Sunday, September 11, 2011

Mankiw on Investment

Excellent thoughts from Greg Mankiw on the importance of investment for this recession in this article. He specifically highlights the importance of investment for Keynesians, contrasting it with the consumptionism you hear from more popular sources:

"Yet fluctuations in investment spending, rather than being only a passive response, are also one of the driving forces of the booms and busts of the business cycle. The great economist John Maynard Keynes suggested that investment spending is in part determined by the “animal spirits” of investors, which he described as “a spontaneous urge to action rather than inaction.” Recessions occur when optimism turns to pessimism, and businesses are reluctant to place bets on a prosperous future. Recovery occurs when investor confidence returns."

"Animal spirits" is always a little vague when it is invoked, and it sounds a little hokey. Of course all that is meant by that is the expected yield of a specific investment. Those expectations - for obvious reasons - can be unstable, hence "animal spirits".

All the suggestions for dealing with the investment problem are excellent. Hopefully this helps put to rest the idea that Keynesians offer a consumptionist vision. The one suggestion that is missing from the list is further fiscal stimulus (although note he nevertheless doesn't jump on the Bob Higgs austerity bandwagon... this op-ed is very different from the one Barro recently wrote). I imagine that has a lot to do with the fact that Mankiw is advising Romney now.

Mankiw also addresses an idea that Andrew Bossie has been raising in the comments. I think Andrew is right that housing has dragged down investment figures and it's worth noting that that is a major driver of the numbers, but Mankiw points out:

"While the sluggish housing market can explain the slow pace of residential investment, it is not the whole story. Business investment has also been weak. Over the last two years, nonresidential fixed investment has grown by only 12 percent, whereas during the two years after the 1982 recession, it grew by 27 percent. Similarly, the narrow category of spending on business equipment and software fell more than twice as much in this recession as it did in the 1982 recession, and it has been slower to recover."


  1. Re "animal spirits," a stock market technician I once worked for described the stock market as a manifestation of the zeitgeist of the people.

    Dennis Baker

  2. I'm guessing Horwitz quoting a Keynesian as support that investment is a the problem while still claiming that Keynesianism = consumptionism is driving you up the wall.

  3. Wow. Thanks for pointing that out Desolation Jones. I suppose at least he's not explicitly talking about Keynesianism in this one. But right - can he not see the irony of posting these one after the other?

    Steve has been producing a lot of head scratchers lately. Normally I think he's one of the most on target on that blog - I don't know what's been up with his posting lately.

    I like how he introduces this new post with "it's not just Higgs" - as if anyone thought it was just Higgs. The volatility of investment relative to consumption is one of those stylized facts of macroeconomics that they teach you very early. By sophomore year every economics major should know this stylized fact.

  4. "'Animal spirits' is always a little vague when it is invoked, and it sounds a little hokey."

    It isn't really vague; the concept of a vital fluid or other kind of stuff or what have you being involved in either how the body works or the mind works or the interaction between has been around a long time. Keynes' thought is species of a commonly related genus of thought along these lines associated with some obvious folks - Galen, Descartes, Hume, etc. They were often considered to be in our blood and it was claimed that they had profound effects on every aspect of our being (particularly when they got out of balance). So to me what Keynes is getting at here is an updated version of this concept, but it isn't a fluid in our body anymore, it is tied to Freud's concepts of unconscious motivations and the like (the more I read the more I realize that Keynes was very much enamored with Freud and relied heavily on him for his concepts regarding human psychology) - there are motive and hidden forces in the minds of most people and it is up to a small elite to make sure they are held in check.

  5. Indeed, I think it is safe to say that Keynes was basically a Freudian, which ought not be terribly surprising - Freudianism was a very commonly held position in the 1930s and 1940s (though it turned out to have a lot of deleterious effects on a whole bunch of people).

  6. In fact, the more I read Keynes and the more I read about him he seems to have in mind an almost after Eden notion of man; man as a fallen creature, a concept which is best exhibited by the desire for money (which is something that really bothered him - the commercial aspect of people around him - which I think partly explains why libertarians don't like him - we have very different notions of what constitutes the appropriate nature of economic transactions, etc). Only in the future when desire and want are cured will that "spring" of the love money* (his word - bizarre that he picks up an almost mechanistic notion of human psychology in the same way that Hobbes and others during the 17th century scientific revolution talked about such things - read the Leviathan it talks about the insides of people being like clocks) which drives man be put aside.

    There is a ton of philosophical, near theological, etc. presuppositions, axioms and bric-a-brac even behind what Keynes argues regarding his economic concepts - and much of that stuff is quite conservative in bent, and very pessimistic about human beings. This actually endears Keynes to me because he turns out to be a far more interesting, muddled character with a lot of very anti-modern attitudes about his fellow human beings.

    He reminds me so much of so many other historical figures from the time; people who want to be the handmaidens of a new society. But not in the sort of really crude way that the USSR was built; and I think that is where advocates of the notion of Keynes being a quasi-fascist or whatever have a hard time conceptualizing what Keynes was about - because the only historical framework they have from the time period is either fascism or communism, when there were all these sort of elitist, but not barbaric or violent concepts of societal engineering (if you want to use a term like that). Someone that comes to mind is Le Corbusier. It isn't an exact analogy by any means obviously, but Keynes I would say falls into that camp. In fact now that I have let this rattle around in my head a bit, a good analogy in some ways would be James Hilton's concept of Shangri-La from his book in the early 1930s.

    Anyway, Keynes is starting to grow on me, but in a way that is different from other people I suspect.

    *And there are definite aspects of classical Greek/Roman and later religious thought which he seems to be calling on - or at least the general tradition of such.

  7. I have no idea what you're talking about Gary. This all reads like bibliographic diarrhea. Let's try to stay on topic with Mankiw on investment in the recession.

  8. Daniel,

    I'm just telling you that you're wrong.

    "Of course all that is meant by that is the expected yield of a specific investment."

    It means much more than this.

    So I am very much on topic.

  9. Oh wow! All that Freud, Eden, Hobbes, Le Corbusier, Hilton, the Soviets, theology, and Greek and Roman religious thought was all on that one point.

    I thought you were just waxing po-mo with Galen, but I could see that you were trying to connect the ideas. I didn't realize you kept going with it.

  10. For Gary and Daniel,

    It appears that Keynes used the term "animal spirits" more in the literary meaning that was popular at the time by those like Dafoe, Austen (pg 3) rather than simply an updated version of older (Hume, Descartes) physical version (like something in our blood). Like high hopes!

  11. @Gary Gunnels: Actually, you're not the only person to have pointed things like that in Keynes's writings. Some people have pointed out that Keynes's remarks on usury laws in The General Theory parallels Adam Smith's remarks on usury laws, and even goes back to old Judeo-Christian thought itself!

    Carmine Gorga seems to be taking the argument a bit more than his co-author and colleague, however. See his website for more information...while I'm not particularly religious or spiritual, I can see where he's coming from somewhat.


  12. I kind of wish everyone who calls themselves a Keynesian would read 'Keynes Betrayed' by Geoff Tily. 'Animal Spirits' was mentioned 3 times in TGT and is a red herring.

    Keynes would be arguing that long term interest rates are still too high and have been for a long time. That is why investment is so sparse and volatile.

  13. Blue Aurora -
    Right, Keynes's interest rate theory obviously has antecedents. He recognizes this and goes into this in detail in Chapter 23. But the fact that other people talked about what Keynes talked about a long time ago seems to me to be very different from the Freudian/anti-modern/Shangri-La muddle that Gary has presented.

  14. Daniel,

    There is nothing muddled about what I have to say actually.

    I've made an argument; you have as yet to make a counter-argument.

    There's a huge and rich bunch of literature on the connection between Freud and Keynes - it is well worth reading. I really do get the feeling that many Keynesians are like many Randians I've known; where Keynes and Rand are above criticism and sort of figures that lie outside history. Keynes only becomes interesting as a historical figure when the sort of intellectual influences and choices that he makes are laid bare. And Freud was a significant influence on him; which ought not be surprising - Freud was a significant influence on those he surrounded himself with - the Bloomsbury group. Many of them had themselves analyzed by Freudians (though I don't know if Keynes ever had himself analyzed) and of course Keynes mentions Freud in a significant number of his works.


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