I would like to discuss this Mises Daily article. Take it step by step, maybe only one or two replies per day.
My perspective is from the Austrian point of view, specifically, I grasp the concepts of capital formation, the structure of production, subjective value scales, and time preference. The fantastic thing is that these concepts are not disjointed, rather, they all flow together into a coherent theory of the business cycle, or perhaps, human action in general. These concepts are ignored by Keynes.
My question: The basic Keynesian assumptions do not seem grounded in reality. It is not the math or the equations that I struggle with or want to discuss. It is the basic Keynesian assumptions that seem absurd to me. I would like to discuss each of #s 1 through 5 in the article, slowly, until it makes sense. For example, #1 makes no sense to me at all.
Help is much appreciated. Good luck.
The Keynesian Cross - Mises Daily, 07/13/10
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
1. In a given situation of technique, resources and costs, income (both money-income and real income) depends on the volume of employment N.
This makes no sense to me. It seems that employment and income are dependent on capital formation.
1. In a given situation of technique, resources and costs, income (both money-income and real income) depends on the volume of employment N
This sentence is a bit confusing, I agree. I don't know if it has anything to do with this, but Keynesians (at least Keynes and Hicks) have a very strange approach to wages. For example, their IS/LM models dictate that as output increases and interest rates lower, there is a boundary at which employment can no longer grow (that is, where investment/savings crosses with liquidity preference/money supply). As such, the private sector cannot reach full employment. Even ignoring the implausibility of this mode as a long-run depiction of employment and economic growth, it really shifs discussion away from where it should be - employment is not just a function of investment. Employment is also a function of wage rates. The supply and demand for labor has its own market, and as such full employment requires not so much greater investment, but also a fall in wage rates.
On the other hand, I've found that sometimes Keynes can be very confusing and ambiguous in his writing, and once you get down to the bare essentials he's not as wrong as you had thought. This goes, at least, for his liquidity trap theory (which is not as refined as that of Hicks, and is not similar to Krugman's). I don't think that The General Theory and Austrian economics can be reconciliated (as some think), but I think that Keynes was not always incorrect (even if where he was not wrong he was also not unique).
Jonathan, thanks for your reply. It's still as clear as mud. "Income depends on the volume of employment". It's like saying respiration depends on breathing.
Yes, it confuses causality. Keynes understands this, but he believed that (a) the labor market is unique due to the irrationality of laborers, and (b) that wages were especially rigid (so-called money illusion). Thus, the irrationality of laborers, in Keynes' world, leads to perpetual (and extreme) endogenous wage rigidity, which keeps the unemployment rate elevated and the economy below full capacity at all times (which means lower aggregate income).
Keynes, like Ricardo, looks at social groups in their aggregate. Different social groups are motivated by different things, and have different, but fixed, marginal propensities to consume. His ultimate goal was to "euthanize" the "rentiers," i.e., the greedy speculators, and he would do this by socializing investment and eliminating interest. This is the Keynes that was lost in the new-Keynesian revolution, but preserved in the post-Keynesian framework. As bad as the new-Keynesians are, it could get a lot worse.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
chloe732:1. In a given situation of technique, resources and costs, income (both money-income and real income) depends on the volume of employment N. This makes no sense to me. It seems that employment and income are dependent on capital formation.
perhaps capital goods fall under the category resources which he fixes at some arbitrary point.
He is proposing you imagine the same day playing out but with different numbers of people having jobs to go to. he says the more people with jobs the more 'aggregate income' adds up to. To me, it seems particularly odd to hold costs constant under such analysis as costs must surely vary with changes in the labour market...
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
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Esuric, Nir, thanks for your replies. Very helpful. I understand what you're saying, but the Keynesian framework is so bizarre and ad hoc (from my point of view) that I can see this will be far more challenging for me than I thought.
Concepts I took for granted in college, ie, "aggregate demand", now make no sense at all after studying Austrian capital theory. I'm going to have more questions on this in a day or two.