Saturday, November 12, 2011

Sentence of the day

"It seems to be a quixotic and never-ending task to oppose demonstrably false statements about economics, often made by economists." - Robert Vienneau

I feel like that summarizes a lot of my blogging career.

Specific points he calls: "well established" propositions:
  1. Adam Smith did not use the phrase "The invisible hand" to refer to the optimality properties of a static general equilibrium supposedly brought about by the workings of competitive markets.
  2. Thomas Carlyle did not coin the phrase "The dismal science" to refer to Thomas Malthus's anti-utopian theory of population. According to that theory, human population responds endogenously to increased prosperity, thereby making impossible any rapidly established, long-lasting general rise in per capita income beyond the custom and habits of mankind.
  3. John Maynard Keynes, in The General Theory of Employment, Interest, and Money, did not explain widespread and persistent unemployment by sticky, rigid, or slowly adjusting money wages and prices - a pre-Keynesian theory that, in fact, he opposed.
I would put number 3. slightly differently. Rigid money wages were a pre-Keynesian theory, and they were not the explanation Keynes provided, but I think it's too strong to say Keynes "opposed" the theory. He makes very similar points to the wage rigidity argument in parts of ch. 19, they simply don't form a central part of the argument. Keynes criticized Pigou for leaving it at rigid wages - not for being wrong about rigid wages.

Two interesting points that I think most people don't know about the invisible hand: (1.) he uses the phrase much later - a couple hundred pages into the book - than most people realize, and (2.) he first used the term in the Theory of Moral Sentiments, years before Wealth of Nations.

9 comments:

  1. Indeed, Gavin Kennedy is an excellent example of someone who goes on the noble (if very tedious) task of righting incorrect beliefs, as Robert Vienneau points out on his blog.

    But speaking of correcting erroneous beliefs about Keynes, Daniel, what did you make of the material in Chapters 20 and 21 in the GT? The supply-side foundations of the GT are apparently contained there, along with evidence that Keynes distinguished between a classical Quantity Theory of Money with his more "general" quantity theory of money. In a footnote, expectations are in the equations used on pages 304 to 306 of the GT.

    http://www.hetsa.org.au/pdf-back/21-A-4.pdf

    http://www.hetsa.org.au/pdf-back/24-A-4.pdf

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  2. 'I would put number 3. slightly differently. Rigid money wages were a pre-Keynesian theory, and they were not the explanation Keynes provided, but I think it's too strong to say Keynes "opposed" the theory. He makes very similar points to the wage rigidity argument in parts of ch. 19, they simply don't form a central part of the argument. Keynes criticized Pigou for leaving it at rigid wages - not for being wrong about rigid wages.'

    I have to admit I'm not 100% sure what you're saying, but here's my take:

    - Keynes explicitly assumed flexible wage sin his analysis.

    - He came to the conclusion that unemployment would still exist.

    - He noted that wages are sticky in the real world, but that this was a positive as it kept demand buoyant.

    So Keynes accepted that wages are rigid, but thought this was a good thing rather than a bad one. Vienneau's problem is that he is characterised as holding the opposite position in standard economics teaching. Do you agree with him?

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  3. Sigh - badly worded last sentence: Keynes is characterised as having sticky wages explain demand side business cycles in standard economics teaching.

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  4. I almost posted that with it - one of my favorites. I bet you have this one framed over your computer, Gary.

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  5. The debate over what Smith meant is complex, not clear cut. See...

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1495787

    Dan Klein and Gavin Kennedy had a debate about it, though I haven't had a chance to read that yet.

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  6. LOL

    I admit I only read the Abstract, but they base their paper on whether the invisible hand was in the centre of Smith's books?

    Honestly, GMU professors.

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  7. OK, they offer some justification into the paper, but I still think they're splitting hairs here, particularly as the 'invisible hand' in context was used:

    a) to describe an early version of trickle down economics

    b) as a vaguery about investors preferring domestic ventures

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  8. I have no idea if it's worth anything - but it is a fascinating argument.

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