Tuesday, July 31, 2012

Keynesians on Uncertainty V

This comes from the relatively new Keynesian convert, Judge Posner, who nevertheless has really been able to nail Keynesian concerns in his writing on the crisis. Answering the question of why unemployment remains so high earlier this year, he writes:

"The uncertainty of the economic environment and the weakness of bank balance sheets caused banks to restrict lending (other than to the federal government and a handful of other reliable borrowers), so credit for consumer purchases became harder to get, and this further reduced consumption spending. The Federal Reserve flooded the banks with money, but the banks hoarded the money. With credit scarce and consumer spending down, companies reduced production and so laid off workers, which further reduced consumer spending, both directly by reducing incomes and indirectly by increasing uncertainty about the economic future. 

When the downward spiral stopped, and consumer spending revived, companies were reluctant to hire back the laid-off workers because of continued uncertainty about economic conditions arising in part from the deepending economic crisis in Europe and slowing economic growth in countries like China, India, and Brazil."


Now, this is five (count 'em - one, two, three, four - then this) unambiguous examples of the importance of uncertainty to Keynesian views of the crisis.

This was not out of the blue. When I disputed Chidem's claim a week and a half ago that Keynesian ignored uncertainty (and I was not the only person to say it was a very strange and uninformed post from her), Bob Murphy - after furnishing a quote that didn't really speak to the question - challenged me to find one example of Krugman citing uncertainty as a problem that needs to be addressed. I've found two from Krugman, two from DeLong, and one from Posner now and yet things are oddly silent from Bob (to be fair to him - and I definitely want to be fair to him - I know Bob's been very busy with writing and teaching lately). But it's still worth asking: does this cut it or should we continue this series?

Steve Horwitz got in on criticizing me too. A couple years back Steve was very supportive of me as a young scholar - something I really appreciated. For some reason now I get this:

"Ah yes, argumentum ad Keuhnum:

1. Austrian claims Keynesian says X
2. Austrian says X is wrong
3. DK says "I don't know of any Keynesian who believes X"
4. Austrian points to textual evidence of X
5. DK insists that's not what the Keynesian meant
6. Austrian does facepalm, wastes a bunch of time arguing about it and eventually realizes it's pointless, and goes back to working on something more productive

Why the facepalms? So far Bob has offered one quote showing a Keynesian who didn't accept a very particular version of an uncertainty argument. I've offered five examples of Keynesians highlighting uncertainty as a major contributing factor for the recession. Does Steve think better of this comment now too, or do I need to keep going?

Contrary to some peoples' beliefs, I see exactly zero benefit in bullshitting my readers or making stuff up - and that goes for my comments on other blogs too. I'm an open book, guys, and I see no point in obfuscating on plain truths.

My sincere claim is that uncertainty about the future is the critical driver of Keynesian theory. I am certainly not the first to say this, and it's in plain English in the General Theory. That's of course not the only thing going on. There are other non-expectations/uncertainty-related shocks to demand that really do matter, like the financial crisis and potentially some policy decisions as well. But those shocks generate uncertainty and changes in liquidity preference and subjective assessments of profit opportunities that depress demand further. This is not crazy stuff I'm proposing.


  1. Out of curiosity Daniel Kuehn, do you find it "excessive" of Dr. Michael Emmett Brady to trace Keynes's approach to uncertainty in the General Theory all the way back to the mathematics of A Treatise on Probability, which in turn owes a debt to George Boole's An Investigation of the Laws of Thought?

    Dr. Michael Emmett Brady aside, you could have strengthened your argument by pointing out the specific pages where Keynes makes references to uncertainty (and to A Treatise on Probability) in his magnum opus: Pages 148 and 240.

    1. I certainly don't think it's excessive to note that the uncertainty ideas in the GT go back to the TP. That's obviously true. As for Boole, I'll have to take his word for it. I'm not that familiar with the origins of the TP.

      I didn't have the book on me, and anyway I think my critics are more concerned about contemporaries.

  2. Somehow Chidem never stopped digging with her claim that Joe Stiglitz is a supporter of further monetary easing. My conclusion is that she does not understand Keynesians as much as she thinks she does.

  3. I suppose Austrians think the ultimate source of all uncertainty is government. It helps to lump your enemies together.

  4. Daniel, FWIW, I dropped this series when you presented what appeared to me to be two smoking guns in my favor from Krugman--and thought you had helped your case. Go back and look at those two examples again. Krugman is explicitly rejecting the regime-uncertainty diagnosis that Chidem was talking about, so on that score it's good for us. Then, when he goes on to talk about other types of uncertainty, he isn't himself endorsing them as reasons for the downturn. Instead, he's just saying how hypocritical these conservative Republicans are. I.e. it was of the form, "And to the extent that you think uncertainty is holding back investment, Paul Ryan is scaring investors with talk of default on Treasuries way more than Obama's health-care socialism. You guys are a bunch of frauds."

    Look, when Krugman was talking about his alien invasion curing the economy in 6 months, he didn't add the caveat, "So long as people are confident about sales in the future." He has never, ever (as far as I can remember) suggested that uncertainty of any kind is the thing holding back the economy right now. Your two examples are consistent with my interpretation. He wasn't worrying about budget uncertainty or Europe in those posts, he was just showing why right-wingers were ideologues in their interpretation of survey results etc.

    1. Chidem wrote this: "These correspond to two ways of understanding the sluggishness of the US economy, explanations based on different time horizons and levels of analysis. For Keynesians, the key is demand, which needs to be boosted by government action. For the other side, the key to slow growth and job creation is heightened uncertainty."

      And this: "But as far as macro policy goes, Keynesians focus on the spending angle—that is, the result of the uncertainty, not the shakiness of futures prospects that is causing the problem. Their policy levers work on the immediate prospect of creating aggregate demand, while ignoring the effect on people’s expectations of the future. As Mr. Meltzer points out, the Fed has been pursuing short-term policies. The analysis that underpins calls for stimulus, both monetary and fiscal, is concerned with the symptom – low spending – rather than the underlying doubts of which it is a result."

      What I've provided clearly demonstrates these are false.

      My claim has always been that yes, Keynesians (including Krugman) have argued that regime uncertainty is less important than other types of uncertainty, and yes there is a disagreement on that because that's precisely the kind of uncertainty Austrians point to.

      But to claim what Chidem claims - that Keynesians care only about short-term spending channel solutions and do not worry about the problem of uncertainty (this is what she said - she did not just say "well they agree with us on uncertainty they just worry about different kinds of uncertainty" - that would have been very different) is simply wrong.

      Now you seem to be saying what I've been saying (and perhaps you were always saying this), so perhaps it is evidence in your favor.

      But it is unequivocally evidence against Chidem's claims.

    2. Notice how Chidem characterizes the difference: (1.) time horizons and (2.) levels of analysis. Not "they think about one type of uncertainty and we think about another".

      Perhaps you have agreed with me all along, but Chidem definitely made a much broader claim than you that misrepresented the argument, and a lot of people besides me saw this.

  5. Oh, the ones you gave from DeLong and some others were closer to your point, so I am prepared to say Keynesians in general worry about uncertainty. But I still remain by my original claim, when I said *Krugman* never has.


All anonymous comments will be deleted. Consistent pseudonyms are fine.