Economics Questions

Re: Do you respect John Maynard Keynes?

AdrianHealey — Sat, 11 Sep 2010 12:14:34 GMT

Student:

i wonder how many people responding to this thread have read Keynes and not simply his detractors. of those who have read Keynes, i wonder how many approached his work already knowing how they would react.

I read essays by him - most notably 'the end of laissez-faire' and tried to read the General Theory, but it has as muddled as they say. I'm interested in reading the consequences of the peace; apparently; that one ought to be good.

Re: Do you respect John Maynard Keynes?

bcyclwutztht — Sat, 11 Sep 2010 03:30:32 GMT

But this only holds if the interest rate is actually reduced. If it remains elevated above the natural rate, then total revenues will fall, but the structure will remain arbitrarily constricted (relative to where it should be if it truly expressed real time preference), and marginal costs will not fall by a sufficient degree, or at all.

You are describing a hampered market, one with a natural rate of interest and an artificial rate of interest. This still fails to prove your thesis (and Keynes') that prices and costs, to use your terminology, must by necessity remain apart in a free market.

Edit: remain apart, that is, at certain points and for materially detrimental periods.

Re: Do you respect John Maynard Keynes?

Esuric — Sat, 11 Sep 2010 02:34:01 GMT

Again, however, the output of one business is the input of another---that is, the "price" fetched by the one business is the "cost" born by the other.

Precisely. When the aggregate demand for final goods and services falls, total revenue falls for each stage of production, but not in a proportional manor. The higher stages of production are effected less relative to the lower stages that yield the finished product or nearly yield the finished product. But, at the same time, a reduction in the aggregate demand for finished goods must, ipso facto, mean a higher demand for future goods, i.e., saving. This lowers the interest rate and the financial system funnels real savings towards investment activities (the higher stages are more sensitive to changes in interest rates). This lengthens the structure of production and lowers marginal costs at each successive stage (see Prices and Production). In other words, an elevated savings rate facilitates the division of labor and capital.

But this only holds if the interest rate is actually reduced. If it remains elevated above the natural rate, then total revenues will fall, but the structure will remain arbitrarily constricted (relative to where it should be if it truly expressed real time preference), and marginal costs will not fall by a sufficient degree, or at all.

So Hayek expands upon Wicksell's endogenous view of money, by treating money as exogenous?

No. Keynes originally began with an endogenous view of money and the Wicksellian framework in his earlier works. Unfortuantely for Keynes, Hayek absolutely obliterated his Treatise on Money, and showed that Keynes fundamentally misunderstood Wicksell. Keynes, in response, retreated from many of his original positions and treated money as an exogenous policy variable in the GT.

Re: Do you respect John Maynard Keynes?

bcyclwutztht — Sat, 11 Sep 2010 02:19:22 GMT

@Student

np. it's true. just ask around.

Re: Do you respect John Maynard Keynes?

Solid_Choke — Sat, 11 Sep 2010 02:03:19 GMT

The important thing is that keynes pulled together many different threads to weave a coherent story of economic fluctuations that many people found convincing.

How long ago did you read the GT? I grant that Keynsianism is coherent, but the GT was not. It took a lot of cleaning up by Hicks to get models like the IS-LM. He contradicts himself on many occasisions in the GT and constantly confuses real and nominal units.

Re: Do you respect John Maynard Keynes?

bcyclwutztht — Sat, 11 Sep 2010 02:00:03 GMT

(1) "Yes, there is a difference between the prices of outputs and the prices of inputs. Costs will fall faster than prices when the division of labor and capital expands, brought about by a lower time preference. Prices may fall faster than costs when the division of labor and capital is constricted by monetary and inter-temporal disequilibrium."

Surely this is true---for individual businesses. Again, however, the output of one business is the input of another---that is, the "price" fetched by the one business is the "cost" born by the other. I fail to see how the analysis holds across businesses.

(2) "You're putting words in my mouth, once again."

Indeed. My bad.

(3) "The existence of imperfect information and endogenous rigidities are not, in anyway, disputed."

I certainly don't dispute the existence of imperfect information. On the other hand, so called sticky prices and sticky wages, however, I do question in the context of a free market. Your argument for their existence is merely (a) your argument vis-a'-vis prices and costs as per the above; combined with (b) the empirical fact of sticky prices and wages (in the context of a highly regulated market economy that we see all around us---and that Keynes saw all around him).

(4) "Some examples [i.e. of endogenous rigidities]:

1. Firms, rather than adjusting prices, may choose to slash inventories and investment.
2. Employers, rather than lowering wages, may choose to lay off workers.
3. Banks, rather than elevate the interest rate, may choose to expand the supply of money in the broader sense (the degree to which they may do this depends on many factors).
4. Some employers choose to pay a wage above the marginal productivity of labor in order to increase morale and productivity."

My objection remains: Namely, that none of these phenomena occurs in isolation---meaning that prices elsewhere will adjust accordingly (in a free market economy, that is) to EACH AND EVERY ONE of these activities 1-4 on your list. Certainly, price/cost disparity is readily apparent when analyzing a single firm. However, you have merely asserted---not demonstrated---the necessity of price/cost disparity among firms (again, in a free market economy).

Keynes argues similarly, to my knowledge, though his analysis ignores inter-firm transactions by focusing on aggregate data, whereas your analysis ignores inter-firm transactions by focusing on data for a single firm only.

(5) "Wicksell's Interest and Prices is the cornerstone of Austrian monetary and business cycle theory (later expanded upon by Mises and Hayek). Wicksell, like Keynes (until the GT), had an endogenous view of money, where he rejected the mechanical quantity theory of money, and showed that the interest rate is the indirect transmission mechanism. Keynes retreated from this position in the GT, thanks to Hayek (he treated money as an exogenously fixed policy variable)."

This is interesting. So Hayek expands upon Wicksell's endogenous view of money, by treating money as exogenous? Could you please elaborate a bit on this seeming contradiction?

Re: Do you respect John Maynard Keynes?

Student — Sat, 11 Sep 2010 01:31:53 GMT

bcyclwutztht.

The criterion by which the soundness of an argument is to be judged is NOT a head count of how many people believe it to be sound

thanks for the heads up.

Re: Do you respect John Maynard Keynes?

Esuric — Sat, 11 Sep 2010 00:59:06 GMT

By "price" I take your meaning to be "selling price". Is not one's price is another's cost? If so, how can prices fall faster than costs? I'm not trying to be difficult here. I do not follow the argument on this. Is Wicksell analyzing a free market economy?

Yes, there is a difference between the prices of outputs and the prices of inputs. Costs will fall faster than prices when the division of labor and capital expands, brought about by a lower time preference. Prices may fall faster than costs when the division of labor and capital is constricted by monetary and inter-temporal disequilibrium. Again, prices do not adjust instantaneously, even in a free-market economy, and money is a good in itself (never neutral).

However, regarding imperfect information (i.e. "asymmetric" information) I fail to see how Austrian economics fails to acount for it.

It doesn't, and I never said that it did.

Further, again to your implication that Austrian economics somehow fails to account for the fact of imperfect information

You're putting words in my mouth, once again.

And re: Endogenous rigidities (which, presumably, sustain in free markets for a materially important length of time, in your estimation). We'll have to agree to disagree.

The existence of imperfect information and endogenous rigidities are not, in anyway, disputed. Keynes was famous, in part, for his arguments regarding the stickiness of prices, especially wages. He may have overemphasized such phenomena (dramatized), but they do exist, and they're absolutely vital. Many neoclassical economists during that period were taking Walras' general equilibrium model too literally.

Some examples:

Firms, rather than adjusting prices, may choose to slash inventories and investment.
Employers, rather than lowering wages, may choose to lay off workers.
Banks, rather than elevate the interest rate, may choose to expand the supply of money in the broader sense (the degree to which they may do this depends on many factors).
Some employers choose to pay a wage above the marginal productivity of labor in order to increase morale and productivity.
And there are, of course, exogenous rigidities.

How does the "uncertainty" you refer to here relate as you see it to the "imperfect/assymetric information" you refer to above? It almost sounds like you reserve a special category for "uncertainty", and that it deserves some sort of special theoretical attention and/or separate theoretical analysis.

Uncertainty exists because information is always imperfect. Investors do not truly know the actual rate-of-return on investments, for example; they make approximations and accept and try to calculate risk (differs from uncertainty). They do not know, a priori, the most efficient ways to organize their capital, ect ect. Uncertainty definitely deserves special theoretical attention.

Re: Do you respect John Maynard Keynes?

bcyclwutztht — Fri, 10 Sep 2010 23:35:52 GMT

@Student

"...the important thing is that keynes pulled together many different threads to weave a coherent story of economic fluctuations that many people found convincing."

The criterion by which the soundness of an argument is to be judged is NOT a head count of how many people believe it to be sound.

"...was keynes theory perfect? no. but if perfection is your criteria for respect, then i imagine you must be a lonely person."

Nor is it to be found in ad hominem. (Edit: Or whatever fallacy this is...straw man? No one's saying Keynes was imperfect, therefore unworthy of respect. More like Keynes was highly imperfect---perhaps wittingly; at least negligently---and therefore unworthy of respect.)

Re: Do you respect John Maynard Keynes?

Lagrange multiplier — Fri, 10 Sep 2010 22:30:21 GMT

Thanks for the YouTube link, Student.

Re: Do you respect John Maynard Keynes?

Student — Fri, 10 Sep 2010 22:17:28 GMT

personally, i respect keynes as both an economist and as a person.

as an economist, its hard to argue that keynes work did not revolutionize the study of economic fluctuations. i know a lot of people have noted that many of keynes' individual ideas can be found in other works, but i would say the same is true for the work of most economists (how much of human action is original to mises?). the important thing is that keynes pulled together many different threads to weave a coherent story of economic fluctuations that many people found convincing. you can argue that some threads were unoriginal to keynes, but the "big" thing is what keynes did with them (if keynes added nothing new, we would call that "malthusian revolution" or something else). was keynes theory perfect? no. but if perfection is your criteria for respect, then i imagine you must be a lonely person.

as a person, keynes was at least a very interesting person with a variety of admirable traits. cultured, curious, scholarly, witty. i doubt he was perfect, in fact he seems to actlike an arrogrant prick at times, but i certainly don't know of anything about him that would lead me *dis*respect him anywyas. (btw: here is a good video on keynes and bloomsbury: http://www.youtube.com/watch?v=lspGtRXKVNA)

Re: Do you respect John Maynard Keynes?

bcyclwutztht — Fri, 10 Sep 2010 20:36:22 GMT

"The structure of production, in such circumstances, does not reflect the true time preference of society--it is arbitrarily shortened (more direct methods) and prices fall faster than costs. Wicksell claimed that such a condition would yield a "rot," or an uncontrollable deflationary spiral. But prices will eventually adjust, restoring cash balances."

By "price" I take your meaning to be "selling price". Is not one's price is another's cost? If so, how can prices fall faster than costs? I'm not trying to be difficult here. I do not follow the argument on this. Is Wicksell analyzing a free market economy?

"Wicksell, like Keynes (until the GT), had an endogenous view of money, where he rejected the mechanical quantity theory of money, and showed that the interest rate is the indirect transmission mechanism. Keynes retreated from this position in the GT, thanks to Hayek (he treated money as an exogenously fixed policy variable)."

This is interesting. So Hayek expands upon Wicksell's endogenous view of money, by treating money as exogenous? Could you please elaborate a bit on this seeming contradiction?

"Absolutely not. There are endogenous rigidities and imperfect/asymmetric information."

To be clear, sounds like you argue for special recognition for Keynes/the validity of certain of his ideas on this basis (i.e. That he was unique in empasizing imperfect information---I'll discuss endogenous rigidities below). However, regarding imperfect information (i.e. "asymmetric" information) I fail to see how Austrian economics fails to acount for it. And I don't see how Keynes "reminded the economic community" of its existence. Indeed, in the Austrian story of economic growth, the very basis of entrepreneurial action is the fact of asymmetric information---that is, the wellspring of growth is the fact that successful entrepreneurs successfully exploit their specialized knowledge.

Further, again to your implication that Austrian economics somehow fails to account for the fact of imperfect information, Hayek's great contribution (to my inexpert and incomplete knowledge) was precisely in demonstrating how free markets reconcile the important fact of imperfect information---not perfectly so, but for all intents and purposes sufficiently so; nevertheless, in a manner superior to any alternative.

And re: Endogenous rigidities (which, presumably, sustain in free markets for a materially important length of time, in your estimation). We'll have to agree to disagree.

"He wrote a lot about uncertainty, especially when it came to interest rates/investment."

How does the "uncertainty" you refer to here relate as you see it to the "imperfect/assymetric information" you refer to above? It almost sounds like you reserve a special category for "uncertainty", and that it deserves some sort of special theoretical attention and/or separate theoretical analysis.

Re: Do you respect John Maynard Keynes?

Solid_Choke — Fri, 10 Sep 2010 17:34:21 GMT

i wonder how many people responding to this thread have read Keynes and not simply his detractors. of those who have read Keynes, i wonder how many approached his work already knowing how they would react.

I read it. I didn't have very high hopes going in, since my professor told me that no one is really a Keynsian anymore. After the latest recession I think it is safe to say that he was completely wrong. There are Keynsians all over the MSM.

When I read it I was under the impression that Keynes basically invented GDP accounting and that he was the first to come up with the paradox of thrift. Also, I actually fell for his interpretaion of classical economics (which is little more than a straw man). After reading the secondary literature I learned that none of those are original with Keynes.

Re: Do you respect John Maynard Keynes?

Daniel James Sanchez — Fri, 10 Sep 2010 17:12:54 GMT

Conza, if you have a problem with StrangeLoop's style of posting, bring it up in the Issues Forum. Any more posts in this thread not actually about the merits and demerits of Keynes will be deleted.

Re: Do you respect John Maynard Keynes?

Lagrange multiplier — Fri, 10 Sep 2010 15:45:23 GMT

Yes, you've brought nothing to the table, except fruitless criticism.