an input into (ie - a determinant of) the loanable funds market. Interest rates could be too high to provide a full employment level of investment. Now you have a mechanism whereby the old underconsumptionist theories caused an underemployment equilibrium.

    Over time you can grow out of it. Technological development could be such that investment opportunities that were not profitable before become profitable. But you're still going to be having secular growth at a below full employment level, and you're still not going to be dealing with the underlying problem.

  6. Ridiculing effective demand is fun, though.


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