More on the wonders that actually reading Keynes can do... Bob Murphy edition

Not that I want to continue that debate with Bob Murphy where he pointed out a problem, I conceded, and he continued to act as if I never conceded... but he puzzled me when he said this:

"You seem to be saying, “Oh, the Keynesian theory is still right, it’s just that unemployment is driving expenditures.” But no, that’s the opposite of what Keynesian theory says. If changes in unemployment are what drive expenditures during the business cycle, then Krugman et al. are wrong for saying we need the gov’t to boost spending to maintain aggregate demand."

That seemed a little odd and a lot wrong. I thought "somebody oughta warn Franco Modigliani!". Let's just take a look:

"There are also other factors, over and above the operation of the general rule just mentioned, which may operate to modify the marginal propensity to consume, and hence the multiplier; and these other factors seem likely, as a rule, to accentuate the tendency of the general rule rather than to offset it. For, in the first place, the increase of employment will tend, owing to the effect of diminishing-returns in the short period, to increase the proportion of aggregate income which accrues to the entrepreneurs, whose individual marginal propensity to consume is probably less than the average for the community as a whole. In the second place, unemployment is likely to be associated with negative saving in certain quarters, private or public, because the unemployed may be living either on the savings of themselves and their friends or on public relief which is partly financed out of loans; with the result that re-employment will gradually diminish these particular acts of negative saving and reduce, therefore, the marginal propensity to consume more rapidly than would have occurred from an equal increase in the community’s real income accruing in different circumstances."

Or, to put it in modern Keynesian-theory-speak (for those who have imagined some massive rift between Keynes and Keynesians) "When your income is zero you still have some autonomous spending that you find a way to finance, and you consume 100% of your income until you hit the point where the C curve and that Y=E curve on the Keynesian cross meet, after which point you consume a smaller share of your income".

I should hope the concept of "feedback loops" is reasonably accessible to people. Lower expenditures can cause unemployment and unemployment can cause lower expenditures, and lower expenditures with unemployment are still consistent with a life-cycle income hypothesis (which motivates the autonomous consumption idea). Intervention does not become meaningless in a feedback loop.

It's encouraging to realize you read Keynes like Bob Solow reads Keynes

The other day, Don Boudreaux wrote a post about McCraw's biography of Schumpeter, and specifically cited a passage on Keynes:

"But their [the young economists of the late 1930s and 1940s] focus on the techniques of Keynesian macroeconomics – which are amenable to mathematical modeling and very useful in the new methods of national income accounting – had diverted attention from the vision that underlay the whole apparatus. Even though the Keynesian creed of stagnationism “has petered out with the situation that had made it convincing” – the Great Depression having given way to unprecedented prosperity – most economists had remained so enthralled with Keynesian technique that they seemed “bound to drift into one of those positions of which it is hard to say whether they involve renunciation, reinterpretation, or misunderstanding of the original message.” And in taking this tack, as Schumpeter had said many times before, most economists had lost sight of the heart of the capitalist process, which in its endless dynamism was the opposite of Keynesian stagnationism."

Bob Solow reviewed the biography at The New Republic (this link to Thoma has the most ungated text), and this portion of the review on Schumpeter's view on Keynes was especially good:

"The internalized rivalry with Keynes, his exact contemporary, for the title of World's Leading Economist seems to have nagged frequently at Schumpeter.

But he seemed not to understand what Keynesian economics was about, or why it won over the younger generation. For example, he described Keynes as the apostle of consumer spending (in contrast to his own emphasis on innovational investment). But in fact consumer spending is passive in Keynes's General Theory. The driving force of the aggregate economy is actually investment spending; and Keynes put great causal weight on "animal spirits" and "the state of long-run expectations," both of which are much more akin to entrepreneurial drive.

Similarly, Schumpeter charged Keynes with being a "stagnationist" (in contrast to his own belief that there was no natural limit to entrepreneurial energy and innovation). This is a more complicated matter. The Keynesian framework could accommodate stagnationist ideas about the drying-up of profitable investment opportunities; and in other hands it did. Keynes certainly did not admire "money-grubbing," and he would have classified a hot-to-trot Schumpeterian entrepreneur as a money-grubber. That is not stagnationism. It is probably more accurate to say that Keynes erred in a different way, by thinking that consumers might become satiated as their incomes rose."

First, Bob Solow - unlike a lot of critics of Keynes knows that Keynesianism is not a consumptionist theory. This is something I've highlighted many, many times. This is something the critics regularly stumble on. At the end, Solow also notes where we can criticize Keynes - he's alluding to the essay Economic Possibilities for Our Grandchildren, which is a great read but has one prediction about consumption satiation that was a poor prediction. As I've noted in an exchange with Mattheus, it was this essay and this essay only where Keynes was ever much of a utopian (and here not even for the same reasons that Don Boudreaux accuses him of being a utopian in the General Theory!).

If you have to choose between getting your Keynes from Bob Solow or getting your Keynes from Don Boudreaux, for God's sake pick up something of Solow's (or, if you prefer, read this blog!)!!!

I finally watched The King's Speech last night

It was a really excellent movie. I liked the feel for interwar Britain they gave you. It also oddly enough reminded me of Pirate Radio in how it treated a new medium of communication (well, both radio and it wasn't all that new by Pirate Radio). Anyway, the underlying theme of both being that the way society is shaped by technology is highly dependent on the way society chooses to use technology, and the strength of character (or lack of character) that we amplify with technology (of course, in both movies, the protagonists bring strength of character to the table).

I thought a perceptive casting decision was Michael Gambon as George V:



Although the casting of Churchill was disappointing:

Evan on Nietzsche and the impact of technology on scholarship

Evan has a post reflecting on a Nietzsche course this semester. I recommend the whole thing, but found this particularly interesting:

"As I mentioned in my last post, I have really benefited from the online material on Nietzsche, especially Nietzsche Source, which made working with the primary texts a good deal easier than having that many more physical volumes piled around my desk. Besides simply referring back to the German as I worked through the primary passages for my research, I found myself making use of a technology that was unavailable to many past interpreters of Nietzsche, even of the relatively recent past: a full text search function. The ability to search Trieb nach Erkenntniss (to give one example) across Nietzsche's corpus was terribly useful, but I found myself questioning exactly what implications for scholarship were inherent in such tools. It is likely that I ran across a textual connection or two that has remained unexploited, even by a Nietzsche reader of Walter Kaufmann's caliber. Is this right? One almost feels fraudulent citing a range of texts that is much wider than what one has worked through from start to finish. It obviously wasn't my depth of familiarity with Nietzsche that earned me this knowledge, nor my superior interpretive skills. Yet the knowledge sits in my lap and surely shouldn't be dismissed simply because I didn't get a hold of it the old-fashioned way. Best, I think, is to make use of these tools as far as possible while still retaining a humility about the task. A rule of thumb: If I have a good sense of the limits of my abilities to contextualize a passage that I run across in a text search, then I likely also have a good sense of the extent to which I can responsibly employ that passage within an argument that I am trying to make. A rule of thumb on Nietzsche with regard to the preceding: his use of aphorisms and paragraphs makes the question of contextualization simpler in some ways because of their fragmented nature... but in other ways deceptively simple."

Evan's young daughter, Sophie, apparently saw a picture of Nietzsche when he was working with him this semester and insisted that he was a character from Veggie Tales. Following Sophie's train of thought down its circuituous track can sometimes be tedious work, but this is what Evan was able to come up with on that one:

Kenneth Boulding on Freedom

"Freedom is a troublesome concept and all the more important for being troublesome... The confusion arises because freedom is a concept with more than one dimension, and all its dimensions are important. A great deal of unnecessary political controversy and many false images of the world arise out of the failure to recognize the existence of these various dimensions. A person or society may be moving towards more freedom on one dimension and less freedom on another. Under these circumstances it is not surprising if we concentrate on the dimension which is favorable to us and neglect the dimension which is not. Hence we get into seemingly irreconcileable arguments about the meaning of these movements, with each party perceiving himself as becoming more free and the other party as becoming less." from The Dimensions of Economic Freedom, 1964

Bob Murphy sees economic science very differently from how I see it, I think

In his post pointing out my misreading of the graphic in this post, Bob writes: "OK, so again: You said that Keynesian theory predicts the data would say one thing. You didn’t say this, but I assume you would agree, that Austrian theory is agnostic on that point; those theories do not predict the data would say that same thing. So, if the data conformed to the Keynesian prediction, that would be a feather in John Maynard’s cap.

Ah, alas, it turns out the data say the opposite of what you told us Keynesian theory would predict. And now you are saying, this has no bearing on the validity of Keynesian theory vis-a-vis Austrian theory, because the latter is agnostic on this point?

How can this be? If the data turned out one way, it would help Keynesian theory, but if it turns out to be the opposite, it’s a tie?"

When I was working off a misunderstanding of the graphic, I talked about what we "expect to see" according to Keynesianism, and I said it was an interesting graph (I still think it's an interesting graph - it's surprising these discrepancies would end up being anything other than noise). I didn't say it was proof of Keynesianism. But I did have an expectation going into it, and that expectation ended up being wrong.

So is that a reason to discount Keynesianism? Maybe. But I don't understand why Bob is so quick to jump on that. He jumped on it with 1920-21. He jumped on it with his recent Mises Daily article where he declared the Austrian school was right on the stimulus and Keynesianism was wrong. And he appears eager to tally this to the anti-Keynesian camp here. I don't understand this perspective.

My reaction is to say "Huh - that's weird. I wonder why that is happening?" (non-Keynesians might not find it quite as weird because their expectations weren't dashed like mine were). It seems to me we oughta try to answer that question before considering this a mark against anyone. Commenters here offered some ideas (including Nick Rowe who just said it's impossible to interpret). In Bob's comment string, I suggested a life cycle consumption hypothesis explanation - an explanation Bob apparently came to forty comments after me. That seems like a pretty reasonable explanation to me, which solves our conundrum. Is life-cycle consumption inconsistent with Keynesianism? It wasn't the consumption theory Keynes offered, but it is not inconsistent with Keynesian macroeconomics. Is it inconsistent with the Austrian school? Not that I'm aware of. So the best explanation that the crowd-sourced minds of my blog and Bob's blog can come up with for this data is once again something that is consistent with multiple macroeconomic theories. That's where I come out at the end of this, and that's what I call scientific progress. We have a lot of ideas. We take it to the data. I make mistakes. I get my mistakes corrected by my peers. I get curious and confused. We figure out an explanation of the data, and we draw conclusions. For a scientific or an empirical mind, this has all been a great experience, and I am plenty happy to admit I was wrong.

But there seems to be this tendency in some corners - instead of doing science - to do proofs and falsifications. It makes sense, of course, that Austrians think in terms of "proving" things. That's the deductive mindset after all. It shouldn't surprise regular readers to learn that I really don't think we're equipped to do that. If you're interested in abstract philosophy and epistemology, Popper is among the best. If you're actually interested in doing something useful you can largely forget Popper (well - at least you can forget Popperian epistemology - I don't want to rip on Popper himself, who may very well have agreed that epistemology is of limited use in the practice of science, except as a vague mirage). I have serious doubts that Keynesian theory is falsifiable. I have serious doubts that Austrian theory is falsifiable. I have serious doubts that any truly interesting theory, at least of a highly complex phenomenon, is falsifiable. This point is crucial for scientists to understand.

We can talk in terms of observations that are consistent with or corroborate our ideas. If we collect a lot of consistent observations and corroborations, we can be more and more confident of the value of our ideas. We'll never have knowledge of it as epistemologists perceive it, but we'll have a more and more useful understanding of our world. When you think of science as corroboration rather than science as proof, it becomes very hard to talk in terms of theories being "wrong". I've run into this in two places in my short career: critiquing Buturovic and Klein on economic enlightenment, and critiquing Woods, Murphy, and Powell on 1920-21. Both made what appeared to me to be pretty extraordinary claims: that liberals were less economically enlightened than conservatives and libertarians, and that 1920-21 supported the Austrian school over Keynesianism and monetarism. What was my response? That Buturovic and Klein's data supported a number of conclusions (I offered which of those seemed more plausible to me), and that 1920-21 supported a number of conclusions (I didn't really advocate Keynesianism as more plausible there so much as defend it as being quite consistent with the data).

It's relatively easy to demonstrate how different theories are consistent with the data. Why? Because the economy is a very complex subject of study and lots of different processes can be operating at once. For the exact same reason, though, it's very hard to find inconsistent evidence that can be used as a disproof of a theory. The data on GDP(E) and GDP(I) didn't match up with my initial expectations, but they do match up with a prominent and well regarded consumption theory. So does that inconsistency mean (1.) that Keynesianism has a mark against it, or (2.) that the mechanisms governing consumption dominate in the data? Who knows? I certainly don't and Bob certainly doesn't. Now, if it were consistent with a rival macroeconomic theory, then Keynesianism would be in more trouble, I'd think. But I'm not aware of any macroeconomic theory that would expect what was observed in the data. Bob says the Austrian school is "agnostic" on this question, but it's really not. The Austrian school cannot be used to conclude that "if expenditure exceeds income, unemployment increases". Nothing says that, so we look elsewhere, and consumption theory gives us some insight.

My advice is this - do science by racking up corroborations and consistencies. Don't fall into the trap of trying to disprove other ideas. That's a deductionist mentality. That's the mentality of what Keynes called a "remorseless logician". It's damn near impossible, so you're only going to look silly trying to do it. Look at past posts on this blog to see how many times I've said "Austrian theory is wrong" or "X disproves the Austrian school". I try to put the heat on some elements of Austrian theory, and I do quibble with methodological and philosophical points. But you don't see me proclaiming the falsity of the Austrian school. Why? Because disproof is hard (as is proof).

So in a way Bob's characterization of me is accurate. I just want to explain why I approach things that way. Consistent data and corroboration is a good thing. Collect that stuff and use it to make judgements. Inconsistent data should first be explained - it may have nothing to do with what you were originally thinking about. I guess the best way to sum it up is with these two points:

1. In science, inconsistencies are much more likely to bring you a deeper understanding of what's going on than they are to bring disproof. In logical deduction, inconsistencies are much more likely to provide a disproof but not a deeper understanding of what is going on. Science is not deductionism, and

2. Theories succeed in science by being capable of explaining a wide range of observation. Theories are usually surpassed by other theories that do a better job at explaining observation. If other theories can't explain the observation better, they offer no more consolation*.


*Kuhn makes this point repeatedly - science doesn't progress unless a better explanation emerges. Inconsistency with one theory without consistency with an alternative theory means very little. The Austrian school and Keynesianism (minus life-cycle consumption) are equally incapable of grappling with observation. Keynesianism plus life cycle consumption theory and the Austrian school plus life cycle consumption theory do do better. We have made progress by determining that amongst ourselves.

Part of a new paper on SSRN - thoughts appreciated

I'm done for now with the first section of the NBER chapter on the supply of new engineers. I've posted that and the introduction on SSRN here. The rest of the paper should be quicker to write - it's in a detailed outline, but I didn't include it here.

Any thoughts would be greatly appreciated. The audience is intended to be fairly broad - not just economists. Also engineers and policymakers. So I tried to explain things like self-selection models in clearer, non-technical language. If you can think of any way I can improve that I'd appreciate it.

Thanks for any thoughts. Of course I post more as I get it cleaned up.

A good passage from Boulding

Also in the manpower essay I mentioned in the last post. This is indirectly related to why demand policies are more sensible than supply policies on this stuff:

"There is no Single Well Defined End (SWDE) of Society, measured in bushels or gollops or even dollars. There are a great many different ends of a great many different people, some of which are competitive, some complementary, and some independent. Moreover, there is no such thing as manpower, save as a hot abstraction to be handled with long tongs. Not Manpower, but Men - with this cry I propose to arouse the populace to the threat which menaces them. I repeat, not manpower, but men: men in their infinite variety and sacredness, in their complex personalities and unfolding desires. Man as Manpower is all very well for a slave society, where man is a domestic animal, to be used for ends which are alien to him. But in a free society man is not manpower; he is not a donkey chained to a great churn for the production of SWDE. He is a free being, the lord of society and not its slave, the creator of demand as well as of supply. In these days we are all in danger of being overcome by the great Feudal myth of Society, a frowning overlord to whom we are all too subservient, even if he has the impressive title of Lord National Interest or even Lord Social Interest."

The point that he makes later on is that simply increasing a factor of production is not going to achieve the private or social goals that we may have. He starts with an oversimplified picture of the market - then he outlines where that breaks down, focusing particularly on externalities as a justification for public or social demand for certain things. But he makes the point that you don't satisfy that demand by artificially generating more factors of production. That is (1.) distortionary, (2.) an affront to a free society, and (3.) a misunderstanding of the economy as some simple machine where if you put in more inputs you automatically get out some "Single Well Defined End" as he puts it. Generating more manpower doesn't automatically produce this "Single Well Defined End" - the market will respond to demand for that "Single Well Defined End". This is the point he makes with respect to conscription - if there is a social need for military (he sees few - he's a Quaker), Boulding argues that armies should be financed, not conscripted. Soldiers should be bid for on the market by the government so that the labor market isn't distorted and forces of supply can respond to demand. It doesn't work the other way around. This "manpower view", applied to the science and engineering labor force, suggests that if we just generate more and more scientists and engineers the United States will be in a better, more innovative, more competitive position. This is (generally) not my view. I think some supply policies make sense of course. Diversity is a major problem in the scientific workforce, and those sorts of policies are good. Strengthening science education is never a bad idea. But trying to produce outcomes that you want by widening the pool of scientists and engineers is unwise. If there is a legitimate social demand that the market is not satisfying due to externalities or whatever other reason, then by all means, demand that outcome. Offer to pay for it. That's how the market achieves objectives - it satisfies demands. Simply increasing the factors of production, crossing your fingers, and hoping your desired outcome will come out the other end is not going to produce very good results. If we want world-class transportation, make an investment in transportation - don't double the amount of engineers and hope a transportation network will materialize. If we want a colony on Mars, make an investment in a colony on Mars - don't double the amount of aerospace engineers and astro-physicists produced per year. The market works, and it works by satisfying demand. So if there is a social demand that is not being met, go the market and demand it. The reallocation of factors of production in response to that demand generally functions pretty smoothly.

Two new books

I was at the library yesterday, and dropped by their book sale. I picked up two:

1. Kenneth Boulding's "Beyond Economics: Essays on Society, Religion, and Ethics". I haven't read much Boulding before, but I read some of the essays in here last night and enjoyed them very much. One of the ones I read was called "An Economist's View on the Manpower Concept" (1954), which was interesting because that's largely what my NBER paper is about - it addresses these concerns from so-called "manpower studies" that suggest we're going to have a great shortage of scientists and engineers. The same chicken-little concerns were there in the fifties, and Boulding refutes them well. Most economists have addressed the concerns well - virtually every study over the last sixty years that I'm aware of has been in agreement on that point. So that's interesting and Boulding is a talented writer - but towards the end he gets into another issue that I've been thinking of but hadn't heard anyone provide my perspective on before: the question of, if we're looking to achieve some social or public objective that requires professional labor - whether we should subsidize supply or demand for that labor. It seems to me that the demand side makes much more sense, and Boulding agrees - but a lot of people focus on labor supply policies here (even people I'm usually positively disposed towards on these issues - like Richard Freeman). In the essay, Boulding compares labor supply policies to the draft, and says of the draft that "it is unquestionably the most disastrous social invention of the past two hundred years, and I find it difficult to forgive the French for inventing it." He also has an essay called "Economic Libertarianism" (1965), which I haven't read in its entirely. I can fully endorse his framing of the argument in the initial paragraph: "I shall try to look at what I call the limits of libertarianism, particularly in regard to the role of exchange in the organization of society. I think freedom is a bit of a red herring here. The really crucial question is the role of exchange as an organizer. This is what the economic liberals, if we can call them that, care about. It is both the successes and the limits of this role of exchange which represent the real issue."

2. I also got a publication by the National Research Council called "Scientists, Engineers, and Track-Two Diplomacy: A Half Century of U.S.-Russian Interagency Cooperation". It's a history of American and Soviet scientific interaction throughout the Cold War, and afterwards. One of hte most interesting looking parts of the book is the appendix - which has lots of documentation of some of the initial treaties which set these exchanges and relations in motion. One of the things they include in it is a list of requests for exchanges - the Russians would say how many Russian scientists they wanted to study certain topics in the U.S., and for how long, and the Americans would request the same. It gives you a sense of the priorities of each regime, and also where they perceived they were at a disadvantage.

Around 7:46 AM I felt a shiver down my spine...

...and then I checked my blogroll and realized it was because of this post.

I am 100% with him when he says art ought not to be cut.

I am 100% with him when he says that we would have better citizens if economics was taught.

Neither of these points lead to his conclusions (which, I understand, are not a call to action or anything).