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Paul Davidson at University of chicago economics department seminar


Vital economic debate is alive and well in Chicago.

Post-Kenyesian economist Paul Davidson recently was invited to the University of Chicago to give a lecture on Keynes’s solutions to current economics crises – solutions that are very much at odds with the traditional approaches associated with Chicago School economics.

In his talk titled “The Keynes Solution: The Path to Global Economic Prosperity via a Serious Monetary Theory,” Davidson discusses the failures of orthodox economics and explores how Keynes would have addressed them. You can watch the lecture and download the video or audio here.

Davidson points to Keynes’s theory of liquidity to explain why laissez-faire financial markets cannot be efficient and do not solve the problem they claim to solve: optimally allocating capital. He also notes that traditional explanations of financial markets fail to explain unemployment or bubbles – phenomena that Keynes studied throughout his body of work. In particular, Davidson cites the failure of risk-management approaches that rely on a stable and knowable future, which is impossible according to Keynes’s idea of radical uncertainty.

Davidson also explains how orthodox theories guide economic policy such as Quantitative Easing (QE). Quoting Keynes on why QE doesn’t stimulate the economy, Davidson says, “If you want to get fat, buy a bigger belt,” before adding that “QE doesn’t help you get fat, but it may help drop your pants.”

In all, Davidson’s presence at Chicago shows that the school that shook up economics in the mid 20th century by thinking outside the box is still pushing the boundaries of economic thinking.  Chicago remains a vital center for economic debate. INET applauds both the University of Chicago and Davidson for promoting the kind of healthy economic discussion that is necessary for the economics profession – and the economy – to get back on course. Hopefully more economics departments will follow its lead.

Watch the lecture

  1. May 19, 2013 at 1:48 am

    Rejection of the ergodic axiom does not necessarily imply that there is an economic role for government. Non-ergodicity and inability to forecast accurately the economy applies to governments as well as to individuals.

    Without an adequate economic theory, how does a government make the right decisions? If there is no scientifically proven causality, there is no basis of deliberate action to alter the course of the economy. The Lucas critique discusses the impossibility of econometric models to guide government policy.

    With a lot of government controls and central planning (based on whatever), a Keynesian economy moves towards state-controlled communism, which did not feel the need to prove economic efficiency. Sadly, the problem of economics is far bigger than what Keynes considered.

    • merijnknibbe
      May 19, 2013 at 7:41 am

      The ‘Lucas critique’ and rational expectations economics can be understood as a conscious attempt to ignore the accounting identities (like: ‘final demand = total production = total income’) which give rise to all the paradoxes inherent in macro economics (when more saving leads to less spending income and hence saving declines). But to succeed in this intellectual endeavour the ergodicity axiom and quips like the ‘Lucas critique’ are absolutely necessary as these de facto state that when the government spends less – the private sector (exports, households, companies) will automatically start to spend more (Ricardian equivalence, life time consumption, the confidence fairy etcetera. (hough even this additional spending might be smoothed and therewith take some time to materialize).

      But does this happen? Did austerity awaken the confidence fairy (this idea is still stated again and again by people like Rehn and Dijsselbloem)? Hmmm.

      One example: cutting domestic demand in Greece (and restraining domestic demand is the hart of austerity policies: lower pensions, higher VAT rates, increased unemployment, less government employees, lower wages) is aimed at increasing savings and shifting remaining demand away from the domestic demand to exports. The accounting identities however state (and remember: these identities are not an assumption but an empirical fact) that lower demand will necessarily lead to lower income and production – and not necessarily to higher (export)demand and additional investments from the business sector. In the neo-classical world of Lucas such paradoxes this problem is solved by the confidence fairy, which consciously uses these savings to invest in the private sector an to produce export goods and servicesas it knows that there will be an output and demand gap which means that there will also be profitable opportunities to invest and to produce export goods without ‘crowding out’ and this additional demand will compensate lower demand caused by the restrictions above (yes, in the end the confidence fairy is a very Keynesian lady…). The accounting identities still do exist – as ergodicity states that as everybody is aware of them less spending by one sector will, according to Lucas style thinking, automatically be compensated by another sector. Did this happen? Well, look at investments and unemployment in Greece, Spain, Portugal…. Ironically, the Lucas critique itself, influential at the ECB, led to policy failures…

      Fun fact: Irish exports of goods (volume) declined with 10% during the first three months of this year.

      And yes, the 15% Greek current account deficit of 2007/2008, at the time ignored by the ECB, was of course unsustainable. You might however read Matthew Iglesias on alternative ways to solve this: http://www.slate.com/blogs/moneybox/2013/05/16/michael_kinsley_on_austerity.html Paul has to say something about this, too.

      • May 19, 2013 at 10:25 am

        Lucas critique predates rational expectation. The critique which is correct does not necessarily imply the rational expectation which is incorrect.. Rational expectation was assumed to make the future forecastable, which implies the ergodic axiom.

  2. paul davidson
    May 19, 2013 at 3:30 am

    Really ?// No role for government in a nonergodic economy because the government can not predict what will be profitable investments any better than the private sector entrepreneurs and firms?

    Of course if the economy is at full employment , then there is no need necessarily to increase the size of government.

    If, however, the economy is in recession or depression — in a market oriented economy, it must mean there is not enough spending on producible goods and services in the private sector to encourage entrepreneurs to hire all who are willing and wanting to work .

    The government could pay entrepreneurs to employ workers to dig holes and others to refill them. Not very profitable I admit but the employed workers will then use some of the income they earn (based on the marginal propensity to consume) to buy things that they want (having the ability to pay) and thereby create profit opportunities for entrepreneurs. Won’t that be socially useful?? [Remember the bridge to nowhere that enriched people in governor Sarah Palin’s state of Alaska?]

    But even better– how about the government deficit spending by letting contracts to private sector entrepreneurs to produce something useful!
    Like what you say???

    Well it does not take an expert predicting the future to know that without proper sanitation, sewer systems, and clean water supply systems, there is a severe threat of devastating disease to the population now or sometime in the future (even if the date when the health problem will develop in the future can not be accurately predicted.) So in a recession how about the government letting out contracts to private entrepreneurs to construct improved water supply systems, sewer treatment plants, etc

    . Also if we know that many of the bridges and roads in the economy are old and may be in serious disrepair, how about spending to get infrastructure in tip top shape — even if we cannot predict which bridge will collapse when a lot of our population are using it?

    Also we know that there are many diseases that are serious threats to people — but we do not know how to defeat such diseases and therefore it may not appear to be profitable for a pharmaceutical company to invest in R and D to find out how to fight a specific disease– (especially if the disease is more prevalent among the poorer people in the community).

    . How about the government providing research contracts to laboratories, universities, etc — for R and D?? That will create jobs and even if the research turns out to be fruitless, it will provide knowledge as to what not to do to fight a specific disease — and just like digging holes and refilling them, the additional income earned by the other wise unemployed or underemployed minds and people will permit them to go out and order products they desire from private entrepreneurs.

    Need I go on?? Just look at what the WPA did during the Roosevelt administration — building thousands of school, creating a recreational and scenic lake shore (and Lakeshore Drive) for the citizens of Chicago. Would these schools have been seen as profitable for the private sector to build during the Great Depression? or the Lakeshore development in Chicago appear to entrepreneurs in the 1930s profitable to sell recreation and scenic values to future populations including the population living in Chicago in the year 2013 including Robert Lucas??

    Need I go on??

    The greatest US public works project took place in the Eisenhower Administration. It was the Interstate highway system. Was it worthwhile? — while providing jobs that meant no serious recession and considerable growth and prosperity during most of that administration. How many of us still get very useful transportation from this system??

    Let me also cite an entitlement program that in the past provided huge dividends to the USA. This was the GI bill which permitted veterans (myself included) to obtain college and graduate education that as private citizens we could not afford. The number of GIs that became engineers, scientists, etc. surely helped the US economy in the decades following the big war. How about a big GI bill for veterans today??.

    Now Milton Friedman would have said — well let them take out student loans for this is an investment in human capital that self-interested individual veterans should understand and gladly take out student loans!! But the huge overhang of student loans today in an economy that cannot show much growth means that college graduates can not get good paying jobs. How will they pay off their huge student debts?? and if enough student loan defaults occur ,will this not create another financial crisis similar to the sub prime mortgage crisis?

    Milton Friedman loves to point out that his parents were poor and lived in Perth Amboy New Jersey and he probably could not have afforded a college education except that Rutgers University was a New Jersey state university and the costs were minimal. So Milton got a good education at Rutgers and then went on to do graduate work and get a Ph. D.

    But , Milton, likes to point out, the moment he graduated Rutgers he left the state of New Jersey and never returned. Consequently the tax payers of New Jersey were foolish, Milton says, because they invested in his human capital and he never returned a dime in taxes back to the state of New Jersey. New Jersey should have given him student loans and then he would have to provide a positive return to New Jersey in paying off the debt plus interest! Ergo no free education only student loans — a good market solution according to Milton.


    well I could go on – but I think I have suggested that in a nonergodic system, there is no market process which immediately restores full employment — and therefore there is a role for government even if its ability topredict the future is no better (and certainly no worse) then private entrepreneurs.


    • May 19, 2013 at 10:34 am

      Central planning and total state control of resources (prohibition of private property) would eliminate unemployment, as you say “The government could pay entrepreneurs to employ workers to dig holes and others to refill them.” There is no need to go on if full employment is ultimate goal of economics.

      • davetaylor1
        May 20, 2013 at 3:59 pm

        Lyonwiss, our local government used to pay local people to fill any holes that traffic dug, and could discipline them if they were not filled. Post Thatcher, contracts to renew the worst bits of road are let occasionally to non-locals and even foreign companies, who find it more profitable to ship workers in, pay for their lodging and disappear when the contract is written off as complete before shoddy work results in the holes reappearing in short order. For of course the goal of entrepreneurial economics [sorry, chrematics] is not full employment, and nor is that of governmental economists when our choice of government is reduced to Parties run by chrematists. As a matter of fact, things were much better here when local services (including housing finance) were provided for by local people who interests were in their own locality rather than in promotion to or not getting into trouble with Big Brother in central government.

    • May 19, 2013 at 11:24 am

      Also Paul, you are making many assumptions about “government”, not being corrupt (public choice), being wise in allocating resources to health, education, research and development, being totally devoted to public interest etc. The evidence suggests that there are significant numbers of politicians and bureaucrats, who have placed self-interest above all else, through “crony capitalism”. Academic economists seem to discount such possibilities, as they are never mentioned in textbooks. Even thick textbooks on monetary economics hardly ever mention credit defaults. Have you given much thoughts to what central banks and governments are doing right now? Some of them are saying: “we are all Keynesians now”. Are they liars, not entitled to make such claims?

      • paul davidson
        May 19, 2013 at 3:33 pm

        As someone who has worked for private enterprise (I was in charge of the economic division for a large oil company), academia, and even government, I can assure you that there are what you call “corrupt” people in all these organizations–[need I mention Enron?] — but does that mean we can not permit private enterprise to produce goods and services that the public wants? or academia provide education to the public? What makes a tenured full professor work hard to do research, keep his lecture notes up-to-date, , help his students as best he/she can, etc.? The market solution of a slacker at work =– namely dismissal by the employer — is difficult if not impossible in universities. Should we remove all traces of tenure?

        OF course we have to some rules for ethical behavior in all organizations and hope these rules will be followed by mos! and breakers of these rules will not be tolerated by the organization.

        But the Hayek slippery slope from government role in assuring aggregate effective demand will promote full employment to the central planning of a Soviet type state is nonsense.. It is not the ownership of the means of production by the State that is important, Keynes noted, just that the government move to prevent a lack of effective demand.

        After all not only a Soviet type economy assure full employment. We could also have a slave market economy — since there is always full employment work for slaves.

        Would you want the government to remove itself as a central planner for providing police protection, and fire protection for the population? Or the government not providing dams to help provide flood proterction?.

        Let me tell you a situation I once confronted. While at the University of Tennessee my residence was outside the city limits in an unincorporated part of the county. The county provided no fire department or even fire hydrants. There was a private company that would sell homeowners the promised services of fire fighters if their house caught fire. Since there was no fire hydrants , these fire fighters would bring a tanker of water with them when they went to fight a fire. If they ran out of water they would radio to their home base to send another tanker of water.

        If you subscribed to their company, for your annual payment your received a medallion which you put on your mailbox so that if your house caught fire, the fire fighters coming to your house (perhaps because a neighbor had noticed the flames and phoned them). would look for the medallion to see if you were covered for fire fighting.

        I once asked the firefighters what they would do if the house was burning and they could not find the medallion. They said they would try to put out the fire and then charge the homeowners $800 ( in 1980 dollars) per hour including travel time to and from the firehouse and time to refill the water tanker. If the household did no pay the company would sue. residence.

        Since there was only one fire fighting company the house owner had little choice.

        Is that an efficient solution? Or would you prefer to live in a community where the government centrally planned where fire hydrants should be and how many fire fighters and equipment should be available to fight fires?

      • May 20, 2013 at 12:25 pm

        You might expect business to work in its self-interest and you might expect government to work in the public interest. Unless you have worked in government you would not suspect that the latter is false. Business is curbed by government through regulation. But government does not know how to curb itself. The voters being kept in the dark cannot really curb government either. Keynes was never very clear about government, on which he placed a lot of faith.

  3. Paolo Leon
    May 19, 2013 at 6:10 am

    The government may make mistakes, but can correct itself, because it has the command of aggregate demand, which is not in the hands od firms or individuals. By the way, in orthodox, Lucas-like economics rational expectations are of the economic agents, but not of the government, which is is inherently stupid, even if the same humanity populates governments and markets. Ricardian neutrality is here at stake: how can individuals be Lucas-rational if they think that when governments spend will have to raise taxes in the future, while spending may raise the level of income and therefore future taxes?

  4. paul davidson
    May 20, 2013 at 1:53 pm

    lyonwisss, I already told you I have worked for governmental agencies and have found many dedicated people working in the public interest — so I find your generalization about government workers WRONG.

    If you are talking only about politicians then I still think you are wrong–e.g., did Roosevelt or Truman work in their own self interest or in the public serf interest?

    Even Republicans when they are blocking Obama are, I believe, thinking they are working for the public self interest. The problem is that to many mainstream economists have miseducated these politicians!

    • May 21, 2013 at 1:34 am

      A government bureaucracy is set up to work for a particular public purpose. People in the bureaucracy work for their bosses following orders, regardless of whether they believe is actually in the public interest. For example, people in government cannot reveal, let alone criticize any government work practices, even if such information is in the public interest. Some of this and other issues are discussed a large literature on public choice theory.

      You should not presume that you know all about politicians, particularly Roosevelt and Truman. Politicians, with the help of secrecy laws, can hide a lot of information from the public. By the time the truth is revealed, sometimes more than 50 years later, people have lost interest, but fail to imagine that the same magnitude of lies may be happening in their own time.

      All you need to do is to listen and observe what the central bankers and governments have been saying and doing to see the contradictions and deceptions. Did the US government not actively encouraged the housing bubble, by lowering interest rates and assured everyone that everything is fine? Is it just incompetence or is there corruption by vested interests?

      If as you say, “the problem is that to many mainstream economists have miseducated these politicians!”, then politicians can be misled, then how can we trust the government to solve economic problems? You cannot simultaneously say government is the solution, but it has been wrongly educated.

  5. Robert Locke
    May 20, 2013 at 3:23 pm

    As an historian I find this discussion about government and private industry and how they interrelate with each other extremely American and even then badly informed. Because economists do not engage in comparative studies of institutions and educational systems, they never can come to grips with how well civil servants can run economies in cooperation with private industries (they always drag out as government examples the Soviet Union), or with how badly private enterprise, in conjunction with private educational institutions (US managerialism) can screw up economies.

  6. davetaylor1
    May 20, 2013 at 6:49 pm

    Having listened to Paul Davidson’s lecture, it confirms my conclusion that economists don’t understand that there are two types of ergodic and non-ergodic systems. They are assuming chaotic ones where all events are ergodic but non-ergodic trends emerge. However, in human ones, non-ergodic intended courses and pre-existing paths already exist and can be sufficiently maintained by sufficiently rapid correction of errors/deviations induced by ergodic events. One might liken these to shooting a gun without knowing the location of the target, and firing a guided missile where the target can be located more precisely the nearer it gets.

    For goodness’ sake: cybernetics and error-control logics involving negative information feedback have been around since 1945 (in practice for as long as navigation by compass and sextant). If the defenders of Keynes had begun to understand the significance of what Weiner and Shannon were saying, they’d have seen and been able to defend his proposals for investments in infrastructure as correcting long-term drift, like that which occurs in navigation despite the economy being continuously steered by means of price adjustments. Insurance (ultimately Quantitative Easing) and the liquid pricing of derivatives are presumably intended to perform the same functions, but in themselves they are correcting monetary information feedback and thus papering over, not resolving the problems, which predictably, therefore, continue to get worse instead of better.

  7. paul davidson
    May 20, 2013 at 7:23 pm

    sorry Dave Taylor but you still have not gotten the message.

    Keynes’s General Theory provides that classical theory is a “special case ” (Keynes’s words) obtained by adding fundamental postulates to the GT — namely, the postulates of the neutrality of money, of gross substitution, and of ergodicity (so the future can be known today and hence it is predetermined).

    It has nothing to do with negative feedback or correcting for “long-term drift” [drift over time from what? a predetermined full employment secular trend???].

    A system of uncertain in Keynes implies that the future is not predetermined. It is ontological uncertainty that Keynes is invoking while you see to imply economics only has the problem of epistemological uncertainty about a predetermined full employment secular trend.

    In a general theory, the economy is not being “steered ” (steered towards what?) by [relative?] price adjustments or the pricing of liquid assets — or even insurance or even quantitative easing.

    Did you really listen to the video of my talk at Chicago where I indicated that Quantitative Easing was like (in Keynes’s word to Roosevelt — trying to get fat by simply buying a larger belt! I hope we know buying a larger belt does mot automatically make on fatter!!

  8. davetaylor1
    May 21, 2013 at 9:33 pm

    Sorry Paul, but you are reacting to what I said like one of the autistic economists who listen only to themselves and were the reason this blog was set up. I “got” Keynes’ message over forty years ago. My point is that it is a special case of control theory, just as classical theory is a special case of his. My admiration of him is all the greater for the fact that modern control theory hadn’t been invented when he wrote his General Theory.

    Even when I first learned control theory it hadn’t been realised a control system involved an aim and up to three corrective feedbacks involving past, present and future. What “steers” a complex system is not direct action like pressures lifting safety valves but how we (or the more or less automatic systems we have set up) interpret information about the effects of our previous actions. An economy involves people as such, and as producers, distributers, decision-makers and sometimes a banking system. Which represent the aim and which the feedbacks? As I already said at #6, when the decision makers are money-seeking entrepreneurs rather than people who have to live with each other we get what we have now: chrematistics. The same type of control system is controlling money-making instead of households. Thus I am not denying what Keynes said, though I deny what you put into his mouth regarding ergodicity: that the future can be known today. The future of what? Here’s what C E Shannon says in his “A Mathematical Theory of Communication” (Bell System Technical Journal, July 1948, p.392):

    ” Except when the contrary is state we shall assume a source to be ergodic. This assumption enables one to identify averages along a sequence with averages over the ensemble of sequences (the probability of a discrepancy being zero). For example the relative frequency of the letter A in a particular infinite sequence will be, with probability one, equal to its relative frequency in the ensemble of sequences”.

    So Shannon is saying, if you already know the average of an ensemble of infinite sequences (i.e. in a macro view) you know its average in a particular sequence [but not conversely; i.e. finite sample may differ, and an aggregation of these micro sequences may not be complete]. The point being he then demonstrates ways of calculating ensemble averages from what the sequences are, e.g. letters from an alphabet (ontological), not numbers from counts and/or measurements (epistemological).

    If one uses the imaginable example of a Newtonian orbit of the moon, an epistemological view derived from verifiable measurements reveals not a closed path but a spiral. However, considering the path ontologically as an orbit, one can put limits on how far it is likely to stray from its average path and what type of event would take it off its path. In the more human-scale example of a space-ship in orbit, control then becomes possible: macro control of activity in the spaceship then controls not WHAT is done but what must NOT be done (what would be an error) if the spaceship is not fly out of its orbit.

    If (by analogy to economics before the 1929 and 2009 slumps) the accumulated deviation is causing the spaceship to fall ever faster out of orbit, simply speeding up further (as with Quantitative Easing) or slowing down (Austerity) is too late: a correction IN THE OPPOSITE DIRECTION to the direction of fall is necessary to move it back onto a safe trajectory.

    Shannon of course applies this to unending ensembles of texts predictably needing only a finite alphabet , to tunes using only a finite scale, and by extension to radio transmissions using limited ranges of frequencies/channel bandwidths and provision for detection and correction of errors due to ergodic noise in effectively ergodic scrambled signals. These are every bit as diverse and time-scale random as economic events.

    On belts, Paul, you might like to reflect on the fact that a SMALLER belt will make it uncomfortable to be fat. Control is about giving up redundant capacity, not growing, and social control is about harmonising self-control.

    • paul davidson
      May 21, 2013 at 9:59 pm


      It is obvious that we are not Communicating at all.

      When I indicated I thought you had not gotten Keynes’s message – it had to do with the fact that nothing you are saying has to do with why people want liquidity; or what Keynes wrote were the “essential properties” of all liquid assets [chaprer 17 of the GT]– which was Keynes’s explanation why economic systems are not chasing some predetermined future full employment path or moon orbit or needing to steer a complex system so that all that is necessary is to fall “IN THE OPPOSITE DIRECTION”.when the space ship “economy” falls from the path, orbit, etc..

      And instead of relying on Shannon, I suggest you read A. M. Yaglom ‘s book “An Introduction to the Theory of Stationary Random Processes” and then Keynes’s famous discussion of why “Mr. Tinbergen’s Method” is not useful for predicting where the economy is going — and therefore how to correct a fall “in the opposite direction”. And it has nothing to do with the economy being a complex system!

      And when I used the belt statement of Keynes to suggest why Quantitative Easing need not improve economic growth prospects, It did not mean that Keynes (or myself) failed to recognize that an overly tight (smaller belt) monetary policy could make it uncomfortable for workers who lose their job or entrepreneurs who lose sales.– and I don’t think that is because if they were still working they would be fat!

      • May 22, 2013 at 7:36 am

        You said colourfully, “If you want to get fat, buy a bigger belt” and then “QE doesn’t help you get fat, but it may help drop your pants.” But Keynes may be construed to have approved a bigger belt. In the last Chapter 24 of his book (p.376), he said, “But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reason for the scarcity of capital”.

        By confusing fiat currency with capital (means of production), Keynes saw no intrinsic reason for the scarcity of fiat currency and hence capital. His statement essentially endorses monetary stimulus and quantitative easing (QE). But to be fair, one could defend Keynes by saying “if you want to get fat, buy a belt that does not restrict your expanding girth”. But this prescription does not address the assumption that you should want to get fat in the first place.

      • davetaylor1
        May 24, 2013 at 3:27 pm

        Damn good Keynes quote, Lyonwiss. In context I read it as saying interest is not reward for giving up use, it is rent for keeping monetary capital scarce.

        Back at #12, “Did the US government not actively encouraged the housing bubble, by lowering interest rates and assured everyone that everything is fine?”, haven’t you missed the point that there should be no need for shortage of capital for the poor for necessities like decent housing?

      • paul davidson
        May 24, 2013 at 3:32 pm

        Sorry Dave but Keynes did not say “Damn good Keynes quote, Lyonwiss. In context I read it as saying interest is not reward for giving up use, it is rent for keeping monetary capital scarce” Keynes explicitly states that the interest rate is the payment for giving up liquidity! Liquidity is not the same as monetary capital.

      • davetaylor1
        May 24, 2013 at 9:27 pm

        Paul, thank you for several points you made in your lecture, not least your picking out for emphasis Keynes’s rejection of ergodicity, the neutrality of money and infinite substitutability of commodities; and also, the significance of Chapter 17 of the General Theory, which has been much easier to re-read with fuller familiarity with your arguments. I agree Liquidity is not logically the same as Monetary Capital: it is an abstract term which refers to the money which Keynes argues is its most significant physical form. But let’s see what Keynes says in Ch.17. At III (ii) he say “The condition of having a small elasticity of production] is satisfied not only by money, but by all pure rent factors … [but money also] has an elasticity of substitution [of] zero … as the exchange value of money rises there is no motive or tendency, as in the case of [other] rent-factors, to substitute some other factor for it”. [The ‘other’ here occurs in the next paragraph].

  9. davetaylor1
    May 22, 2013 at 7:20 am


    So we are not communicating. Why? Listen to the explanation in the first part of https://www.youtube.com/watch?v=UyyjU8fzEYU of how the brain works, and make the connection between verbal and intuitive thinking. Scholars tend to use the one side of the brain, experimental scientists the other, while Keynes was fortunate enough to be both intuitively insightful and good with words.

  10. paul davidson
    May 22, 2013 at 3:28 pm

    on pager 376 Keynes des not confuse money with real capital — but he is merely arguing that interest payments are not the reward for a “genuine sacrifice” of “waiting” as his classical colleagues would argue, i.e., interest is not a payment to make one sacrifice utiles of happiness associated with consumption today in order to get more utiles of consumption happiness tomorrow. All he is saying is that if private enterprise has many investment projects they would undertake today if the interest rate was a little lower, there is no reason not to lower the interest rate.

    BUT if , as in the Great Depression, entrepreneurs can not expect any profit making investment projects — just by employing an easy money policy will not suddenly bring forth many new investment projects.

    “Getting fat” in my belt quotation was just a metaphor for expanding the economy [just like getting fat expands one’s waist].

    • May 23, 2013 at 12:21 am

      Some would say manipulating interest rates, i.e. the price of money is fundamentally no different from manipulating its quantity, as in “quantitative easing”.

      There are always investment projects waiting in the wings. The less economic and unsound investment projects which were priced out before, get priced in with easy money.

      The US economy expanded at different rates for different sectors. The sector which got very fat, fatter than any other was the financial services sector, which could do with a smaller belt now. But instead, Keynesian monetary policy gave it a bigger belt still, at the expense of everybody else.

  11. davetaylor1
    May 23, 2013 at 11:59 am

    Keynes offered the UK a bigger belt at a time when it was extremely thin as the result of its war effort. A then more prosperous, sensible and magnanimous US government enabled it to happen for the UK and Europe with Marshall Aid, with the result that these countries also became prosperous. US and UK entrepreneurs therefore invested in still not prosperous countries hoping to become even more prosperous themselves, and globalised finance to facilitate this, but since they were not now investing in their own country and government, they are forcing their own people to tighten their belts instead of growing the world economy. Living their globalised urban life of Riley, they don’t see how Nature organises such things: fattening us up for Keynesians winters in which it needs us to live off its harvest while it and we rest, enjoy our recreation, do maintenance work and plant seed for the future. These entrepreneurs just want to reap what others and governments responsible to them have sown.

    The first serious criticism of Adam Smith’s economics of wealth via specialisation was the Malthusian nightmare of uncoordinated reproduction (now worsened by control of disease) beyond the future carrying capacity of Nature. With Nature needing its rest and unable to reason with individuals, it is following its sub-human pattern and exploding world population to provide more than enough seed humans for the future. With Economists reduced to specialists knowing next to nothing about harmonising the rhythms of human life with those of Nature and seemingly worried about nothing but monetary growth, is it surprising that Paul tells me to forget the human science of control of averages, and Lyonwiss cannot see the difference between fiscal and monetary policy?

    • May 23, 2013 at 1:15 pm

      Most of the US effort has been over $2 trillion of base money creation. As for the $800 billion of Obama fiscal stimulus, some of it when down the toilets, literally ($42 million went to upgrading toilets and other sanitation facilities in Alaska).


      The Obama multiplier has proven to be a joke. It does not surprised me, having worked in governemnt for ten years. Academics and “philosophers” cannot separate fantasy from reality.

      • davetaylor1
        May 24, 2013 at 7:02 am

        Academics and “philosophers” cannot separate fantasy from reality? This actually is true of the the vast majority of people – including not only most politicians and business men but their executives, minions and the idle rich – who have not learned to think for themselves and still unimaginatively cling to what they have learned from their academic and “philosopher” teachers, who learned it from their own teachers. Self-styled chefs totally reliant on their mother’s cook-books. Which is fine (if boring) so long as the ingredients don’t start running out.

      • May 24, 2013 at 12:16 pm

        Dave, Totally agree. Politicians and business men snatch whatever are there in the forum of ideas. As Keynes rightly noted: “The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” That’s why it’s important to reform the academic economic profession.

  12. Robert Locke
    May 23, 2013 at 1:52 pm

    In a recent poll conducted by BBC World Service, Germany was designated as the most favorably viewed country in the world. We live in nations, which expound different values, have different educational systems, views about roles of government, and private enterprise, etc. so if Germany is viewed more favorably than other countries, national peculiarities must help explain some of it. Yet in all of these discussions economists mention nothing about differences (although people in management do, i.e., Albert’s Capitalism Against Capitalism). Dave mentions a feature, Nature, that the analysis framework of economists usually ignores, but everybody participating in this blog seems to assume convergence on the very peculiar ways people in American think about economic activity or that the differences don’t matter. I don’t have much faith that people who live in the cocoon of the English language or Anglo-Saxon institutions will ever question themselves seriously, but history has a way of dealing with people who don’t. It’s called decline and fall. And if ever a country’s elite seemed to be a candidate for this fate, it is in the US.

  13. Mike Meeropol
    May 23, 2013 at 2:41 pm

    Unfortunately the “decline and fall” of the United States will take the rest of the world with it as the leaders of the US continue to buy the garbage about global warming being a “hoax” —

    As the disasters accumulate over the next 50 – 100 years, I hope the survivors of the future will include those American climate deniers and their political mouthpieces among the list for humans forever cursed for letting the short-run profits of the super-rich in the US trump the long run needs of the planet (and therefore the population).

    From the perspective of long term survival of the people on this planet, a good long depression that truly suppressed industrial production might be a useful breather for old mother earth —

    Maybe “at the other end” the new technologies will come on line and the reduction in greenhouse gas emissions will finally begin.

    (the unemployed and poor will of course be collateral damage).

    The sad thing is that’s the “optimistic” scenario of the decline of places like the US.

    (And it also depends on China making serious changes — getting away from coal for example — which is a totally different political challenge)_

  14. Robert Locke
    May 24, 2013 at 9:15 am

    Reference to Dave Thread #24. I’d like to second the idea he mentions. Most of us are prisoners of the ideas we learn from our environment, our teachers and philosophers and this frequently puts us in a mental straight jacket. I experienced this personally at the beginning of my research career. As an historian I knew that I had to be empirical and go to the sources. I selected a research topic for my PhD that dealt with the attempt to restore Devine Right Monarchy in France c. 1870-75. I assembled lots of letters, memoirs, etc. and read them carefully, two years of research in them in France. But then I made the following mistake. I had learned that the Right in France c. 1870 was associated with the landed aristocracy and that the Orleanists and Republicans were of commerce and finance. In my empirical work, however, I was finding industrialists and bankers in the ranks of the Legitimists (devine Right Monarchists) and big landlord aristocrats among the Orleanists who were suppose to be bankers The mistake I made, then, was to cling to the “traditional” interpretation of the social-economic evolution of France (call it Marxist for simplicity), even though it ran counter to the evidence I had assembled. I simply said that my historical and philosophical teachers had been right and that my evidence was accidentally exceptional to their rule. Compositionally, I could not organize such a mess with these ideas but I clung to them and struggled to write up a coherent dissertation for 6 years. But it did not work. Then, one day I asked myself, “what if my “educators” were wrong? What if the French revolution that overthrew the old monarchy was not connected to the industrial revolution of the 19th century. I had made the mistake of moving from the “evidence” I had collected to my inherited explanatory framework to interpret it. So I threw out that interpretative framework and thought about the evidence — concluding that the social-ideological history of nineteenth century France was separate from the industrialization. And I went further. I concluded that it was not necessary to have the “French” revolution or the “American” in order to have a modern progressive state. It would not be “democratic” — that was the French Revolution, which happened before the industrial revolution but “feudal” — industrialialization could happened in states that had had no 18th century revolution a la America and France. This made it a lot easier for me to understand the development of Germany, Japan, and now China.
    I was liberated.

    • May 24, 2013 at 12:32 pm

      Robert, Bravo! It’s all about the depth of understanding. I would guess more of 95 per cent of academic research is about incrementally extending or embellishing other people’s ideas. When I confronted academics about this observation, they give the excuse that they are training PhD students, who are probably responsible directly or indirectly for the vast majority of published papers. It is a shame that a professional forum has been perverted for something other than its originally intended purpose. It is time wasting to have to sort the wheat from the chaff.

      • davetaylor1
        May 24, 2013 at 6:08 pm

        Yes, Lyonwiss. It is perhaps even more than a waste of time when the wheat has already been sorted out in order to sell the chaff.

        I guess it is alright for 95% of academic research being about incrementally extending or embellishing other people’s ideas so long as those ideas are working. Most of mine was about rebuilding “birds nests” into maintainable structures. However, like Robert, in so doing I found a different structure (i.e. conceptual framework) which not only worked better but, in providing the mathematician Poincare’s “hooks to hang ideas on”, liberated my understanding of dynamics and of the value of iconic language. Proverbially, “if the cap fits, wear it”, and Leavitt “macro” diamonds fit the “birds-nests” of economic “micro” systems very well. (Cf. Lonergan’s version: http://www.eileendeneeve.com/Lonergans%20Economic%20Ideas%20Today%20complete.pdf).

  15. June 3, 2013 at 8:36 pm

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