Wednesday, March 9, 2011

Keynes and Consumption, Again

Casey Mulligan is promoting the idea that Keynesians think consumption drives the economy. As I've explained here, I think this sort of claim demonstrates a big misunderstanding of the claims of Keynesianism. The worst thing is, there's a kernel of truth to it, insofar as the Keynesian perspective doesn't see increasing consumption as a problem. It's just treating the symptom, rather than the disease. So Keynesians don't go out of their way to oppose consumption-inducing policies because that would be counter-productive. However, that gives the impression to some people who don't take the time to think about it that Keynesianism is all about increasing consumption, when really it's all about increasing investment.

When I wrote the post that I linked to above about Keynesianism and consumptionism, I was largely inferring from theory. I did not have a passage in mind where Keynes said "investment is way more important than consumption you guys". I've come across such a passage, which is vindicating I think!

In chapter 22, Notes on the Trade Cycle, he writes:

"Practically I only differ from these [underconsumptionist] schools of thoguht in thinking that they may lay a little too much emphasis on increased consumption at a tiem when there is still much social advantage to be obtained from increased investment. Theoretically, however, they are opn to the criticism of neglecting the fact that there are two ways to expand output. Even if we were to decide that it would be better to increase capital more slowly and to concentrate effort on increasing consumption, we must decide this with open eyes after well considering the alternative. I am myself impressed by the gert social advantages of increasing the stock of capital until it ceases to be scarce. But this is a practical judgement, not a theoretical imperative."

Consumption isn't anti-thetical to the Keynesian system, but there's a strong presumption towards investment... I thought I had read another passage at some point that made the point even more strongly than here. If I find that again I'll post it.


  1. Does this mean that a pyramid is an investment or merely a driver of consumption? This reminds me of dean baker's definition of 'job.'

  2. Does this mean that a pyramid is an investment or merely a driver of consumption? This reminds me of dean baker's definition of 'job.'

  3. The pyramid passage was a point about the relative lack of demand deficiency in ancient Egypt because of the production imperatives of their religious beliefs. It's also a nice little rendition of subjective value theory.

    I'm not sure the investment/consumption distinction makes sense here. The split between investment and consumption is a matter of personal preferences, isn't it? The point is that the Keynesian mechanism - the wedge between the interest rate and the marginal efficiency of capital - is a mechanism that drives down investment, not consumption.

  4. By the way, Daniel, why is it so easy to strawman Keynesian economics?

    Why is it that for every supposed Keynesian belief, there is always a valid source to show that it is not exactly what Keynes believed?

    I ask, not because strawmanning Keynes is typical of a standard think-tank anti-Keynesian, but because it is done by the most distinguished contemporaries today.

  5. Interesting question... I think there are a few reasons, but I'm also not sure it's entirely a problem with Keynesianism (RBC types feel a lot more embattled and misunderstood right now than Keynesians do!) ... I'll try to post on it more extensively tomorrow.

  6. I saw Mulligan's piece this morning and, no joke, I thought to myself, "Daniel is going to jump all over this," haha.

    I guess that means I've been reading you for too long ;)

  7. 'I'm not sure the investment/consumption distinction makes sense here. The split between investment and consumption is a matter of personal preferences, isn't it?'

    Is there someone (or more) not Keuhn on this comment board who can tell me what these sentences mean?

  8. A little convoluted I suppose, and since I'm not one to take orders from commenters I'll clarify what I seem to remember thinking about this morning on this.

    What does it matter whether it is investment or whether it is consumption? That passage was noting that when you have a set of subjective valuations that offer an insatiable degree of effective demand, that is going to be a prosperous society. Whether it's a marginal efficiency of a capital we're talking about (investment) or a marginal utility we're talking about (consumption) is largely irrelevant to the context of the passage you're referencing. The point is that while two pyramids or two dirges for the dead are twice as good as one in ancient Egypt or medieval England, two roads from London to York in modern England aren't twice as good as one. He's simply remarking on the fact that when you were building massive stone pyramids to appease the gods your "marginal efficiency of capital"/"marginal utility" far exceeded any interest rate constraint. Today this isn't the case.

    The split between investment and consumption in any given economy is going to be a matter of consumer preferences and subjective valuation. But what that was in Egypt exactly... whether they understood it as something that would bring in and create more wealth or something that was simply to be enjoyed strikes me as being a fairly meaningless question.

  9. The point of your post was that you are Keynes' #1fan because you understand his preference for drlvlng investment over consumption. You follow thls by telling me that the distinction between investment and consumption is completely subjective and that the Egyptian view of whether "they" were investing or consuming is meaningless. Many other problems with your thinking in this post, but this is ridonculus.

  10. re: "the Egyptian view of whether "they" were investing or consuming is meaningless"

    No, you are misreading. What I said was that your questino was meaningless. Not the Egyptian's own view of things. It was meaningless because it wasn't relevant to the point of the passage.

  11. So if a nation is compelled by its autocratic ruler or its own religious mania to build a casket the size of a town, it's destined to prosperity because the "marginal efficiency of capital"/"marginal utility" (interchangeable here, I guess) will far exceed any interest rate constraint. Whether it increases the ability of the taxpayers to create more wealth (by creating a transportation system, say) is immaterial as long as the mania remains or the ruler can force the taxpayers to continue paying by some method for silk brocade lining in the giant casket. But it's generally better for government to increase investment instead of consumption, which you get even though other K people usually don't.

  12. mobsrule you're missing the point, which is precisely why I noted Keynes's writing style as a stumbling block for people not interested in having a real discussion in tihs post:

    If you think the message is "building stone monuments to honor ancient gods is great!", then you've missed the point entirely.

  13. So the marginal efficiency of capital and marginal utility ARE interchangeable for the purpose of that passage and it's agreed that as long as aggregate demand is maintained at a sufficiently high rate a society will prosper... even if it maintains that state through production of things that are useful only as monuments to some dictator. That the potlatch nature is a feature instead of a bug because a society that puts its energy only into useful things will run out of stuff to do and whither without some govt to force it to produce something huge and because that's what empirical science says. What's not to understand?


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