This is not true, and there is a simple antidote to such caricatures of Keynesianism. It is available in (of all places!) an “Austrian Economics Newsletter” of 1983, where George L. S. Shackle summed up the essence of Keynes’ theory. I reproduce it here:
[sc. Keynes’s] ... theory of involuntary unemployment is perfectly simple and can be expressed in a paragraph, or in a sentence. If you express it in a sentence, you simply say that enterprise is the launching of resources upon a project whose outcome you do not, and cannot, know. The business of enterprise involves investment, the investing of large amounts of resources--huge sums of money--in things whose outcome you cannot be certain of, which could perfectly well turn into a disaster or a brilliant success.This is actually a splendid summing up of what Keynes’s theory is about: rises and falls in the aggregate level of investment.
The people who do this kind of investing are essentially gamblers and they can lose their nerve. And if they decide to withdraw from trade, they sweep their chips up from the table. If they decide it’s too risky, if their nerve gives out and they can’t bring themselves to go on investing, they cease to give employment and that is the explanation. When business is at all unsettled--when there’s any sign at all of depression--or when there’s been a lot of investment and people have run out of ideas, or when their goods are not selling quite as fast as they have been, they no longer know what the marginal value product of an extra man is—it’s non-existent. How can you say that a certain number of men have a certain marginal productivity when you can’t know what the per unit value of the goods they would produce if you employed them would sell for?”
“An Interview with G.L.S. Shackle,” The Austrian Economics Newsletter, Spring 1983.
There are many things that affect the level of that investment, but a crucial one is the expectations of people make the investment decision. Their expectations are, in the end, subjective.
When investment collapses the question then becomes: how can that private sector investment be restored? Is there a substitute for it in the meantime to increase employment, income and output?
The answer is yes. And consumption is certainly one factor, but not the only one. In fact, the major Keynesian method to restore the health of economies historically has been stimulus programs that take the form of public infrastructure/public investment.
Great find. As a first year PhD student I was surprised to learn that I was among a select few to have read Keynes' General Theory. While that may, in part, be due to my specific program, I'd venture that for a significant number of people their primary exposure to Keynes is hearsay.
ReplyDeleteEven if one questions the source, the cost of searching out contradictory information can be high. Hopefully posts such as this will help illuminate the truth and areas of convergence within different groups (e.g. subjective expectations).
It's also what the textbooks say. Here a passage from Economics (6th edition) by Begg, Fischer and Dornbush (pages 354-355).
ReplyDelete"Since there is no way of knowing for sure what future demand will be, Keynes argued that investment demand was likely to fluctuate significantly, being strongly influenced by current pessimism or optimism about the future - what he called the animal spirits of investors."
Josh your language is far too neoclassical ;) "costs" of searching out contradictory information?
ReplyDeleteI 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 (2010) 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. It is said ALL the time. Bob Murphy has my short list of exemplars if you're interested in support for this claim:
http://consultingbyrpm.com/blog/2012/12/papola-has-a-barrel-of-ink.html
THAT is what I continue criticizing besides the general idea that using up consumer goods can grow the economy, recession or not.
"rather than an appeal to causeless mass psychological changes. "
DeleteKeynesianism does not say that changes in expectations of business people are "causeless".
"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 statement is misleading. What Keynesian says that the only - the sole - goal of fiscal expansion is consumption spending?
And, as I have said above, the historical method by which Keynesian economics fills the "gap" is by public infrastructure/social/R&D spending - which contradicts what you have said.
Who said that? How can you quote me in black-and-white and then misrepresent it.
DeleteI clearly didn't write "only - the sole". I wrote "that consumption can fill the gap". Can. Not only. And, as I've pointed out elsewhere, consumption is a repeatedly popular "solution". I dispute that as a solution at all. It's not. It's a fallacy. We can't consume our way to growth. That's the point. It's not at all inconsistent.
This tactics like that, I'm sure it's fruitful for me to rebut you further, "Lord Keynes". But you are, once again, living up to the style of your namesake.
As to your assertion that public expenditures represent "investment", well, that's quite charitable. It seems to me that the various stimulus packages have been a mix of largely one-time tax credits aimed at goosing consumer spending (and talked about as such), make-work subsidies, extended UI benefits (again, justified as consumption-goosing), mortgage forgiveness and straight-up crony boondoggles and corporate bailouts.
"Investment" earns a return that covers the cost and then some. I'm not saying that government NEVER achieves that goal. They most certainly do. But it's essentially impossible to know which efforts are true investments and the tendency to wildly over-pay for labor costs in public projects makes that possibility even less likely.
"And, as I've pointed out elsewhere, consumption is a repeatedly popular "solution". I dispute that as a solution at all. It's not. It's a fallacy. We can't consume our way to growth."
DeleteNor do Keynesians believe that the solution to recession is to simply "consume our way to growth". The whole point of Keynesian theory is restore private sector investment.
Let me ask you point blank: do you believe capitalists increase production of products when demand for those goods surges?
If you think "no", you're basically saving capitalism does not work.
If you admit "yes", it is obvious consumption demand has a role in driving an economy, though not the only one obviously.
The demand for commodities is not the demand for labor, Lord Keynes.
DeleteAs we've seen in this recession, output recovered even as employment flatlined, enabled by increased productivity.
So no, increased demand for currently produced goods and services do NOT need to result in increased employment. It can, but it can't be assumed.
And this is especially true when there are policies that clearly depress the labor market happening at the same time, including dramatically decreasing the incentive to work for the lower-skilled workers who have been hit hardest in this recession as well as raising the price of hiring for employers.
A classical policy would ensure nominal stability by satiating the demand for money with increased supply of money and focus like a laser on liberalizing labor markets and reducing barriers to employment for workers and employers. We've gone in the wrong direction.
In the broader context of growth, though, the case for saying "consumer spending drives the economy" is even weaker. Innovation after life-changing innovation has come about without any existing consumer demand. The Apple II was produced out of Mike Markula's savings at a time when almost nobody but a tiny band of nerds saw any reason whatsoever for a personal computer. That's not an aberrant story. It's the story of many (many most) radical world-changing innovation. Supply comes first. Then, if it's value-adding, it enables new real demand.
"So no, increased demand for currently produced goods and services do NOT need to result in increased employment. It can, but it can't be assumed. "
DeleteBingo. It can - but what you refuse to say is that often does too. And this concession pretty much destroys the attack you make on boosting consumption spending as one part of a Keynesian macro policy to aid a recovery.
One important source of the business decision to invest comes from demand for their product or expected demand.
"A classical policy would ensure nominal stability by satiating the demand for money with increased supply of money and focus like a laser on liberalizing labor markets and reducing barriers to employment for workers and employers."
The Classical theory is deeply wrong.
Cutting wages? In an environment of deep private debt?
All you will do is cause a debt deflationary collapse, as in 1929-1933 in the US or Weimar Germany.
Debtors - households and businesses - have debts fixed in nominal terms. Cutting their income will just make the debt burden soar, driving significant numbers of debtors then creditors into bankruptcy.
That will depress business expectations even more.
If you recall, the depression was actually a period of HIGH wages for those who had a job, thanks to Hoover/FDR policies of jawboning and then cartelization.
DeleteDebt-deflation is a very real concern, which is precisely why my FIRST part of the quoted policy was "nominal stability". Nominal stability means, ehem, no demand-driven deflation. I don't know how you keep quoting me and then contradicting the quote itself.
Someone without a job because they aren't employable at the going wage or unwilling to take positions at the wages offered has no means to pay their debts as it is. That's a very different problem then debt-deflation.
"A classical policy would ensure nominal stability "
DeleteGiven that as my first point, I have no idea why any talk of deflation followed.
Why are you talking about deflation when the first part of my classical policy you've quoted is "ensure nominal stability by satiating the demand for money with increased supply"?
DeleteI don't get it. That is an explicit call to prevent deflation through monetary policy. Read what you quote, please.
(1) "If you recall, the depression was actually a period of HIGH wages for those who had a job, thanks to Hoover/FDR policies of jawboning and then cartelization. "
DeletePrice deflation meant debt deflation for businesses from the beginning (sales prices being the business income).
Wages fell quite sharply after 1931. Even Rothbard admits that, despite Hoover’s high wage policy, wages began falling in 1931 (Rothbard 2008: 270). In fact, wages began falling significantly from 1931 and continued to fall in 1932 and 1933 (Wigmore 1985: 229), along with severe price falls. So why didn’t this arrest the depression?
Also, why didn’t wage and price falls in Germany and other nations prevent a very severe depression there?
http://socialdemocracy21stcentury.blogspot.com/2012/11/robert-murphys-politically-incorrect_22.html
(2) "A classical policy would ensure nominal stability "
Given that as my first point, I have no idea why any talk of deflation followed."
The "Classical theory" in practice never provided price stability:
http://socialdemocracy21stcentury.blogspot.com/2012/10/the-gold-standard-did-not-prevent-price.html
(3) "Why are you talking about deflation when the first part of my classical policy you've quoted is "ensure nominal stability by satiating the demand for money with increased supply"?"
Precisely because monetary policy is impotent to stabilize aggregate demand and broad money supply in these severe recessions and depressions.
Japan, during its debt deflationary troubles, did ZIRP and then QE (2001–2006) - massive monetary stimulus - but nevertheless the country slipped in price deflation and stayed there for years.
http://socialdemocracy21stcentury.blogspot.com/2010/04/japans-quantitative-easing-qe-yen-carry.html
"Debt-deflation is a very real concern, which is precisely why my FIRST part of the quoted policy was "nominal stability". Nominal stability means, ehem, no demand-driven deflation. I don't know how you keep quoting me and then contradicting the quote itself."
DeleteOh, and it does not matter if you have relative price stability: cutting wages will still cause a severe crisis of debt deleveraging and bankruptcy.
LK,
DeleteSmall businesses statistically worry about uncertainty in the economy MUCH more than usual.
http://www.nfib.com/Portals/0/PDF/AllUsers/research/studies/small-business-problems-priorities-2012-nfib.pdf
This is somewhat a vindication of the Keynesian view.
and debt-deflation has not taken place yet, testament to the goverment debt that is taking it's place.
http://cdn.debtdeflation.com/blogs/wp-content/uploads/2011/12/121911_0526_Movementatt5.png
It's important to note that consumption leads to investment.
ReplyDeleteIf private investment has collapsed then that is because there is no profit to be had from the opportunities on offer. So the simplest way to restore that confidence is to increase profit opportunities.
The idea that government spending has to be on 'investment' projects is to forget that money doesn't stop at its first use.
You can instead ensure that people have money to spend and save and let those spending and savings decisions guide the investment at the private level.
It always amuses me that you get complaints about maintaining consumption from the sort of people who usually abhor central planning decisions.
Government should always be maintaining the commons in any case and it should use the spare labour on offer during a recession to improve the commons. Improved commons leads to more opportunities to exploit them for profit.
It's all about Spending John, which means private sector spending. Like LK said, if you believe that private sector spending does not increase the economy, you're disregarding not just Keynesianism, but all economics.
ReplyDelete