Any explanations?
Because the keynesian multiplier does not exist ... ? Some book I recommend for you.
1/ The Failure of new economics (chapter 11 "The multiplier"; see especially pages 137, 139, 146, 150-151 and 192).
2/ Dissent on Keynes (chapter 4 "The Myths of the Multiplier and the Accelerator" pages 78-79).
3/ Money Bank Credit and economic cycles (chapter 7 "A critique of Monetarist and Keynesian theories", pages 559-560 and 562).
Are these books online?
Actually I have Money, Bank Credit, and Economic Cycles. Thank-you.
EmbraceLiberty:Are these books online?
Check the "links" section for full text downloads:
The Failure of the New Economics
Dissent on Keynes: A Critical Appraisal of Keynesian Economics
Money, Bank Credit, and Economic Cycles
See also : The “Multiplier” Concept Must Be Entirely Discarded
Baraglioul wrote a good post on his blog, although his critique resembles that of Hazlitt.
As I described recently in another thread, in a world where prices are inflexible and there are no other major factors of change then stimulus is probably the best option available for ending the recession. There should be no debate over whether or not the government can in many cases increase aggregate demand and increase both its spending and the spending of everyone in the economy. With this said there are still inherent problems with the process
I generally find that the real theoretical reasons for opposing stimulus around here are pretty weak, and it really all does come down to price flexibility. If prices are flexible then recessions can fix themselves and most likely government intervention will do nothing other than get in the way for all the above as well as adding a whole new level of uncertainty into the mix. Rothbard has a really good section on why recessions should be entirely self correcting in MES at the end of his chapter on money.
At best it is akin to a blood transfusion from the left arm to the right arm, with a lot of the blood spilling on the floor in the process.
As for the multiplier, it's not that it doesn't exist, but that it always and necessarily exists, regardless of any so-called government 'stimulus'. Money that isn't spent directly for consumption is either invested or hoarded. If it is invested, it is still being spent. If it is hoarded, the purchasing power of the money in circulation rises ceteris paribus.
"The “Multiplier” Concept Must Be Entirely Discarded"
I'm sorry, but that is a terrible article.
EDIT
Also, a final note is that government borrowing must raise the interest rate from what it formerly was which disturbs the readjustment process, harms long term growth, and means that there's less money around to invest in projects, and in some perverse ways a recession is exactly the right time to engage in long term projects
EDIT EDIT
Some similar stuff can be said for taxation to fund stimulus, but it also has the problem of decreasing AD before the stimulus can raise it, resulting in the need for even more stimulus.
neodoxy -> "in a world where prices are inflexible"
...stimulus is probably the best option available for ending the recession.
SMH. If the cause of the recession is money printing and borrowing that which cannot be repaid,, which results in wasting of resources aka malinvestments, how is stimulus going to address those problems?
There should be no debate over whether or not the government can in many cases increase aggregate demand
Oh absolutely. But was lack of aggregate demand the problem in the first place? AE and Say's Law say of course not, just the opposite.
and increase both its spending and the spending of everyone in the economy.
If they print or borrow money from abroad, yes. But if they print, then the spending is only increased in nominal terms. And if they borrow from abroad, then it's lighting a ticking bomb aka that money has to repaid some day. So one is not ending the recession, but merely delaying it and at the same time increasing its eventual severity [because it allows more malinvestment to continue, as well as getting people impoverished paying off those loans].
Now maybe Neodoxy means that stimulus that causes price inflation, thus lowering real wages, will help people get hired, ending that aspect of the recession, as Keynes suggested. But Hazlitt already demolished that one by saying modern unions know all about cost of living increases. Maybe Neodoxy will reply that the govt fake statistics that give very low estimates of price inflation will fool the unions. But Peter Schiff has noted that in today's economy, in the US and even more so in Europe, the problem is no longer wages as much as regulations. Nobody is hiring in Europe because it is basically illegal to fire someone once hired. And there are many more laws that encourage people not to hire anyone.
BTW kudos to Rodolphe for spending time providing links, thus stimulating me into replying.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
EmbraceLiberty –
By asking whether stimulus “works” I assume you are asking whether stimulus “improves the economy” and by that I assume you are asking if stimulus causes the country who engages in such stimulus to have greater material wealth and standard of living.
Humans can increase material wealth and standard of living by engaging in projects that have an output which is greater than the input. Specialization and trade allow for humans to pursue many different projects. If it costs 1 barrel of oil to extract 2 barrels from a well, there is 1 barrel of surplus. This can be spent on consumption or can be invested in a different productive asset. Correspondingly, if it costs 2 barrels of oil to extract 1 barrel from a well, there is no surplus to this activity; rather, it is a losing proposition. Anyone pursuing this kind of zero-surplus activity will soon go broke and be eliminated from the financial "gene pool" of investors, as they will not be able to find participants who will voluntarily engage in their zero-surplus activity.
There is a great confusion in this world between material wealth and money. Money is not synonymous with material wealth. Money is a medium of exchange that allows us to make trades that we otherwise would not have been able to make, i.e. money allows humans to move beyond the limitations of direct exchange. To quote Murray Rothbard: “If A has a supply of eggs for sale, and B has a pair of shoes, how can they get together if A wants a suit? And think of the plight of an economics teacher who has to find an egg-producer who wants to purchase a few economics lessons in return for his eggs! Clearly, any sort of civilized economy is impossible under direct exchange.”
The act of “stimulus” does not create any resources that did not previously exist. There is no surplus created from an act of “stimulus.” The act of stimulus is carried out by government and by definition it is the reallocation of resources by the use of force. If it were voluntary, it would not be carried out by government, and it would by definition be an act of trade. Said another way, “stimulus” is the forced allocation of a previously created surplus. States and governments, by definition, face no market forces on their cost basis. They have no competition and do not face market pressures to contain costs. As a result, governments are intrinsically incapable of radically reducing the cost basis of their activity.
So the reason that “stimulus does not work” is that it is simply a reallocation of resources (which already existed) against the will of the owners of those resources. Stimulus is carried out by individuals who have no market pressures to contain their costs, while they have tremendous pressure to cater to lobbying groups and blocks of voters.
"Now maybe Neodoxy means that stimulus that causes price inflation, thus lowering real wages, will help people get hired, ending that aspect of the recession, as Keynes suggested. But Hazlitt already demolished that one by saying modern unions know all about cost of living increases. Maybe Neodoxy will reply that the govt fake statistics that give very low estimates of price inflation will fool the unions. But Peter Schiff has noted that in today's economy, in the US and even more so in Europe, the problem is no longer wages as much as regulations. Nobody is hiring in Europe because it is basically illegal to fire someone once hired. And there are many more laws that encourage people not to hire anyone."
Neodoxy wrote a reply. Neodoxy lost the reply just as he was finishing up. Neodoxy is sad. Neodoxy will respond again later.
Keep 'em coming, Neodoxy.
Keynesianism is a free lunch theory. 'Aggregate demand' is nothing else than societies total ability to afford scarce objects. Keynesians suggest that this ability can magically be raised if we have more money to spend. It's communism light: "If you take away the need to pay for stuff, then stuff will appear out of thin air".
Dammit Neo, when are you going to learn to copy and paste into Notepad?
John James:Dammit Neo, when are you going to learn to copy and paste into Notepad?
Whattoyou mean, James?
Yeah, if I have a long post I usually copy into notepad before trying to post. Sometimes I think 'screw it, it'll be fine' and post without copying. Those are the times I lose my posts.
""The “Multiplier” Concept Must Be Entirely Discarded"
I'm sorry, but that is a terrible article."
Could you substantiate your claim, please?
"...then stimulus is probably the best option available for ending the recession."
Basically, the "recession" is already over. It ended with the crisis. Before the crisis, economic ressources were employed for unprofitable projects. That was the real "recession"; but this recession was unseen. When the crisis occured, past errors were revealed, and so previoulsy badly employed ressources could begin to be channeled in better ways. The so-called "recession" being actually the true recovery, there's no need to '"end" it.
Unfortunately, the state tried to end it by setting out a "stimulus" and, as a result, managed to create a true [second] recession.