Gene writes: "So, I'm teaching Keynesian economics for the second time. And once again, I'm telling my students that, per Keynesians, recessions occur when intended investment falls short of savings. And the best way to fix this, per Keynesians, is for the government to invest in roads, bridges, parks, education, etc. I'm fine with explaining all that.
What I can't figure out how to explain is why there are people saying Keynesianism is all about consumption and takes no account of investment."
The idea that it "takes no account of investment" is very tough to justify - and probably can't be justified. But I can see why consumption might get into the mix.
First, Keynes is often taught without regard to government at all, so in the Keynesian cross you have investment and consumption with a standard consumption function. So without government in this, how would you talk about prospects for recovery?
Either investment could increase or autonomous consumption could increase. Those are both curve-shifters, after all. In practice a lot of government spending looks like consumption, right? Some is investment, but a lot is handing out money to people who will spend it: outsourcing consumption to taxpayers. That's not "the problem" from the Keynesian perspective, but it creeps into the solution.
Also, the level of consumption is reduced (along with the level of savings), when income declines. That's a symptom, though - not a cause.
The other thing is the multiplier - higher propensity to consume makes stimulus more effective. That's of course a result of the slope of the consumption schedule, not because consumption is the primary issue. But consumption also creeps into the discussion that way.
Finally, really, really bad treatments of the paradox of thrift get people to say things like "Keynes didn't like savings". Gene and other reasonable people know that the problem with this is that it ignores the distinction between any savings and an excess of savings over investment. But if you persuaded yourself to be mislead on this point, "Keynes likes consumption" is the obvious corrolary to "Keynes does not like saving".
The last two points - about the marginal propensity to consume and about the paradox of thrift - are out an out misunderstandings of Keynes leading to preoccupation with consumption. The first two points - about thinking of government spending as an increase in autonomous consumption or noting the decline in consumption - are not quite as bad but they do seem to confuse cause and effect.
Smith on Human Capital
2 hours ago