Thursday, November 22, 2012

More on Keynes and Consumption

From Jonathan Catalan and Bob Murphy.

Jonathan takes the features that discussed which prove that Keynesians have consumption in models and have some thoughts about it to be a segue into thinking that it's a consumption-driven theory. Again, I disagree. If having consumption in the model and mentioning it opens the door to being a consumption theory, then every economist is a consumptionist. Austrians assume a trade-off between consumption and investment, after all! That seems to give it a much more prominent role than Keynesians do. After all, Keynesians assume a lock-step trade-off between consumption shares and saving shares, but that's simply because it's an accounting identity (S=Y-C)! Austrians have to actually assume the same sort of trade-off between investment levels and consumption levels - there's nothing in nature requiring such a thing. So if the mere relevance of consumption to the machinery of the model qualifies here, then there are other more prominent candidates for being a consumptionist theory. Now, I don't want to disavow the way Keynesians talk about it at all. I don't think there's anything wrong with emphasizing consumption if that's what you want to emphasize. So I'm not interested in tossing this back at Austrians, I'm just interested in keeping the mere presence of consumption in the mechanics of the theory distinct from the misleading tendency to think about Keynesianism as a consumptionist theory - because that leads people away from very important discussions about capital, money, the loan market, etc.

Bob's post is a little odd. First he invokes the paradox of thrift and the marginal propensity to consume, but he seems to be making the same mistake I mentioned when I brought them up. Yes, we talk about the marginal propensity to consume because it impacts the multiplier. But shifts in that aren't what we think causes downturns (which I gather is what Gene was curious about). By mentioning mpc all you're doing, Bob, is noting that consumption is in our models. But... isn't that true of all economists?

He has an unusual use of the paradox of thrift to make his point to. As I said before - increasing saving relative to consumption is no problem. That won't cause a paradox of thrift. What's a problem is if you increase saving relative to investment. If the share of income you save increases, the consumption share declines, and investment increases you're fine. If the share of income you save increases, the consumption share declines, and investment doesn't change you're in trouble. So it should be pretty clear it's not consumption that matters even in the paradox of thrift. (Just a gentle remark, Bob!).

Bob actually helps me make this point when he quotes Krugman: "Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income."

"Spending" of course, is not just consumption. And the fact that in the next passage he talks about the Federal Reserve lowering interest rates tells you exactly what non-consumption spending he has in mind (there aren't many other options here!).

Now, if the damning evidence is that Keynesians will write an article about consumption during a recession - particularly one where consumption takes a bigger hit than normal, I'm not sure what to say. Isn't that what all responsible recession watchers do? In fact by pointing out how unusual a drop in consumption like that is, Krugman is basically saying "this is not usually what comes up during recessions, but since it's in the data let's walk through it". After all, investment shifts because of revisions of assessments of the marginal efficiency of capital due to some shock. Certainly there's nothing that prevents consumption from shifting for the exact same reason! We don't usually talk about it because it doesn't usually happen in the way that investment (a very forward-looking activity) does. But if it happens, we certainly have the theoretical machinery to talk about it, so why not?

Take a look at Bob's title too - how weird is that? One article on consumption by Krugman shows that consumption is more important than investment? Odd.


  1. Daniel, I don't think you got the point of my post.

    1. You had a lot of points and I didn't address all of them. There was less specificity to latch on to than there was in Bob's post.

      You took the things I talked about as a reason many people mistook it for consumptionism: mpc issues and paradox of thrift - and used that to argue that it wasn't totally unfair to call it consumptionist. So what have I got wrong?

      So I noted that point of yours, and then I went on to reiterate why I don't think that really justifies the characterizations that Gene often hears.

      So did I not get the point or did I not talk about every point you would have wanted me to talk about? I think it's probably the latter, which is different of course.


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