First Approximations

Greg Mankiw posts a letter from an editor friend in response to a blog post of his sharing Robert Solow’s views on modern macroeconomics. The editor writes:

“I was particularly interested to read the following sentence:

"But this is not a bad FIRST APPROXIMATION in many cases."

I don't think I have edited one econ manuscript that has not used the phrase "first approximation" many, many times. When econ PhDs are given out, are you all required to sign a secret agreement that says you must use this phrase in anything you write? Note that I have not found a similar phrase in the other disciplines for which I've edited several books (chemistry, biology, anatomy, physiology, genetics, physics, political science, and history).”

This concern caught my eye because I noticed this phrase “first approximation” in another well known piece of economics I was reading recently: the General Theory of Employment, Interest, and Money. In Keynes’s discussion of the time structure of production, he introduces the section with:

“It follows from this that the assumption upon which we have worked hitherto, that changes in employment depend solely on changes in aggregate effective demand (in terms of wage-units), is no better than a first approximation, if we admit that there is more than one way in which an increase of income can be spent. For the way in which we suppose the increase in aggregate demand to be distributed between different commodities may considerably influence the volume of employment. If, for example, the increased demand is largely directed towards products which have a high elasticity of employment, the aggregate increase in employment will be greater than if it is largely directed towards products which have a low elasticity of employment.”

I’m not sure if Greg Mankiw’s friend is offering a criticism or what, but I think this is a good thing. I don’t think you see “first approximation” talk in chemistry, anatomy, physics, or genetics because the material these sciences deal with is either (1.) sufficiently precise that talk of “first approximations” is irrelevant, or (2.) sufficiently sensitive that “first approximations” aren’t useful to talk about (you don’t want to build a nuclear reactor on the basis of a “first approximation”).

We know that economics studies an extremely complicated system with lots of feedback loops, and that the components of the system are harder to measure than those other disciplines. It’s also reasonable to think that “first approximations” are still useful in economics. Even economists who eschew policy intervention eschew it on the understanding that, for example, expansionary monetary policy will cause some imprecisely known degree of inflation. Lack of precision as to how much doesn’t weaken the negative response to the policy (nor the positive response, for that matter).

I think you don’t see talk of “first approximation” in biology, political science, and history because these fields usually aren’t rigorous enough in their modeling to even need it. When they do model (think, for example, population dynamics or epidemiology) I’m not sure if they say “first approximation” – but it would certainly be appropriate for them to qualify that such models are first approximations. Same with meteorologists and other scientists that do rigorous modeling of complex systems.

So I agree with Mankiw’s friend – the origin of the use of the term is probably cultural as much as anything else. But we should be glad economists are conscientious enough to approach their work in this way! They know the qualifications that hem in their work. Whether journalists, politicians, or the public get the picture is a different matter, of course.

...and speaking of American fascism

How terrifying is it that a substantial share of the population wants to prohibit the peaceful construction of a place of worship? This opposition has gone thoroughly mainstream. What on Earth is going on here? It's absolutely incomprehensible to me.

I don't even know what links to provide - you all can find them, and nothing has stood out as being notable in the opposition to the mosque, and no opposition to the opposition to the mosque has perfectly crystallized my thoughts on all this. But that's part of what's so scary about this - that so many people can so non-chalantly tell American citizens that they can't build a place of worship simply because they are Muslims.

Politicians, uncertainty, and Bernanke's dissertation

Real Time Economics, a WSJ blog, reports on Rep. Jim Hensarling's (R-TX) questioning of Federal Reserve Chairman Ben Bernanke. Hensarling read this to Bernanke:

"Uncertainty is seen to retard investment independently of considerations of risk or expected return. Introduction of uncertainty can be associated with slack investment, resolution of uncertainty with an investment boom"

Hensarling connected this uncertainty to policy and government action, and asks Bernanke whether he's familiar with the passage. Bernanke was - it was from his dissertation, which is here. Bernanke then goes through the motions. He makes a joke. He provides a synopsis of the dissertation. He acknowledges the importance of uncertainty, but dodges any effort to pin it down and quantify it. He also raises the mixed signals the economy is giving right now about its confidence. All fine.

It would have been nice to tell Hensarling what you can figure out quite quickly from Bernanke's dissertation: it has nothing to do with policy regime uncertainty. It's all about uncertainty regarding the profitability of investment and the performance of the economy. I imagine Hensarling is thinking that policy is the only uncertain thing out there, so he tells his staff "go find something for me that Bernanke wrote about uncertainty is bad so I can use it to show him that I'm right and even he said so". If that was his goal, he seems to have picked the wrong document. Bernanke shouldn't have been so deferential (I didn't see the testimony - I'm counting on the fact that Real Time Economics would have reported if he said anything like this). He should have said "Representative, the policy regime uncertainty that you cite is obviously a relevant factor, but my dissertation talks about business uncertainty about the future, completely independent of policy - and that is primarily what they're concerned about and uncertain about now".

This whole "policy regime uncertainty" meme is real, but the way it's being presented is a distortion of what firms are actually worried about right now. They're worried about demand and economic performance. One of the biggest proponents of this "policy regime uncertainty" argument is the National Federation of Independent Businesses, the self-styled "voice of small business". The NFIB makes a lot of claims on news programs that concern about Obama's policies is strangling business right now. The problem is, this doesn't even match up with their own survey data. If you look at the most recent NFIB confidence survey, here, that becomes clear. On page 7, for example, businesses are asked to state the most important reason for their outlook on the expansion of their business. On page 20, they are asked to share the single most important problem for them. In both questions, it is the economic outlook responses and not the policy responses that dominate. This comes up in consumer surveys too, and most other confidence surveys I've seen over the last couple years. Don't get me wrong - the portion that is concerned about policy isn't trivial. But considering that their primary concern is economic performance and demand, a substantial share of them are probably concerned, like me, that policy isn't stimulative enough.

The bottom line is that Hensarling acted opportunistically with Bernanke's dissertation or at least didn't understand at all what Bernanke was saying. Bernanke was talking about a different kind of uncertainty, and survey after survey suggests that it is not policy regime uncertainty that is the primary concern of businesses. This is really spectacular - we just had the biggest health care legislation in decades. The fact that policy didn't register higher as a concern is notable in light of that. Part of this may be that there is no longer any uncertainty when it comes to health reform - they know what's going to happen and can plan for it. Part of it is inevitably a vote of confidence in the policy itself. Whatever it is, all the policy uncertainties that you could think of add up to less than the economic uncertainties.

Fascism in America

This is not a Jonah Goldberg or a Noam Chomsky rant - both of whom I consider to be clowns. Chomsky is at best a marginally more plausible clown, but only marginally. But this post is not a rehashing of those arguments...

...I am, once again, collecting and reading more about Lovecraft's views on political economy. Fascism plays a major role in his thinking on the economy - and he explicitly calls it "fascism". There are a lot of people, like Keynes for example, that people try to accuse of being fascist with little success. Lovecraft self-identified as one, and he was by no means the only person to self-identify as one during the interwar period.

So I'm reading about American fascist thought in the interwar period, and I had a thought - I am guessing that not even World War II, but the Holocaust specifically, more than anything else, prevented the spread of fascism in the Western world. Really, the fascism that Lovecraft and others advocated was different from Nazism from the beginning. It was an advocacy for a strong-man polity and a planned economy to be sure, but it was fundamentally different. These sorts of "fascism-lite" boosters in America, as well as elsewhere, were able to romanticize German and Italian fascism through the twenties, thirties, and even into the forties because of their fundamental ignorance. The Holocaust, however, put a decided end to anything like that, and these days you couldn't have a guy like Lovecraft self-identify as a fascist.

Interwar American fascists were able to romanticize Germany and Italy because they:

1. "Made the trains run on time"

2. Beat back the Bolsheviks (von Mises calls the fascists the "saviors of Europe" for this feat in the 1920s).

3. Provide a sense of order and pride after the disarray of first the Great War, and then the Great Depression.

None of this made a bit of difference after the Holocaust. Invading sovereign states was forgivable - democracies, monarchies, dictatorships, tribes, and socialist collectives had been doing that for eons. But wholesale slaughter and genocide was a different matter entirely. This is not to say the human beings aren't capable of sweeping genocide under the rug - they are. But when systematic genocide is thrust upon them, when they are not allowed to ignore it, we humans will not waver on the verdict.

Without the Holocaust, I think things would be very different. We would see a lot more Hitler apologists out there. Racism and anti-semitism would be considerably worse, because it would not be so closely tied in with the image of actual extermination. The pseudo-scientific veneer might even be maintained. Joe McCarthy, Richard Nixon, and Henry Kissinger even might have self-identified as fascists (of course denouncing the excesses of those first generation of German and Italian fascists). With that sort of base, any number of modern politicians: Dick Cheney, Sarah Palin, etc. might have taken up the fascist banner. The neo-conservative movement, with its roots in Trotskyism and the New Left, perhaps might have avoided drifting into the fascist fold, but then again - perhaps not. Neo-conservatism has taken quite a fall since its early days.

All these developments are reasonably plausible. Why didn't that happen? Because the Holocaust made fascism and Nazi apologetics absolutely untenable. I'm guessing that tragedy alone explains why fascism fizzled in the West. I still think it's possible we could see fascism in America, but I think we need a major, major jolt for it to happen. The Tea Party definitely won't cut it, despite Chomsky's hand-wringing over them. If the 60s or even simply 1968 didn't catapult us into fascism, it will take quite a bit to. A nuclear attack. A prolonged depression (!!!). A pivotal assassination. I could see it happening, but not without a major, major trigger.

So anyway, that's just a speculative thought on how the Holocaust ultimately did in the prospects of fascism. None of this is directly related to Lovecraft's economics - which is going to be delicate in this area. Planning and interwar American fascism are more nuanced issues than a lot of disparaging modern retrospectives give credit for. It's not something a rational person can embrace, to be sure - but it's not Nazism either. Making that distinction is very tricky. It's very much like Orwell's socialism, in that sense. The difference being, of course, that we have a long record of Trotskyism and anti-Stalinist socialism (and before that, anti-Marxist socialism) to highlight that kind of distinction. In contrast, the life of this brand of fascism was cut short. For the sake of humanity, that is a very good thing - but it makes researching it much harder.

On Inequality

...feels like Friday here in the office so one more post. I'm just jotting down some thinking I've done recently.


So I've been thinking through more of Lovecraft's thoughts on political economy, and inequality features prominently in his discussion of it. I've also been looking into the writings of his contemporaries writing on inequality, particularly contemporary economists. It seems to me there are four basic ways to approach inequality:


1. From a rights perspective: people have a right to what they earn, differences in wealth or inequality are merely differences in ability and effort exercised and monetize through contract and property rights. From a contractarian perspective, then inequality is largely acceptable. Inherited wealth, while justifiable from a rights perspective, can also be challenged from this perspective.


2. From an incentive perspective: this is almost a consequentialist approach to inequality. Inequality is good because it motivates effort and improvement. It also directs people to socially beneficial activities (if there are more profits in one industry than there are in another, people will have the incentive to enter that industry). I often like to reference Bernoulli's law - it is inequality that provides lift. Keynes largely comes from this consequentialist angle when he explains why he is fine with economic inequality. Lovecraft has a consequentialist approach to inequality too, but it is very different from this incentives explanation - it is more of an aesthetic and cultural justification for inequality.


3. From a human dignity perspective: this is more of a humanitarian approach. Concepts of human worth suggest that people deserve a certain standard of living, simply in the interest of human dignity. You could approach dignity as a question of relative outcomes as well. Lovecraft also expresses some of this humanitarian vision, which is somewhat ironic given his very well articulated Neitzscheism (no matter - foolish consistency is the hobgoblin of small minds).


4. From an opportunity perspective: this is the "equality of opportunity" approach, as opposed to the "equality of outcomes" approach in point #3. It can be thought of as the democratic perspective. The unequal circumstances we are born into stack the deck in favor of people whose parents (or grandparents, or great-grandparents, or...) were more successful. From this angle, it is pointed out that the contractarian approach can be naive by ignoring endowment effects.


Are there any other ways to think about inequality? I have sympathy for all four of these - I think most people do. Others, of course, lean heavily on only one or two of them. I personally don't think from an ethical standard it's clear what to do with inequality (or put it this way - if it is clear it's because you've come at the question with a very detailed ethical outlook to begin with). I'm not going to think about inequality this abstractly or broadly in what I write about Lovecraft's views on the issue, but the issue itself is a major part of his political economy.

Assault of Thoughts, Scientific Progress Edition - 7/22/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

- Scott Kuhagen provides an update on the Commonwealth of Virginia's travesty of an Attorney General and his witch hunt in Charlottesville. AG Cuccinelli is tossing the very notion of academic freedom aside and targeting scientific progress at the University of Virginia. It's a cliche, I know, but it fits the bill: Mr. Jefferson must be rolling in his grave over this. It would be bad enough with any university, but the ideals and the mission on which the University of Virginia was founded make this especially sad.

- Andrew Sullivan links to interesting research that suggests that the technological gap between Europe and sub-Saharan Africa explains the majority of the difference in per capita income between the two regions today. Very powerful stuff, and I would say not surprising. But then they write: "78 percent of the difference in income today between sub-Saharan Africa and Western Europe is explained by technology differences that already existed in 1500 AD – even BEFORE the slave trade and colonialism." This seems like bad reasoning to me. Presumably, the reason why the Atlantic slave trade took off, and the phenomenon of "white slavery" fizzled had a lot to do with the very technological differences this research has identified as important. So it doesn't really make sense to say (or really, simply to imply here) that "the difference in per capita income is due to technological differences, not slavery," because slavery itself is probably a very important mechanism through which technological differences made their impact. The two are very closely related. And not only that, but the damage to African society from the slave trade probably locked-in the technological discrepancy.

- Alex Tabarrok at Marginal Revolution has an interesting post on private space exploration. He reviews private contributions to space exploration in the early years, and notes a few different ways to think about the data. He concludes the obvious - that private space exploration is a very, very good thing. With shock only a person that believes or suspects Obama is a socialist could manage to muster, he also notes that it is "surprising" that President Obama has been pushing American space exploration in this direction too. I have a few issues with how Alex approaches this issue.

He starts out by quoting Matt Ridley, who says "Can you doubt that if NASA had not existed some rich man would by now have spent his fortune on a man-on-the-moon programme for the prestige alone?". This seems to me to miss the entire point about the nature of the public-private split in space exploration. First, there was nothing preventing private individuals from going for it on their own, which (since we haven't seen a man privately put on the moon) would suggest that there are substantial entry barriers. Second, private and public efforts at this sort of thing aren't really conflicting. Presumably the aerospace industry would benefit from scale economies, and there are almost certainly going to be knowledge spillovers; public and private space exploration are complements in this sense, rather than substitutes. So this whole implicit premise that "if only X" we could have had an even better private space exploration history seems (1.) wrong because there was nothing substantial preventing such private endeavors, and (2.) wrong philosophically because it inappropriately juxtaposes the public and the private as something we have to choose between.

OK, so I don't think this is an either/or situation - but what are the benefits of public exploration? The answer to that question is implicit in the record on private exploration that Alex shares. A lot of these exploratory initiatives where not motivated by profits at all. Of course we also have ample examples of advances in space exploration that are attributable to the profit motive, usually attributable to communications technology (in the future probably attributable to mining, etc.), but the point is exploration itself isn't necessarily going to be a profit-making endeavor. As a result, we shouldn't logically expect the price mechanism and the market to be able to zero in on an optimal level of space exploration. This is a mistake that you see in a lot of areas where externalities are important, like road building. Opponents of publicly provided infrastructure will point to examples of privately built roads as if that proves advocates of public infrastructure wrong. The externalities argument is never (or should never be) that there will be no private provision, because to say that important costs and benefits are externalized isn't to say that no costs and benefits are internalized. Obviously some are and there will be some private activity. But pointing out that banality does nothing to demonstrate that an optimal amount of private effort is being invested. That's my reaction here, too. It's fantastic and not surprising that there are privately funded observatories, satellites, etc. - it doesn't mean it's sufficient. Knowing how much of a good with fully internalized costs and benefits is "sufficient" is easy - the market will tell you. When the costs and benefits aren't internalized it's harder to say. John Stuart Mill, writing on colonies, made fundamentally this same externalities argument for public exploration and colonization:

"If it is desirable, as no one will deny it to be, that the planting of colonies should be conducted, not with an exclusive view to the private interests of the first founders, but with a deliberate regard to the permanent welfare of the nations afterwards to arise from these small beginnings; such regard can only be secured by placing the enterprise, from its commencement, under regulations constructed with the foresight and enlarged views of philosophical legislators; and the government alone has power either to frame such regulations, or to enforce their observance."

The point is, private exploration is important and good for the same reasons the market is always good, but it's not sufficient. We know most private activity has been charitable, indicating there is little profit in space exploration. This is likely due to the externalities involved, which opens the door to public space exploration. Public space exploration should be flexible, though. It should draw on the private sector's ingenuity, it should leverage private interest with a prize-fund, and it should give the private sector considerable say in the goals and destinations. And while some externalities are unavoidable (i.e. - the externalized benefits to future generations), we should shore up the ones that are avoidable by establishing clear property rights in space.

I am a deficit goose

We've all heard of "deficit hawks" and "deficit doves".

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Deficit hawks like to run tight ships and avoid deficits, even running surpluses if possible. Historically, we almost always run deficits because sovereign debt is a very different beast from private debt. Nevertheless, a "deficit hawk" would still like to keep those deficits to a minimum, even if he is smart enough to know governments can run deficits from now until eternity, so long as the debt is run up at a sustainable pace.

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Deficit doves don't care so much about the debt and place great faith in the difference between sovereign debt and private debt. They usually think very highly of fiscal policy and macroeconomic stabilization, and don't have as many of those New Keynesian caveats and qualifications about when and where to do fiscal policy.

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Lately people have been talking about "deficit chicken-hawks". Usually these are Republicans that spend like Republicans think Democrats spend. Sometimes they're disingenuous, sometimes they're just oblivious - but they aren't deficit hawks.

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Now, the Post-Keynesian blog "New Economic Perspectives" has coined the term "deficit owl". Here's the deal - a bunch of solidly liberal Keynesians like Robert Reich and Joe Stiglitz drew up a petition saying we should do more fiscal stimulus as well as put renewed emphasis on dealing with the long-term debt. Three "more Keynesian than Keynes" Keynesians - Paul Davidson (Post-Keynesian grand poo-bah), Jamie Galbraith (price-control enthusiast John Kenneth Galbraith's son), and Robert Skidelsky (Keynes's biographer that sometimes forgets the title of Keynes's magnum opus) - refused to sign because of that statement about keeping down the long-term debt.

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This is all pretty crazy. First, Robert Reich and Joe Stiglitz are on the left wing of Keynesianism, much less the broader American economic-political spectrum. If you're refusing to sign a petition by Reich and Stiglitz because you think it's too hawkish on the debt, it means you are way out in left field. Second, what the hell is a "deficit owl"??? The blog post is titled "Deficit Doves meet Deficit Owls", but I'm not even quite sure which is which. Is an owl "softer" than a dove? I guess it means the three dissenters are wiser? Who is who here? I could understand deficit dove, deficit hawk, and deficit chicken-hawk but now I'm just confused. Maybe "deficit ostrich" would be better, since they ignore the long-term debt?

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Forget the owls - I'm coining a new term (clearly the only way to get clarity is to throw yet another fowl reference on the table). I am a deficit goose.

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You see, the problem with the hawk/dove dichotomy is that it assumes a constant stance on deficits. But like a good Keynesian, I believe that when the facts change we should change our minds (what do you do?). The reasonableness of a deficit is determined by lots of things, chief among them being macroeconomic conditions. Some people question whether this "functional finance" position (essentially counter-cyclical fiscal policy) is really Keynesian - I don't think it is the heart of Keynesianism, and it definitely pre-dates it - but it's certainly consistent with Keynesianism. I'd be very surprised if Keynes wouldn't have considered himself an advocate of "functional finance", but if he wouldn't have advocated it then he should have.

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Anyway, the point is what we really need are deficit geese. Deficit geese fly south for the winter and north for the summer. When their surroundings get dismal, they change their behavior to warm up their environment. When their surroundings heat up, they take action to cool things down.

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P.S. - if any budding ornithologists reading this know anything about the migratory patterns of doves, hawks, chicken-hawks, or owls that contradicts this post, just keep it to yourself.

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*Evan took that picture, in Michigan I believe

Kling on Austerity and 1945-47

He writes it up here.

This post could be submitted to Webster's as an example under the word "strawman argument".

I'm in the comment section. Anyone who knows what I think about 1920-21 can guess what I have to say about 1945-47.

My Thoughts on Garrison

So I recently finished Garrison's Time and Money and I wanted to share a few reactions. First, it was a very good book and I recommend it. As far as I can tell, he's faithful to Hayek's vision on the macroeconomics of the capital structure, but I haven't read Hayek on that so I can't say for sure. Regardless, he certainly offers a well articulated vision of his version of the macroeconomics of the capital structure.

A major portion of his project is expressing Keynesianism and Monetarism in a Hayekian framework and comparing the three. Thinking through each in this way is very good I suppose, and I shouldn't criticize the effort (only the execution) - but I think many of my concerns about the execution are directly derived from the requirements of engaging in that sort of effort in the first place. To put Keynes in Hayek's framework, Garrison does away with a lot of what makes Keynes unique. How is this a proper analysis of Keynes? Some thoughts:

- Garrison assumes away a lot of the distinctiveness of Keynes, and then proceeds to blame Keynes for the shortcoming. For example, on page 158 after talking about an increase in uncertainty, Garrison writes "For the economy to avoid falling into the interior of the PPF, the funds released from the investment-goods sector would have to be absorbed in the economy's consumer-goods sector. This reallocation of resources, however, is already implicit in the movement along the unshifted supply of loanable funds: less saving; more consumption". The reason why he's able to make this assumption, of course, is that he completely omits any discussion of the relationship between uncertainty and liquidity preference until the next chapter. He talks about depressed investment demand in one chapter, without liquidity preference, and then he talks about liquidity preference in the next chapter, without depressed investment demand. It's no wonder that in the first chapter on Keynes the economy stays at full employment! It was liquidity preference that Keynes thought would drive the economy out of full employment!

- Separating the process of investor uncertainty from liquidity preference on pages 158-159 allows Garrison to scoff at the Keynesian notion that the interest rate will remain unchanged (i.e. - too high) in response to a declining demand for loanable funds. He critiques this and the depiction of the labor share of income - the "assumed structural fixity" of the two, as he calls it - without realizing (or at least without acknowledging) that it is precisely Hayek's assumed structural fixity (i.e. - no shift in the supply of loanable funds) that Garrison uses to pin Keynes to the PPF and completely nullify all of Keynes's insights. The only critique Garrison has of the stable labor share of income is directly related to this. His critique is that the labor share of income would not be stable because the interest rate changes. But the only reason why the interest rate changes in this chapter is because Garrison completely omits discussion of liquidity preference until the next one! Garrison is right that a baseline level of liquidity preference is a structural concern that can legitimately be treated separately. He's wrong to ignore the fact that additional liquidity preference goes hand in hand with the investor uncertainty that caused the leftward shift in the demand for loanable funds.

- In his chapter going over liquidity preference (the second chapter on Keynes), Garrison explains Keynesian policy recommendations in a way that sets him up, several chapters down the road, to declare that Milton "we're all Keynesians now" Friedman is closer to the Austrians than to Keynes. In Figure 9.2, I think Garrison captures Keynesian liquidity preference well. The fact that he expresses it in a loanable funds market is irksome (Keynes was strenuous about the fact that the interest rate was determined in the market for money and not the loanable funds market), but it works OK. Output is below the PPF for precisely the reasons Keynes highlighted. But for some reason, a couple pages later in figure 9.3 where he's explaining Keynesian policy, the policy shift isn't from below the PPF to the PPF and classical full employment (as Keynes said) - it's from the PPF beyond the PPF to an unsustainable production level. Where did that come from? I have no idea. Keynes, the man who wanted to use policy to re-create classical conditions (the reason why I think he bears a reasonably close resemblance to the German ordoliberals) becomes Keynes, the man who doesn't recognize the existence of a PPF and wants to spend, spend, spend.

- Which brings me to another concern... Garrison's PPF is not the usual PPF. It is not an impassable technological frontier, it is a "sustainable output" frontier. That can get tricky at times - watch out for it.

- Finally, when Garrison discusses Friedman's plucking model he insists that it is inconsistent with Keynes (who he thinks oscillates above and below the PPF, as I mentioned earlier), but that it is consistent with Austrianism. It's actually a very interesting section where Garrison makes the case that malinvestment does not imply overinvestment, and turns the traditional Austrian boom-bust cycle into a bust-boom cycle that is consistent with Friedman's plucking model. It was intriguing - I'll let other Austrians decide how convincing the argument is. Nevertheless - the idea that Keynes is not consistent with the plucking model follows from Garrison's distortions of Keynes that I mentioned above. I think it also (though less necessarily) follows from the assumption that the baseline from which the economy is "plucked" is a full employment baseline. I'm not sure why you would assume from the outset that that is the case. Garrison says "well, Keynes thinks we're always below full employment so we obviously can't be plucked from full employment". I would simply respond "I would have thought that the baseline level of liquidity preference is fairly steady, so what we're being 'plucked' from is a stable-growth, sub-optimal path that is below full employment". He doesn't even consider the prospect (i.e. - he assumes his own conclusions by assuming that what we're being plucked from is a full employment growth path). This was the only truly surprising part of the book. When he introduced the plucking model, I was sure he would say "Keynes is consistent with Friedman here, and they both ignore the Austrian insights which is why Austrianism contradicts this". Nope. He ended up saying "Keynes is inconsistent with Friedman on the plucking model, but Austrians are consistent because our boom-bust model is actually a bust-boom model". That approach genuinely surprised me.

Much of the rest was very good - my biggest concern was the two chapters on Keynes (and even those were quite good overall). I provided other thoughts on Garrison in this post.

I know it's probably hard to get much out of this as a simple blog post, but it's a way for me to get my thoughts written down, and perhaps people can refer back to this if they read Time and Money. Next on my list, I think, is the first of Joseph Dorfman's three volume series on "The Economic Mind in American Civilization". This one covers the period from 1606 to the founding. Joseph Dorfman was Murray Rothbard's advisor. If someone has a better suggestion before I come home from work and start reading that, let me know :)

John Stuart Mill, Keynes, and Employment

In this post on the breakdown of Okun's Law, commenter Sebastian raises a very important point about what is known as John Stuart Mill's Fourth Principle, that "demand for commodities is not demand for labor". He offers this link to the Organizations and Markets blog. I'll quote Mill from his Principles of Political Economy (1848):

"Demand for commodities is not demand for labor. The demand for commodities determines in what particular branch of production the labor and capital shall be employed; it determines the direction of the labor; but not the more or less of the labor itself, or of the maintenance or payment of the labor. These depend on the amount of capital, or other funds directly devoted to the sustenance of labor."

This is something that is often cited as being misunderstood or abandoned by Keynes. I've always been somewhat confused by the point. Keynes has an employment function that is a function of output, which I suppose is the source of the concern. But Keynes:

1. Talks about employment functions for specific industries and firms and contrasts this with the aggregate employment function.

2. Talks about the importance of capital employed in and industry in the determination of the employment function.

3. Talks about how the total employment function can change depending on whether labor is directed towards industries and firms with high or low elasticities of labor demand.

So to me, Keynes seems to hit all of Mill's bases. I honestly don't know what the issue is. I have argued that Keynes could have pushed this analysis farther, but I don't think he completely dropped the ball on the employment function, the way some people suggest. I think where Keynes could most revise his employment function is in bringing his liquidity preference into it, not in abandoning the project for some other formulation.