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Question about Keynesian "priming the pump" theory

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bloomj31 posted on Tue, Dec 1 2009 10:36 AM

It's commonly talked about now that Keynes argued that when economic activity lagged because of a lack of consumer spending that the government could make up the difference and thus "prime the pump" for economic activity to start flowing again.

My question is whether or not Keynes ever stated whether or not it mattered where the government got the money from?

In other words, did he assume continued surpluses that the government could spend out of?  Did he advocate that it be done with deficit spending?  Did it matter if there was already a fiscal deficit?

Did he care if the money was just being printed by a central bank?  I ask this mainly because one of my favorite quotes about inflation comes from Keynes who said: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

I think that if he made any of these distinctions they should be recognized because Keynesian advocates would seem to have forgotten to mention caveats about this particular policy concept when selling it to the public.

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In regards to inflation, Keynes is pretty ambigious.  He claims that spending public money on gold-mining adds no real wealth, but yet gold-mining in general does and that gold-mining can make individuals very wealth.  He makes an analogy with the U.S. Treasury burying notes (bank notes) in mines, deep under the Earth, and having private companies fund their "discovery".  He suggests that this would cause unemployment to decrease, and those private enterprises to be that much wealthier (by the amount of money "mined"), but I'm not sure if he's being sarcastic or if he completely contradicted himself (right before that he said gold-mining was a disutility of labor and added no real wealth).

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Esuric replied on Tue, Dec 1 2009 12:07 PM

No, he doesn't care where the money comes from, as long as there's his magic multiplier, deficits are always a good thing. Keynes advocated low interest rates at all times, and loved fiat money (read up on his Bancor proposals). Keynes believed people valued money because it reminded them of their own shit (he seriously believed this). Furthermore, his policies literally support reducing workers real wage rates through inflation. There are no caveats: inflation is good.

"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."

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I think your policy question may be based on an incomplete understanding of what Keynes actually said.

Keynes did not argue that the business cycle was caused by fluctuations in consumer spending. Indeed, in his formulation, the line of causation largely ran the other way (with consumption being to a large extent passively determined by output). Instead, Keynes argued that fluctuations in investment spending were primary culprit for lagging economic activity.

Keynes solution to these fluctuations in investment spending was not narrow expansions in "government spending", but the actual "socialization" of investment. By putting investment in the hands of the government, we could therefore divorce our economic well being from the "animal spirits" of investors.

Good article on this topic here:

http://www.jstor.org/pss/4538449

But, more deeply, I think you should realize that Keynes was the not the final word in Keynesian economics. There have been many advancements since the General Theory. So I don't think you will gain much knowing more about Keynes' beliefs (unless you're just curious from a historical perspective). 

As far as modern Keynesians go, I believe that many would advocate government spending funded by borrowing from investors (deficit spending) as a solution for todays problems. At least that's what you hear from folks like Larry Summers, Paul Krugman, Christina Romer, etc. But not all Keynesians would agree.

 

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Esuric replied on Tue, Dec 1 2009 12:46 PM

Student:

I think your policy question may be based on an incomplete understanding of what Keynes actually said.

Keynes did not argue that the business cycle was caused by fluctuations in consumer spending. Indeed, in his formulation, the line of causation largely ran the other way (with consumption being to a large extent passively determined by output). Instead, Keynes argued that fluctuations in investment spending were primary culprit for lagging economic activity.

Keynes solution to these fluctuations in investment spending was not narrow expansions in "government spending", but the actual "socialization" of investment. By putting investment in the hands of the government, we could therefore divorce our economic well being from the "animal spirits" of investors.

Good article on this topic here:

I'd like to add that Keynes incorporated the Wicksellian framework into his theories without understanding it whatsoever (which is why Hayek forced Keynes to retreat on most of his positions in the Treatise). To Keynes, the natural rate of interest is like Fisher's real rate of interest; he knew nothing of time preferences or the structure of production. During the great depression, he noticed prices were falling faster than costs, and mistakenly believed that the market rate of interest was above the natural rate, or that S>I, when, in fact, the market rate of interest was merely rising towards the natural rate (which would explain why I>S). Furthermore, he thought it was revolutionary to say that savings didn't equal investment ex ante, that it invalidated Say's law; of course, it has nothing to do with Say's law, and everyone knew that. The Austrians will tell you that savings only equals investment, ex ante, when the market rate is at the natural rate (which is never in a monetary economy). So with no explanation for the bust, for not understanding it's a cycle with a boom phase, he blamed those pesky animal spirits and speculation.

Oh, and Keynes thought capital was a homogeneous blog (perfectly substitutable), making asset bubbles impossible. Kind of hard to explain asset bubbles and Cantillon effects when you don't believe in asset bubbles.

 

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I don't have time to give a blow-by-blow reply to Esuric, but I would like to note for the op (bloom) that I don't believe he is accurately describing Keynes' argument. You will find a very easy-to-read account in wikipedia (of all places):

http://en.wikipedia.org/wiki/Keynesian_economics#Excessive_saving

I suggest the op at least read this before biting down too hard on what he thinks is the "truth".

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Student:
I don't have time to give a blow-by-blow reply to Esuric, but I would like to note for the op (bloom) that I don't believe he is accurately describing Keynes' argument.

Whenever you're ready friend.

Student:
I suggest the op at least read this before biting down too hard on what he thinks is the "truth".

I know more than I'll ever need to know about Keynes; my post-Keynesian professors torture me with this bullshit voodoo economics.

"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."

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Student:

I suggest the op at least read this before biting down too hard on what he thinks is the "truth".

I am a mere bystander on this thread and would like to continue to follow it.  However, I am curious to know; do you adhere to the Keynesian framework, i.e., do you believe that Keynesian recommendations as to government policy would result in favorable outcomes to the current economic crisis?

 

"The market is a process." - Ludwig von Mises, as related by Israel Kirzner.   "Capital formation is a beautiful thing" - Chloe732.

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Esuric:
Keynes believed people valued money because it reminded them of their own shit (he seriously believed this).

I really want to see a source for this.

Austrians do it a priori

Irish Liberty Forum 

 

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priming the pump = Sacrificing now and enjoying the benefits later

keynesianism = Spending like crazy now, and sacrificing (paying back debt) later

Keynesianism is the opposite of priming the pump!!

(this is a pet peeve of mine)

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Esuric:

No, he doesn't care where the money comes from, as long as there's his magic multiplier, deficits are always a good thing. Keynes advocated low interest rates at all times, and loved fiat money (read up on his Bancor proposals). Keynes believed people valued money because it reminded them of their own shit (he seriously believed this). Furthermore, his policies literally support reducing workers real wage rates through inflation. There are no caveats: inflation is good.

Ok, I think this is pretty much what I wanted to know.  Thank you and everyone else for their responses.

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The money can be borrowed or printed. It doesn't matter. That way it isn't taking money from one pocket and putting it in the other.

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