Tuesday, November 19, 2013

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.


  1. to be an 'austrian' you either have to be a compulsive liar, a delusional idiot, or a gullible fool, or some combination of the three.

  2. @3.25-3.30

    He says that the Keynesian consumption function is unstable. But, of course, the consumption is recognised by both Keynes and most Keynesians -- even ISLM types -- as being the most stable component of national income.

    This was then criticised by, for example, Friedman and Duessenberry. (The latter of whom's criticisms are the best).

    This guy has no idea what he's talking about. He seems unaware of some pretty major debates in macro.

  3. Was Hazlitts "The Failure of the New Economics" a poor critique? Was Hutts "Keynsian Episode" a poor critique? An a more layman level how about Hunter Lewis' "Where Keynes Went Wrong." Lewis is for the layman but he quotes from Keynes himself extensively and a lot of people read his books. I'm just asking you because im genuinely curious.

    1. They are all poor critiques.

      To take examples at random: Hunter Lewis' Where Keynes Went Wrong on pp. 221-222 assumes that if only wages and prices were completely flexible all economic problems would fix themselves by market self-adjustment.

      Lewis is blissfully unaware of debt deflation and its economic effects.

      On pp. 231ff. we get fairy tales about how flexible wages could be implemented in the real world, if only it wasn't for evil unions, even though serious empirical studies show that even business managers often dislike across-the-board pay cuts, because they cause falling morale and falling productivity (Bewley, T. F. 1999. Why Wages Don’t Fall During a Recession, Harvard University Press, Cambridge, MA).

    2. Hutt was a keynesian to begin with and I dont see any books anywhere near the breadth that you wrote that can compare to his so simply saying 400 pages is "poor" is obviously not going to convince anyone. So 2 follow up questions: 1. What is then a good critique in your opinion? Surely, there has to be very robust challenges to Keynes - Keynes is not G-d nor the smartest person who ever lived. Which leads possibly to 2: Do you think Keynes is the smartest person in the world who is right about everything? I mean you must wish to make love to him or something because I have never heard one iota of criticism of Keynes from you - which shows lack of understanding, and there is not ever one good comment from you about austrian school: you just cast venim. I'm not an economist but I can tell you a school that has been influential with thousands of economists for over a century is not wrong(for you austrian) or even right( for you keynes) on every thing. So wheres your good critiques squire Keynes-wanna-be? Huh?

    3. "because I have never heard one iota of criticism of Keynes from you"

      Obviously because you've never read my blog properly:



      "there is not ever one good comment from you about austrian school: you just cast venim.

      On the contrary, I appreciate Ludwig Lachmann and have written positive things about his work:




  4. Lord Keynes,

    Have you looked at the Austrian school textbook on macroeconomics, Garrison's Time and Money. I have only read the Introduction, but I wanted to let you know that your ongoing study of Lachmann is a threat to Austrians--and they seem to admit it. They seem to see it as the mutual failure of both Keynes and Hayek:

    "But in countering Keynes's 'expectations without capital theory,' Hayek produced--or so it could be argued--a 'capital theory without expectations.'"

    Is that even remotely true? Did Keynes have a theory of "expectations without capital theory"? Did Hayek actually have a capital theory without expectations"?

    This dovetails into their fear that "expectations" is going to take down Austrian macroeconomics. Garrison writes:

    "The existence of equilibrating forces was not in doubt. But neither was the existence of disequilibrating forces. And there was no way to know which, in the end, would win out. Among Austrian economists, Lachmann was virtually alone in his agnosticism about the ability of the market economy to coordinate."

    "Lachmann raised the issue anew--and with a hint of impishness--arguing that the treatment (or neglect) of expectations in Mises's account of business cycles constitutes the ACHILLES' HEEL of the AUSTRIAN THEORY."

    1. In accusing Keynes of having a theory of "expectations without capital theory", Garrison is just saying that Keynes did not accept the Austrian/Hayekian view of capital in the ABCT: that is, lowering of interest rates below the natural rate induces lengthening of capital structure, etc. etc.

      But this Austrian/Hayekian theory of capital is simply wrong, and the idea that Keynes had no alternative "theory" of capital is utterly ridiculous.

    2. Lachmann was a friend of Shackle who supported the Keyns multiplier theory:

      "Here then is the great lever which Kahn and Keynes showed could be applied to the elimination of unemployment. If, when there is massive general unemployment, the Government starts an extra stream of annual purchases of machinery, buildings, roads, or anything which cannot directly satisfy consumers of, say £100 million, and if the marginal propensity to consume is, say, 3/4, then £400 million a year of extra income, and the corresponding extra employment, will be generated" (Shackle - The Nature of Economtr Though)


      Moreover, Lachmann:

      1) "advocates public works to arrest the process of cumulative depression"
      2) "Lachmann states that the excess capacity generated by plan discoordination, even in the absence of ceilings, might be combated by means of a budget deficit combined with the aforementioned
      selective credit policy" (essays in memory of Ludwig M. Lachmann)


  5. Lord Keyns, your critics should read this:

    Wieser’s interventionist instructions represent the normative conclusions at which
    the author arrives at the end of his investigation. The state should intervene in
    harmony with the social attitude of the economy and struggle against the
    despotism of capitalism: ‘The State may, without fear of harmful results, take
    energetic measures against the capitalists’ (Wieser, [1914] 1967, p. 413). (The Evolution of Austrian
    Economics - Sandye Gloria-Palermo)


  6. A perfect example of animal spirits is people buying homes in 2005 expecting the price to rise, and not buying them in 2008 expecting them to fall.