A Poor Critique of Keynes

... can be found in the video below. This is an interview of an economist called G. P. Manish by the Austrian Thomas Woods in an attempt to summarise and criticise the economic ideas of Keynes.




Some comments:

(1) The discussion of “animal spirits” is rather poor. The term was used by Keynes but three times in the whole General Theory, and all towards the end of Chapter 12. Keynes uses “animal spirits” in the sense of “a spontaneous [human] urge to action rather than inaction,” but this was a mere element of his broader point that expectations of economic agents – particularly business-people – are subjective, and that future events that are vitally important to them cannot be given objective, numeric probability scores.

Now whether or not humans have a “spontaneous urge to action rather than inaction” is a matter for modern psychology, evolutionary psychology, neuroscience and cognitive science, and all that Keynes needed to say is that human beings can and do act in the face of uncertainty.

But in truth the entire concept of “animal spirits” could be dropped completely from modern heterodox Keynesian treatments of subjective expectations without any problem at all. The Austrian and libertarian fixation on “animal spirits” is mostly an utter red herring, as I have argued here in an earlier post.

The crucial point that Keynes was really making is that much of the future is not a matter of mathematical calculation, and that agents face uncertainty about the future.

The sheer stupidity here is that Austrians, more or less, say the same thing about expectations: they are subjective. Yet the Austrians are forever trying to “refute” Keynes on a point that is part and parcel of their own economic theory and that they themselves are committed to supporting.

Now Keynes of course also argued that, because expectations are subjective and investment decisions are not a matter of “mathematical calculation,” business confidence and expectations can shift between periods of optimism and pessimism, so that the aggregate level of investment is unstable.

Pessimistic and shocked expectations can lead to prolonged slumps and lowering of interest rates will not lead to a sufficient increase in demand for investment loans and hence real capital investment.

But neither Manish nor Thomas Woods have refuted this point.

(2) G. P. Manish in his comments from 11.17 (which you can hear directly below) shows us that he does not understand the real world price system and – like all free market apologists – lives in a fantasy world.



Manish tells us that

“as to why we would not expect the economy to settle in that kind of recessionary spiral or recessionary equilibrium is simply because of the fact that on the market it is through price flexibility that markets recover. So, essentially, as Austrian economists and even others have argued ... that at the end of a bust – when the boom turns into a bust – you need price flexibility to reallocate resources … back in line with consumer preferences, because what the boom represented was a misallocation of resources, which in turn was caused by meddling with the monetary … the amount of money in the system, and the creation of fiduciary media, as Mises would call it. And, therefore, if you do this mechanism of price flexibility and especially the actions of entrepreneurs – who are always looking to make profits and therefore always trying to appraisal the future and always trying to move resources back to … in a way that is in line with consumer preferences – we would expect the market to use up resources to the best available way and to the best available level.”

But this sort of price adjustment is precisely what does not happen in modern capitalist economies. The widespread relative rigidity of prices and wages – especially downwards – is an overwhelmingly confirmed empirical fact about modern market economies.

One of the principal reasons for this is the private sector practice of administered prices and the desire of businesses to shun price wars and destructive competition. The general unwillingness of workers to accept nominal wage cuts also makes wage flexibility a permanent fact about modern economies – contrary to the fairy tales about self-adjusting, equilibrating markets.

(3) On “idle resources,” Keynesians are not referring to frictional or seasonal unemployment or deliberate failure to use capital goods because of mere “seasonal” factors (say, the winding down of summer tourism industries during the winter or when seasonal demand is in a slack phase).

Idle resources are, above all, those factors such as capital or labour which are not used during recessions because of an aggregate demand failure, even though workers and capitalists do wish to use their resources and earn money.

At any rate, Manish admits that in recessions many capital goods might indeed be “economically idle,” but his explanation of recessions as only caused by interference in markets is totally unconvincing, not least of all because he never even refuted Keynes’ explanation of the unemployment equilibrium as primarily caused by pessimistic expectations of businesses and the instability of the investment function.