Friday, February 17, 2012

Keynesian Sentences of the Day, from an unlikely source

HT - Russ Roberts.

Replace "productive consumption" with "investment":

"In opposition to these palpable absurdities, it was triumphantly established by political economists, that consumption never needs encouragement. All which is produced is already consumed, either for the purpose of reproduction or of enjoyment. [ <-- at first glance, this sounds like a crude version of Say's Law, and quite unacceptable. When you read on I think it's clear we can think of this as more of an accounting identity than a Panglossian macroeconomics] The person who saves his income is no less a consumer than he who spends it: he consumes it in a different way; it supplies food and clothing to be consumed, tools and materials to be used, by productive labourers. Consumption, therefore, already takes place to the greatest extent which the amount of production admits of; but, of the two kinds of consumption, reproductive and unproductive, the former alone adds to the national wealth, the latter impairs it. What is consumed for mere enjoyment, is gone; what is consumed for reproduction, leaves commodities of equal value, commonly with the addition of a profit. The usual effect of the attempts of government to encourage consumption, is merely to prevent saving; that is, to promote unproductive consumption at the expense of reproductive, and diminish the national wealth by the very means which were intended to increase it.

What a country wants to make it richer, is never consumption, but production."

- John Stuart Mill

I don't know why Russ is still peddling this idea in his own post that Keynesianism is consumptionism. He is a professor of economics. He should know much better than this. Keynesianism says the problem is investment demand. Consumption is a function of income, so it will move around too, but the cause of problems in the economy is fluctuations in investment demand due to uncertainty not just about the level of future consumption, but also the composition of future consumption.

There is no "lump of labor" or "lump of capital" or "lump of consumption". As Keynes took great pains to discuss in chapter 16, entrepreneurs don't just supply some aggregate "consumption" to the market - they supply specific products. If they supplied some kind of amorphous blob of consumption then we wouldn't have as much of a concern about the business cycle. When consumers saved entrepreneurs could confidently invest in tandem because they would know X amount of amorphous blob consumption would go on in the future, and they could invest to prepare to provide that. But in the real world, when consumer's save entrepreneurs don't know how that savings will be represented in future demand. Good entrepreneurs make good guesses, of course - they aren't at a total loss. But investment demand can be depressed if for some reason there's a great deal of uncertainty about how increased holdings of liquid assets will play themselves out in future demand.

The problem is investment, not consumption.

If you want to complain about consumptionism, go find a consumptionist. They're definitely out there, and Keynesians can slip into this like anyone else. Correct that. But let's be clear - Mill is making a point here that's very consistent with Keynesian concerns about fluctuations in investment demand.

UPDATE: In response to some discussion of this on Facebook... this is not to say, of course, that the Mills passage that Russ cites is some kind of proto-General Theory. It's only to say that if your position is that investment demand is key to understanding economic prosperity, then you are on the same broad page as Keynesians. When Keynes cited the underconsumptionists (primarily in Chapter 23) he made it very clear that they were quite wrong to focus on consumption. What Keynes liked about the underconsumptionists was their recognition that the total volume of output could move to re-equilibrate shifting supply and demand. That was an important theoretical contribution by the underconsumptionists: below-full-employment equilibria were plausible because while accounting guarantees that a balance will be struck between supply and demand, there is no guarantee that that balance will be struck at a full employment level. In some cases, the volume of output itself is what moves to rebalance the system.


  1. I don't think it's true that Keynes thought the underconsumptionists focus on consumption was "quite wrong". To say he found it incomplete would be more accurate. Chapter 24 of the general theory:

    "It may be convenient at this point to say a word about the important schools of thought which maintain, from various points of view, that the chronic tendency of contemporary societies to under-employment is to be traced to under-consumption; — that is to say, to social practices and to a distribution of wealth which result in a propensity to consume which is unduly low.

    In existing conditions — or, at least, in the conditions which existed until lately — where the volume of investment is unplanned and uncontrolled, subject to the vagaries of the marginal efficiency of capital as determined by the private judgment of individuals ignorant or speculative, and to a long-term rate of interest which seldom or never falls below a conventional level, these schools of thought are, as guides to practical policy, undoubtedly in the right. For in such conditions there is no other means of raising the average level of employment to a more satisfactory level. If it is impracticable materially to increase investment, obviously there is no means of securing a higher level of employment except by increasing consumption.

    Practically I only differ from these schools of thought in thinking that they may lay a little too much emphasis on increased consumption at a time when there is still much social advantage to be obtained from increased investment. Theoretically, however, they are open to the criticism of neglecting the fact that there are two ways to expand output. Even if we were to decide that it would be better to increase capital more slowly and to concentrate effort on increasing consumption, we must decide this with open eyes, after well considering the alternative. I am myself impressed by the great social advantages of increasing the stock of capital until it ceases to be scarce. But this is a practical judgment, not a theoretical imperative."

    If keynes himself thinks there is only one practical difference between his view and that of underconsumptionists (and, by the by, this is a difference which makes him look worse than underconsumptionists, not better. The socialisation of investment stuff is nuts) then I don't see why someone's face should go pale when Keynes is characterised as someone obsessed with consumption.

    1. I think we might just be offering a difference in emphasis, because this is exactly the passage I had in mind.

      It's true, Keynes did not rail against the underconsumptionists the way Don and Russ do. And that is because there is a grain of truth to them (I think there is a grain of truth to them too). But read this passage again - he basically says "In conditions where underinvestment is the problem for all the reasons I've talked about in this book, and if you don't have any power over the volume of investments, then increasing consumption will work and so they were on the right track". This seems exactly right to me. This does not seem to make Keynes a underconsumptionist to me.

      The underconsumptionists had a lot going for them. I'm not trying to trash them when I say we shouldn't identify them so closely with Keynesianism. I would take Malthus over Say any day of the week. What I think is clearly wrong is to say that Keynes is just another example of underconsumptionism - he's not.


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