"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.