A commenter on Bob Murphy's post about the new Econstories video writes: "I don’t recall Keynes talking about any “Marginal Propensity to Invest”, or “Paradox of Consumption”."
I suggest you start here:
Book IV
The Inducement to Invest
Chapter 11. The Marginal Efficiency of Capital
Chapter 12. The State of Long-term Expectation
Chapter 13. The General Theory of the Rate of Interest
Chapter 14. The Classical Theory of the Rate of Interest
Appendix on the Rate of Interest in Marshall and Ricardo
Chapter 15. The Psychological and Business Incentives to Liquidity
Chapter 16. Sundry Observations on the Nature of Capital
Chapter 17. The Essential Properties of Interest and Money
Chapter 18. The General Theory of Employment Re-stated
You will find this completely mysterious eight-chapter (plus one appendix) book on the behavior of investment hid away behind the apparently massive three chapter book on the behavior of consumption. That's right - if we count the appendix as a chapter, Keynes had three times as much to say about investment behavior as he did about consumption behavior.
Guys like John Papola propagate these sorts of fallacies either by stating them outright or by more subtly nudging people towards them. Doing your homework dispels these fallacies.
Our commenter continues: "No, he talked about marginal propensities to consume, and paradox of saving, despite the fact that by symmetry, the same “problem” would arise if people suddenly reduced their investment with no corresponding rise in consumption, and if people suddenly all tried to consume more without investing more."
Yes, if people suddenly reduced their investment with no corresponding rise in consumption then output would fall.
That's called the paradox of thrift.
There is more savings than there is investment. Two things can adjust: the price of loanable funds that equilibrate savings and investment, or output. Keynes said liquidity preference was a powerful determinant of the interst rate that would cause this problem in the first place, so hope of interest rates falling so that we could gently have consumption replace the lost investment was unlikely. Output would likely be the quantity to adjust.
In other words, our commenter:
1. Misses the most extensive theoretical discussion made by Keynes, namely, his discussion of the behavior of investment, and then,
2. Asserts that Keynes spent too much time focusing on the paradox of thrift and did not spend enough time talking about more important problems, like the paradox of thrift!
This commenter is not a towering mind in economics or anything, which is more reassuring. But he is an excellent example of the sort of rubbish that basks in the glow of the production quality and catchy lyrics of Econstories.
Friday, December 7, 2012
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Yes, if people suddenly reduced their investment with no corresponding rise in consumption then output would fall.
ReplyDeleteThat's called the paradox of thrift.
No it isn't, Daniel. I agree the caricature people present of Keynes is wrong, but you're not going to convince anyone if you say things that are false. "Thrift" isn't a reduction in investment spending, "thrift" means an increase in saving, or a reduction in consumption relative to income.
The paradox of thrift is that when savings and investment don't match up output makes the adjustment.
DeleteIf you want to counter me by saying that "paradox of thrift" is specifically that odd result that increasing saving rates may lead to less savings, that's an entirely appropriate narrow identification of the term. But it's not "false" to class the very mechanism that leads to that result under the term "paradox of thrift". It's entirely appropriate to identify the mechanism in the premise-mechanism-conclusion sequence as a part of the paradox, IMO.
The point is that MF was identifying the exact process of the paradox of thrift and arguing that Keynes never talked about it. No narrowing of the use of the terminology to one specific application of that process from you is going to change the fact that MF completely misses the point here.
He is describing a Keynesian recession and saying Keynes never talked about it. "Paradox of thrift" is appropriate nomenclature for the discussion in my book, but if you disagree that does nothing to change the point.
Delete my large font sentence and the post still stands true, IOW.
Daniel:
DeleteYou will find this completely mysterious eight-chapter (plus one appendix) book on the behavior of investment hid away behind the apparently massive three chapter book on the behavior of consumption. That's right - if we count the appendix as a chapter, Keynes had three times as much to say about investment behavior as he did about consumption behavior.
I think both you and LK are confusing size of chapters with level of importance in the Keynesian theory. That is a flawed approach. In Human Action, Mises devoted a substantial portion to applications of praxeology, but praxeology is the core of Misesian economics. Praxeology only takes up the first couple hundred pages. If one were to use your logic, then I should say to anyone who claimed praxeology is the core of Misesian economics that "Mises devoted only the first few chapters to praxeology! For hundreds and hundreds and hundreds of pages more, he talked all about price formation, markets, interventions, etc, and that is the core of Misesianism!"
Um, no. Just like telling me that Keynes devoted more chapters to investment than he did to consumption does not in any way prove that his theory is investment focused as opposed consumption focused. The consumption chapters lay out the core of Keynesianism.
Guys like John Papola propagate these sorts of fallacies either by stating them outright or by more subtly nudging people towards them. Doing your homework dispels these fallacies.
It's not a fallacy.
Yes, if people suddenly reduced their investment with no corresponding rise in consumption then output would fall.
That's called the paradox of thrift.
No, it isn't. The paradox of thrift deals with reductions in consumption, not reductions in investment.
There is more savings than there is investment. Two things can adjust: the price of loanable funds that equilibrate savings and investment, or output. Keynes said liquidity preference was a powerful determinant of the interst rate that would cause this problem in the first place, so hope of interest rates falling so that we could gently have consumption replace the lost investment was unlikely. Output would likely be the quantity to adjust.
OK, but this does not address my argument.
1. Misses the most extensive theoretical discussion made by Keynes, namely, his discussion of the behavior of investment, and then,
I didn't miss it. You just don't seem to be able to understand its importance, or should I say, relative lack of importance vis vis consumption.
2. Asserts that Keynes spent too much time focusing on the paradox of thrift and did not spend enough time talking about more important problems, like the paradox of thrift!
Except that wasn't paradox of thrift!
This commenter is not a towering mind in economics or anything, which is more reassuring. But he is an excellent example of the sort of rubbish that basks in the glow of the production quality and catchy lyrics of Econstories.
Well, let's be honest here. If I am not towering, then I think it's safe to say that you're ankle biting.
The point is that MF was identifying the exact process of the paradox of thrift and arguing that Keynes never talked about it. No narrowing of the use of the terminology to one specific application of that process from you is going to change the fact that MF completely misses the point here.
DeleteI wasn't identifying the paradox of thrift, DK. I was identifying Keynes' lack of discussing "paradox of consumption", and "marginal propensity to invest", despite the fact that they would (allegedly) have the same negative effects on the economy by symmetry. I elaborated on this by saying he did not discuss situations in which "problems" arise if investment falls with no corresponding increase in consumption, and more importantly, he did not discuss situations in which "problems" arise if people consumed more but without any increase in investment. To Keynes, these latter situations would be cause for joy, since, after all, the marginal propensity to consume would "approach unity".
You know, next time you blow a gasket, I humbly recommend that you actually understand not only my argument, but the subject matter as well (which you seem to be confused about). Just some advice.
I have not proposed a page-count metric of importance (although surely it's an indicator - we can at least say it is one of the two or three key ideas even if we're uncomfortable ranking them).
DeleteWhat I am suggesting that your claim that you "don't recall" him talking about this stuff strongly suggests you have no idea what you're talking about.
What would you say if I told you that I don't recall Mises talking about praxeology?
Ranking ideas based on page count is dubious.
Expectation that you ought to associate eight chapters of exposition with its author is not dubious at all.
I have not proposed a page-count metric of importance (although surely it's an indicator - we can at least say it is one of the two or three key ideas even if we're uncomfortable ranking them).
DeleteYou didn't have to explicitly "propose" it. It is implied in this comment you made to defend the view that Keynes' theory is investment focused:
"You will find this completely mysterious eight-chapter (plus one appendix) book on the behavior of investment hid away behind the apparently massive three chapter book on the behavior of consumption. That's right - if we count the appendix as a chapter, Keynes had three times as much to say about investment behavior as he did about consumption behavior."
Sounds like a page count metric to me.
What I am suggesting that your claim that you "don't recall" him talking about this stuff strongly suggests you have no idea what you're talking about.
DK, please don't straw man me. What the heck does "this stuff" even mean? I specifically said I don't recall him talking about any marginal propensity to invest, or paradox of consumption. Do you deny this? If so, please cite me a page number where he talks about them, and to be as fair as possible, he doesn't even need to call them by those exact names.
What would you say if I told you that I don't recall Mises talking about praxeology?
Then I would say this is a terrible analogy, because contrary to my argument that I don't recall Keynes talking about the specific concepts above (which are more detailed than "this stuff"), Mises in fact did talk about praxeology. He even used the term.
Can you do the same for Keynes?
Ranking ideas based on page count is dubious.
Agreed! Yet you and LK are doing just that.
Expectation that you ought to associate eight chapters of exposition with its author is not dubious at all.
Keynes could have devoted 99% of his General Theory to prattling on about capital and investment. It wouldn't change the CORE foundation of his theory.
I mean come on, you don't even know what the paradox of thrift is about!!!
DeleteHave you actually READ the GT? Serious question.
"Keynes could have devoted 99% of his General Theory to prattling on about capital and investment. It wouldn't change the CORE foundation of his theory."
DeleteM_F has no idea what he's talking about.
We have already refuted his pure idiocy when he made this statement:
“There are passing mentions of it [investment], but nothing like the emphasis on the propensity to consume.”
Anyone who asserts that the GT has only "passing mentions" of investment has zero credibility.
If this idiot had an iota of honesty, he would graciously acknowledge he made a mistake and move on. Instead, he will dishonestly change the subject - shift the goal posts - to different points, and spew forth his torrent of nonsense like the hack he is.
Daniel,
Debate with M_F is pointless, though it is an object lesson in the dishonesty, stupidity and ignorance of Austrians like him.
"I specifically said I don't recall him talking about any marginal propensity to invest, ...."
DeleteThat's because you're too stupid to notice that Keynes talks about this all the time, except that he does not use the exact phrase "marginal propensity to invest". He does not need to use that exact phrase to talk about it, anymore than I need to use the term "fiduciary media" to talk about negotiable debt instruments.
This would be like me claiming that Mises never discussed credit money because he never uses the term "book money" in Human Action.
Daniel, what's a good intro to Keynesianism, or better New Keyenesianism?
ReplyDelete(I sometimes wonder if MF is Bob in a monkey suit messing with us btw.)
It's old, but I always tell people that the book that really made everything click together for me was Klein's "The Keynesian Revolution". For New Keynesianism there are good survey articles like Woodford's "Evolution and Revolution in Twenty First Century Macro" (although that's a broader history). I find Woodford's work on the IS-MP model in, for example, the JEP very accessible and you can kind of think of this sort of approach as IS-LM, but updated with what we think about the Taylor Rule and central bank reaction functions. Any good graduate textbook is going to give a good summary of New Keynesianism - the problem is sometimes its scattered. Usually the discussion of Taylor Rules is where they pull it all together.
DeleteI think of New Keynesianism as being AD relation plus Taylor Rule relation plus Phillips Curve relation.
I think of Keynesianism as being IS relation plus LM relation, with a Keynesian cross and a money demand and supply curve generating both of those.
New Keynesianism, in that sense, revises our understanding of the role LM plays and microfounds the IS curve.
I think of Post-Keynesianism as any number of ways of introducing heterodox relations into those basic building blocks. Post-Keynesianism particularly builds in the prospect of the paradox of thrift more explicitly than Keynesian (ie - Neoclassical Synthesis Keynesianism) does.
(I sometimes wonder if MF is Bob in a monkey suit messing with us btw.)
DeleteI thought we were all in monkey suits jumping up on each other?
Well said, Daniel.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteStupid question:
ReplyDeleteWhen you say that people are increasing their savings without a corresponding increase of their investments, you're talking about a purely nominal phenomena right? All that you're saying is that demand for currency is rising? If not, what are you talking about? Building inventory?
It doesn't have to be demand for currency I don't think - it's just using less income to consume with and not consuming in some fashion with the rest of it. That could be a sort of hoarding/currency demand behavior. But it could also be just supplying more funds to the loanable funds market. If it's the latter, that's going to lower the interest rate and increase investment activity and presumably there's not a big issue.
DeleteBut the concern is that often consumers and investors pull back as a result of the same fears. They're keeping their savings relatively more liquid (which will not drive down the interest rate and may even increase it) and investors are not demanding as much loanable funds because they're reacting to the same shock or perhaps revising their expectations about demand based on consumption trends. This is the case where you'd expect to see more adjustment in output.
As for nominal phenomena - no I don't think it's purely nominal, although I may be misunderstanding the question. Nominal output is going to fall because we're talking about a demand shock. Some of that is going to show up in prices, but you are also throwing people out of work: there are real effects.
I'm worried I may not be understanding what you're getting at. It doesn't have to be just about rising demand for currency although you can see why that would be especially problematic.
By "nominal phenomena", I just meant that it was about what happens with money, so it can't happen in a barter economy. I didn't mean that there were no real effects.
DeleteOK, so it sounds like currency hoarding is just the more extreme case. But this is all about a shift in the demand for financial assets towards more liquid, shorter maturity, safer. Is that it?
If you think about a barter economy, presumably you hold some investment goods and then trade that to producers to invest with. The barter system is creakier, but I imagine you could have a paradox of thrift there by holding on to more investment goods in anticipation of needing them for exchange later.
DeleteKinda weird, but I suppose it could happen.
Money has all those properties that provide the especially devious case of pure liquidity preference, though. So it's definitely more natural to think of that.
My understanding is that holding on to goods is "building inventory" which we usually count in the investment column. Is that correct? Does it matter?
DeleteAs ever I cannot leave replies inline. Old browser I guess.
ReplyDeleteThanks, I'll look for Klein.
Oh Good Lord. There's a reason that Keynes doesn't spell out the term "Marginal Propensity to Invest" in The General Theory. It's because he assumed that one would be able to logically extend his "Marginal Propensity" analysis to investment, imports, and exports. Perhaps things might have been better if Keynes had explicitly spelled it out, but this really makes me cringe. Dr. Michael Emmett Brady comments on the various "marginal propensities" in the following review.
ReplyDeletehttp://www.amazon.com/review/R3QV63646V2MQB/
But more importantly than Book IV of The General Theory, Daniel Kuehn, is Book V: Money-Wages and Prices. In this section Daniel Kuehn, you can find Keynes's mathematical model (which uses differential calculus and integral calculus) depicting a situation of multiple equilibria - only one is the special case of full employment equilibrium, the rest are all unemployment equilibria. Book V also contains elasticities that are worth noting, and a section (the appendix to Chapter 19) that provides a comparison and contrast with Arthur Cecil Pigou's 1933 book, The Theory of Unemployment. Specifically, the important sections of Pigou's book that one ought to read is Chapters 8 to 10. There, you can see the special nature of the classical case, and compare it to the more general case found in Keynes's magnum opus. You ought to get a copy of Pigou's book and revisit the sections in Book V, Daniel. Then you can completely master The General Theory!
There's a reason that Keynes doesn't spell out the term "Marginal Propensity to Invest" in The General Theory. It's because he assumed that one would be able to logically extend his "Marginal Propensity" analysis to investment, imports, and exports.
DeleteWhy not spell out "Marginal Propensity to Invest" and assume his readers would be able to "logically extend" is to consumption?
MF: Note that I said that it "might have been better if Keynes had explicitly spelled it [the Marginal Propensity to Invest/Import/Export/Public Spending] out"...it isn't that hard of a stretch to go from the concept of the MPC and apply it to investment.
DeleteDaniel,
ReplyDeleteIt would be really neat if you spent some of your energy actually criticizing the legion of Keynesian economists, pundits and politicians who really do push consumption as a path to growth and prosperity in public discourse. THAT is what matters. Not technical papers lost in an ocean of academia which gets thrown out the window for crude keynesianism as soon as there's a recession.
Guys like Keynes totally misrepresent the law of markets as "supply creates its own demand", a nonsensical state that makes it seem as if classical economists thought that whatever gets produced will be sold by simple virtue of having been produced. Heaven forbid I make a video that corrects that error and criticizes a very VERY popular fallacy that consumption grow the economy that IS pushed by economists, including nobel prize winners. I guess they don't understand Keynes as much as you do. Is pyramid building "investment" or "consumption", by the way? Because I seem to recall Keynes celebrating it as a path to prosperity.
And gee... where would I get the idea that Keynes thought consumption would grow the economy. Perhaps from passages link this one:
"Moreover the richer the community, the wider will tend to be the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system. For a poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be compatible with the employment of its poorer members. If in a potentially wealthy community the inducement to invest is weak, then, in spite of its potential wealth, the working of the principle of effective demand will compel it to reduce its actual output, until, in spite of its potential wealth, it has become so poor that its surplus over its consumption is sufficiently diminished to correspond to the weakness of the inducement to invest.
But worse still. Not only is the marginal propensity to consume[6] weaker in a wealthy community, but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive unless the rate of interest falls at a sufficiently rapid rate; which 'brings us to the theory of the rate of interest and to the reasons why it does not automatically fall to the appropriate level, which will occupy Book IV. "
This sounds EXACTLY like every fallacious repetition that policies which direct money to those who spend every nickel will be better for the economy. All this is written and said... and yet I'm somehow accused of propagating fallacies. Sheesh.
Here's a link to a messy google doc I was using while I researched before writing the song.
https://docs.google.com/a/emergentorder.com/document/d/1YmKDyCzko9KlycaiGW7DwgSOorp5sOPVw3JofAMDMXI/edit
I do more homework on this stuff than I think you realize. Including reading what Keynesians actually write. I realize that Krugman thinks reading what people you disagree with write is a waste of time... but I'm not a fan of the kind of epistemic closure as he practices. I know you aren't either, clearly.
Consumption doesn't grow the economy. Increasing productivity does. There's no reason to encourage consumption as an attempt to achieve monetary equilibrium either. That's applying the wrong medicine to the hoarding disease. Satiate an increased demand for money (or "safe assets" as DeLong puts it) with MORE MONEY. There's no reason to make claims against future taxpayers to do that. Just increase the supply through open market operations.
- The paragraph you quote is about the marginal propensity to consume. If you think that's not important to considering how much investment is necessary for full employment, I think you've got another fallacy.
Delete- I do criticize Keynesians when they focus too much on consumption. Maybe you should follow the damn blog rather than make assumptions about it. I've criticized Krugman at several points for this sort of thing.
- re: "This sounds EXACTLY like every fallacious repetition that policies which direct money to those who spend every nickel will be better for the economy" IT WILL GROW THE ECONOMY! Jesus John, read my post. It's a fallacy to say this will not grow the economy.
I read the post, Daniel. I'm aware of the Keynesian argument against savings. I'm also aware that Keynes had a much deeper disdain for savings, which clearly informed his approach. See this gem: http://cafehayek.com/2012/09/keynes-savings-and-the-jews.html
DeleteThis is the downright poison is Keynesianism (and I'm not talking about his repulsive antisemitism). The over-aggregation of spending in the analysis literally dissolves understanding of how we come to live better. Not all "Spending" is equal. And the level of spending isn't what matters other than as a measure of monetary equilibrium. Consider that Microsoft has dumped many many billions more than Apple into R&D and yet come out with far far less actual value for the spending. It's HOW you use resources that determines whether it contributes to growth or just uses them up unproductively.
Using stuff up doesn't grow the economy. Figuring out how to produce more per person through increased division of labor and specialization and innovation in tools and techniques does. Steering resources to those who will use up all of them instead of save and invest some of them will reduce the engine of real growth.
To illustrate the point, isn't it the case that in most recessions, profits and business investment collapse first, only followed by consumer spending's fall and then profits and business investment recovery first, only followed by consumer spending. Isn't that exactly what's happened in this recession?
Look at the Personal Consumption Expenditure:
http://research.stlouisfed.org/fredgraph.png?g=dAk
Note that consumer spend kept rising until mid 2008.
Now, compare that with the NBER data on the recession dates:
http://www.nber.org/cycles.html
Note that the "Great Recession" actually started in December of 2007. So the economy started contracting SIX MONTHS before consumption began to fall.
Now compare that with the graph of private investment:
http://research.stlouisfed.org/fredgraph.png?g=dAj
Note that investment stalled in 2006 and began falling then accelerated its decline in mid 2007.
How do you account for this if consumption drives growth in the economy (or is a key to restoring monetary equilibrium) rather than investment and production?
NGDP is all about monetary policy. I learned that from Scott Sumner and George Selgin. There's no reason at all to encourage the using up of resources as a means of increasing NGDP. None. Nor should we burden future generations with bigger government and government debt by attempting to satiate the demand for "safe assets" with treasure bills when we can do the same with the far safer asset, dollar bills.
I actually had a draft of the final bit with Macro Santa where the voice over made this point. Not a single person I showed it to understood what I was talking about. So decided to focus on the great fallacy of our age: that we can consume our way to a brighter tomorrow. We can't. We have to work, save and invest our way out.
"I'm aware of the Keynesian argument against savings."
DeleteThere is no Keynesian "argument against savings." There is an argument against an imbalance between savings and investment.
"Keynes had a much deeper disdain for savings, which clearly informed his approach. See this gem: http://cafehayek.com/2012/09/keynes-savings-and-the-jews.html"
Ah, so someone simply alleges this, and that is good evidence it is so?! Hmm, let me write an evidence-free column that says John really hates Keynesianism because of homophobia, and then when someone talks about this, they can now use my column as "evidence"!
"To illustrate the point, isn't it the case that in most recessions, profits and business investment collapse first, only followed by consumer spending's fall and then profits and business investment recovery first, only followed by consumer spending. Isn't that exactly what's happened in this recession?"
Ah, you mean JUST LIKE KEYNESIANISM SAYS WILL HAPPEN?!
Gene,
DeleteI'm detecting a real chip on your shoulder. No idea why at all. When have I wronged you, sir? Anyway...
#1. Did Keynes NOT have a deep disdain for savings? Is that what you're arguing? Because that's my point and my link to Russ' article is a completely reasonable reference. He didn't just see it as a problem in positivist economic terms, but had a visceral problem with savings and the notion of looking purposively towards the future. He considered it a moral failing. At least, that is what his famed biographer says and I gather from what I've read. Robert Skidelsky, who's devoted a large part of his life to Keynes surely agrees. I'm really not sure why you're reacting to this as if it's heresy.
“Perhaps it is not an accident that the race which did most to bring the promise of immortality into the heart and essence of our religions has done the most for the principle of compound interest and particularly loves this most purposive of human institutions.” - John Maynard Keynes in Economic Possibilities for our Grandchildren. This tract is ALL ABOUT how we should live for today, not tomorrow.
Note that I did NOT say "keynes is an anti-Semite", though it appears he may have been. As Robert says, that was pretty common at the time. The umbrage your taking seems to be clouding your reading of my comment and its context.
#2. Gene, I fully understand that Keynes was focused on the volatility of investment due to "animal spirits" and such. Big deal. He also claimed that we could consume our way out of that problem and so does his moderns. THAT is my point. I stand by it. I can spend the rest of the year citing article after article that argues along those lines.
Are you seriously going to argue that our public discourse, including from nobel-prize winning Keynesian economists, is not littered with consumption-obsessed analysis? See any article from Robert Reich written since 2008.
I hope you'll post over at Scott Sumner's blog with the same snark, since he (a real economist, unlike me) has also noticed that many many economists seem to tell the public things that are contrary to the actual detailed research over and over again:
You haven't done anything to wrong him. Gene is a very bitter man, for some strange reason.
Delete
ReplyDeletehttp://www.themoneyillusion.com/?p=17187
Here's LAURA D'ANDREA TYSON and OWEN ZIDAR in the NY Times:
http://economix.blogs.nytimes.com/2012/10/19/tax-cuts-for-job-creators/
"These demand-side forces explain why consumption goes up much more after tax cuts for the bottom 95 percent than after equivalently sized cuts for the top 5 percent. An increase in consumption, which still accounts for about 70 percent of G.D.P., fuels increases in demand, and that leads companies to create more jobs."
Here's Paul Krugman in the NY Times:
http://www.nytimes.com/2008/10/31/opinion/31krugman.html
"No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend."
Shouldn't he be talking about retrenching business spending? Ehem. Yeah.
Here's Henry Blodget:
http://www.businessinsider.com/companies-need-to-share-more-profits-with-employees-2012-12
"American consumers — the folks who account for ~70% of the spending in the economy.
Almost every dollar these folks earn in salaries gets spent — on food, clothing, houses, education, entertainment, cars, and other goods and services that big American companies produce. So, if, instead of hoarding their wealth by hiking their profit margins ever higher, companies invested more in employees and equipment, they would help the whole economy."
Sure sounds EXACTLY like Thomas Malthus to me, there, Gene. The rich capitalists should pay their worker more since workers consume more as a share of their income. Why not just take a page from William Spence (before Malthus) and have the rich pay the poor to blow glass bubbles and then smash them?!?!?
I could go on and on and on right through Christmas day. I've produced a video aimed at confronting a very real fallacy being put forward by economists who should, as you note, know better and a broader media class who disseminates an even cruder version of it.
Whatever theoretical Keynesianism says, which still ultimately advocates replacing falling investment spending with government consumption and thus is just as subject to my critique, the public is getting "we can consumer our way to prosperity". Don't yell at me for that. Yell at your disingenuous colleagues who get into power and suddenly think that UI benefits are a stimulus because the unemployed have to spend every nickel despite there being no (to my knowledge) evidence or academic work in support of such a claim, keynesian or otherwise.
John, paying employees and buying equipment is investment spending.
DeleteSomeone like Krugman saying the government needs to step up spending on things like infrastructure and education is saying the private sector is unwilling or unable to increase investment enough to get to full employment so the public sector needs to pick up the slack.
Dean Baker, a Keynesian, has also repeatedly pointed out that consumption is historically high right now. People are saving only about 5 percent of their income, historically they saved about 8, and during the bubble savings dropped to zero. (He also points out that investment in software and equipment is almost back to normal.)
So we shouldn't expect savings to drop to zero unless we expect another bubble. He keeps saying that's precisely why we need the government to invest. Otherwise you have people needlessly out of work and suffering as the economy has the potential to produce more than it's doing.
I'm not sure why exactly you'd want the economy to be producing below capacity. They're are reasons you might want this but I don't think you've made them.
That said, I don't know what's difficult about the idea that increased consumption will help the economy. If the savings rate did fall below five percent this would boost the economy, a point I think Daniel made above. It's just that the source of the demand is non-obvious.
If you want to argue that we should be NGDP targeting and avoiding fiscal policy, that's fine, but there is nothing wrong with the story that increased consumption will lead to more investment demand, just because you can tell a story of increasing investment leading to more consumption.
I'd just point out regarding fiscal policy there are seemingly an endless amount of worthwhile things the government could be doing with infrastructure, research and development, and education right now so it might make sense to move some of these projects forward.
I imagine your response will be along the lines that the government can't invest productively or something, or even if it could it shouldn't. If it's the latter you probably should stop talking about our kids having a more prosperous future though.
(Also your point about Apple and Microsoft seem to contradict your point about needing more investment. Or was a point not separate from this discussion: that some companies invest more productively than others?)
I once read a great book called "Economics for Real People" which had a big impact on my understanding of economics. Hmmm.... not sure where that guy went.
ReplyDeleteUnderstanding or lack of understanding, I am not sure which.
DeleteRegardless, you just keep making the same error.
You keep assuming that savings is necessary for investment, when it isn't. All that is necessary is knowledge.
A future promise can be a perfect substitute for savings. You have a second knife, which is idle and unused. You found it. I promise to take the knife and hunt down a squirrel, tomorrow, and share half the squirrel with you. Or better yet, as products or services are merely knowledge in another form, you know how to make knives. I ask you to make me a knife, promising to give you the first squirrel. Where is the savings or investment? Truth be told, in substance, there may be no such thing as savings. Perhaps economic models should deal with the only real reality: knowledge. How do we get idle knowledge deployed and applied?
You are going backward and Daniel is going forward.
Savings is the second knife...
DeleteDing Ding Ding. Sandr for the win.
DeleteJohn, what you've just described is a textbook creditor/debtor or perhaps a shareholder/equity arrangement. The extra knife is savings being lent/invested. The first squirrel is interest/dividends.
Promises alone don't pay bills or buy equipment. I find it interesting that someone who denies the very existence of saving while using a metaphor of saving accuses others of not understanding and "going backwards".
I think the problem is that these Hayek enthusiasts do not understand that the economy needs different explanations at different times, because it is a complex system, not a single-causation system. Sometimes Hayek’s insights are germane, sometimes not. Another problem is that the demand-side slump is a sudden, emergent, mass-hydraulics problem, of an old-school Keynesian type, emerging from another, previous malfunction, of a “Bagehotian” type. We have clearly been in a demand slump, and the following, short flow-chart video may help more people to understand why:
ReplyDeletehttp://www.youtube.com/watch?v=LeZvQdk5UpU
Lee- economic laws apply to all people at all times. See Mises for a discussion of this. One doesn't pick the laws of nature sticking a wet finger up.
DeleteFor those who haven't seen it yet, here is George Shackle basically saying that the essence of Keynes' unemployment is investment: http://socialdemocracy21stcentury.blogspot.com/2012/12/the-essence-of-keynesianism-is.html
ReplyDeleteMy brief take on the matter is that Keynes was focused on investment, however Keynesians today often (maybe unintentionally) refer to boosting consumption (end demand) instead of investment. If I had to guess, consumption sells better with policy makers and the public since promoting investment sounds like favoring business.
(Yes, one could argue that perception is illogical, but that in itself doesn't make it unrealistic.)
Quick secondary thought...it seems important to differentiate between what drives the economy and what drives business cycles/unemployment. Since consumption is ~70% of GDP, it would seem correct to say consumption is the major contributor (i.e. drives) output. That statement, however, is very different from stating that fluctuations in consumption are the primary driver of business cycles and unemployment.
DeleteAnd in saying that consumption is "the major contributor (i.e. drives) output", you are stating clearly the idea that I am absolutely opposing with the video. Production creates output. Consumption uses output up. Those two things are the opposite of one another. GDP is an accounting entity. It's a summary of transactions. It's not a breakdown of how people earn incomes for their productivity activity (the source of their demand). 70% of Americans do not work in retail. Services isn't "consumption" either.
DeleteIf I make pizza and you cut hair and I pay you with my pizza income to cut my hair, that transaction is measured as "consumer spending" but the transaction is "driven by" our mutual production. It's an exchange of productivity. If I didn't produce the pizza, I wouldn't have an income to buy the hair cut. And what about MY customer? She had to produce something for someone else in order to have the money to buy my pizza. It's value-adding production all the way down.
Exchange is a transaction between producers in one way or another. You produce A, I produce B and we trade. Well, that's barter. What actually happens is I produce A for X dollars and use X dollars to purchase B from you, which you produced. But X is just the medium of exchange. Demand is enabled by supply. Say's law.
Consumption is our end, but production is our means. Production drives the economy and increasing productivity drives growth, which is made possible by savings. We can safely ignore and assume away the act of consumption as a matter of preference, and not a problem. If someone produces and sells their goods or services but doesn't turn around and buy anything else right away, that's only a problem if the money is held as cash and the monetary system doesn't accommodate changes in the demand for money.
Also... I don't dispute and haven't that Keynes explanation for the cause of a downturn is a collapse of investment spending. The lyrics from Fear the Boom and Bust went as follows:
ReplyDelete"Business is driven by the animal spirits
The bull and the bear, and there’s reason to fear its
Effects on capital investment, income and growth
That’s why the state should fill the gap with stimulus both…"
Got it. Got it from the beginning. Investment is the volatile driver of the business cycle. Austrians see the same thing and blame it on interest rate elasticity of investment spending (that nexus of savings and investment which Keynes denied existed) rather than an appeal to causeless mass psychological changes.
What Keynes and Keynesians DO say is that we can consume our way out, that consumption spending can fill the "gap" for investment spending.
THAT is what I continue criticizing besides the general idea that using up consumer goods can grow the economy recession or not.
"What Keynes and Keynesians DO say is that we can consume our way out, that consumption spending can fill the "gap" for investment spending."
DeleteThis is only true if you believe the government can't invest or that investment won't rise with rising consumption.
"Public works" like the Hoover Dam or DARPA's role in developing the internet aren't investments to you?
Keynesians are saying lower consumption is likely to lead to lower savings and lower investment and you keep saying we need higher savings and investment and then waving your hands about monetary policy.
But if you believe in monetary policy then you're not an Austrian.
I don't know any mainstream Keynesians who don't believe in using monetary policy, they just think we should use both monetary and fiscal policy for various reasons.
But even if you believe monetary policy would be sufficient our current actually existing Central Bank is either unable or unwilling to do what you say they should, but have seemed willing to accommodate fiscal policy.
"But if you believe in monetary policy then you're not an Austrian."
DeleteI suppose you've never hear of "F. A. Hayek".
As to this appeal to government "investment", the percentage of government spending that could reasonably called "investment" is both trivial (since it excludes all transfer payments and the military) and essentially impossible to measure in effectiveness since we have no financial return being tracked.
But Keynesians make the case that it doesn't matter how money is spent so long as it's spent. This is utterly false, but it's part of the focus on aggregate spending and conflation of monetary stability and the bizarre disregard for productive utilization of real resources.
John, if Hayek supported countercyclical policy from a central bank then in my opinion he's not an Austrian, but some sort of monetarist.
DeleteI don't know of one person who calls themselves an Austrian, besides possibly you, who supports central banking. They all claim central banking can *only* result in malinvestments and that this is "science". (Tyler Cowen is possibly a cryto-Austrian.)
If Hayek supported something called "malinvestments", that would seem perverse. You seem ambivalent about monetary policy yourself.
So maybe support of monetary policy (by you, Hayek, or Cowen) is a strategic bait and switch? You support it as an expedient because you think it's better than the alternative but if the time came you'd drop it too.
I'll try to respond to your claims about government investment and Keynesian spending a little later.
John, the Keynesian point is not that it doesn't matter how the money is spent, but that however we spend it, it is probably better to spend it than not. Obviously we would like to spend it as smartly as possible.
DeleteDo you agree with Scott Sumner that monetary policy isn't doing enough? If you believe that it's not, but will accommodate fiscal policy, why shouldn't we spend more money even if it's spent on consumption? How will this lower investment in your model when interest rates are at zero?
Or do you think monetary policy has already done enough or is already doing enough? If so I'd think this was a convenient excuse to do nothing.
Maybe I'm wrong but it seems there's an endless number of infrastructure projects we could be doing. If we had started them four years ago that would have been better, but it seems we'd have good reason to do them anyway, so maybe if we announce them it will impact expectations positively.
Broadband internet is maybe not a good example, because maybe it would crowd out At&t or Google, but if we did build out fiber broadband across the country it would supposedly be $140 billion. And if we made it a public utility we could even charge for it to get your financial return (if we give a "loan" to companies to do it we could still get them to pay us back). Just like if we build a train, people will buy tickets.
It's unclear why you think having idle resources is good? Why we shouldn't consume what we can produce? Do you think we'll consume our capital? Or are you concerned about natural resources or the environment?
If it's the latter perhaps we should be investing more heavily into scientific research and education. (Again we should be doing this anyway.)
It's strange you put scare quotes around investment when talking about government investment. I thought you wanted more investment? (Even though you haven't explained how a family buying "toys" will decrease investment in our current situation.) But now it seems you don't care about investment so much.
By the way saying Apple is better than Microsoft because they're more profitable is teleological. Just because the something wins or survives in the market does not make it necessarily better. Would you say one movie is better than another because it's more profitable. Maybe Microsoft's research unintentionally helped Apple. (Microsoft actually invested in Apple when they were struggling in the 90s.) (I'm not saying Microsoft is better, but you haven't given proof they aren't.) (You also ignored my point regarding about the Apple II being sold to public schools regarding your other Apple point.)
I've gone off thread though and so am going to stop.
It is remarkably sad how the American right tie them selves up in knots trying to discredit Keynesian economic insights as their Billonaire pay masters want social reaction rather then social progress! Just as they tout Ayn Rand as a philosopher. Pathetic.
ReplyDeleteKeith-really tired of the labels. They add nothing useful to the discussion.
DeleteBillionaires care no more about economics than anyone else. Government spending helps the well connected far more than those it claims to help.