Home > Uncategorized > Transmogrifying Keynes

Transmogrifying Keynes

from Lars Syll

econtalkThe other day, on my way home on the train after having attended an economics conference, yours truly tried to beguile the way by listening to a podcast of EconTalk where Garett Jones of George Mason University talked with EconTalk host Russ Roberts about the ideas of Irving Fisher on debt and deflation.

Jones’s thoughts on Fisher were thought-provoking and interesting, but in the middle of the discussion Roberts started to ask questions on the relation between Fisher’s ideas and those of Keynes, saying more or less something like “Keynes generated a lot of interest in his idea that the labour market doesn’t clear … because the price for labour does not adjust, i. e. wages are ‘sticky’ or ‘inflexible’.”

This is of course pure nonsense. For although Keynes in General Theory devoted substantial attention to the subject of wage rigidities, he certainly did not hold the view that wage rigidity was the reason behind high unemployment and other macroeconomic problems. To Keynes, recessions, depressions and faltering labour markets were not basically a problem of “sticky wages.”

Since unions/workers, contrary to classical assumptions, make wage-bargains in nominal terms, they will – according to Keynes – accept lower real wages caused by higher prices, but resist lower real wages caused by lower nominal wages. However, Keynes held it incorrect to attribute “cyclical” unemployment to this diversified agent behaviour. During the depression money wages fell significantly and – as Keynes noted – unemployment still grew. Thus, even when nominal wages are lowered, they do not generally lower unemployment.

In any specific labour market, lower wages could, of course, raise the demand for labour. But a general reduction in money wages would leave real wages more or less unchanged. The reasoning of the classical economists was, according to Keynes, a flagrant example of the “fallacy of composition.” Assuming that since unions/workers in a specific labour market could negotiate real wage reductions via lowering nominal wages, unions/workers, in general, could do the same, the classics confused micro with macro.

Lowering nominal wages could not – according to Keynes – clear the labour market. Lowering wages – and possibly prices – could, perhaps, lower interest rates and increase investment. But to Keynes, it would be much easier to achieve that effect by increasing the money supply. In any case, wage reductions were not seen by Keynes as a general substitute for an expansionary monetary or fiscal policy.

Even if potentially positive impacts of lowering wages exist, there are also more heavily weighing negative impacts – management-union relations deteriorating, expectations of on-going lowering of wages causing delay of investments, debt deflation et cetera.

So, what Keynes actually did argue in General Theory, was that the classical proposition that lowering wages would lower unemployment and ultimately take economies out of depressions was ill-founded and basically wrong.

To Keynes, flexible wages would only make things worse by leading to erratic price-fluctuations. The basic explanation for unemployment is insufficient aggregate demand, and that is mostly determined outside the labour market.

To mainstream neoclassical theory, the kind of unemployment that occurs is voluntary, since it is only adjustments of the hours of work that these optimizing agents make to maximize their utility. Keynes, on the other hand, writes in General Theory:

The classical theory … is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, unemployment, which is in the above sense involuntary, cannot occur … Writers in the classical tradition, overlooking the special assumption underlying their theory, have been driven inevitably to the conclusion, perfectly logical on their assumption, that apparent unemployment (apart from the admitted exceptions) must be due at bottom to a refusal by the unemployed factors to accept a reward which corresponds to their marginal productivity …

Obviously, however, if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment – if there be such a thing (and who will deny it?). The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. We need to throw over the second postulate of the classical doctrine and to work out the behaviour of a system in which involuntary unemployment in the strict sense is possible.

gtUnfortunately, Roberts’s statement is not the only example of this kind of utter nonsense on Keynes. Similar distortions of Keynes’s views can be found in, e. g., the economics textbooks of the “New Keynesian” – a grotesque misnomer – Greg Mankiw. How is this possible? Probably because these economists have but a very superficial acquaintance with Keynes’s own works, and rather depend on second-hand sources like Hansen, Samuelson, Hicks and the likes.

Fortunately, there is a solution to the problem. Keynes books are still in print. Read them!!

  1. Econoclast
    December 5, 2019 at 10:08 pm

    This guy Jones works for a certified Ayn Rand nutcase organization, the Mercatus Center, whose board of directors sports such luminaries as Charles Koch, Tyler Cowan and Edwin Meese. Jones’s idea of a “national IQ” strikes me a downright loony, somewhat racist and hardly worthy of serious discussion. Never mind Jones has a degree from my alma mater; Berkeley has a reputation as a loony place.

  2. Craig
    December 6, 2019 at 6:15 am

    Randrhoids and their cousins the libertarian economists dramatize the anti-paradigmatic point of view when they gleefuly spout their slogan “There ain’t no free lunch” and their equally gleeful embrace of painful deflation as the answer to our economic problems when freeing and beneficial price and asset deflation is imminently possible.

    They’re the economic equivalents of moralistic bible thumpers blindly preaching guilt, damnation and the curse of Adam….even though mysteriously Christ preached love and its active form grace. It’s sad and disgusting at the same time.

    The present day general populace are just the poor laity who must labor under such orthodox intellectual assault because they haven’t cognited on the gracious policies necessary and the point in the economic/productive process to apply them….in order to experience being economically born again. All of the analogies are there.

    Economists should read Luke 18: 18-22 and realize that orthodoxy and intellectual vanities are more often whiggish impediments to paradigmatic insight more than they are stepping stones toward it.

  3. December 6, 2019 at 10:33 am

    This article offers an interesting insight into the current debate about Keynes’ economic thinking: https://foreignpolicy.com/2019/12/05/keynes-keynesian-socialism-biggest-hero-bourgeois-british-capitalist/

  4. Ken Zimmerman
    December 15, 2019 at 2:08 pm

    Many believe Keynes insists that the state must be the ultimate protector of the public good by changing and regulating markets. Keynes never says markets are always or even mostly unfair or unequal. Which makes me ask, does Keynes place conditions on the state’s role as the ultimate protector of the public good? For example, today does the state have an obligation to protect the public good and the vast majority of the populace that depend on it from the behavior of financial markets that threaten it and is that obligation absolute? Which brings up, for me this related question. Does the state have an absolute obligation to protect the integrity of democratic government, even to the point of destroying large corporations and/or members of the super-rich that attack it? I realize present economists shy away from such questions. But for those who are not members of the elites the answers to these questions are vital.

    • Craig
      December 15, 2019 at 7:18 pm

      Of course they have the obligation to protect the integrity of democratic government, and they don’t need to destroy large corporations and/or members of the super rich. They just need to create a stable, free flowing and integral economy with a new monetary paradigm…..and make damn good and sure that the aforementioned abide by the rules and regulations that will keep it from being gamed.

      Think about it for a moment Ken, what is your best guess as to what the current monetary paradigm is?

      • Ken Zimmerman
        December 16, 2019 at 2:24 am

        Craig, so all we need to control greed, powerful billionaires, and Facebook is a new monetary paradigm? Even today’s messed up news coverage seems to indicate that’s not going to work. You’re not likely to get beyond the PR machines.

        As to Keynes and protecting democracy can you point me to something he wrote or said that confirms his commitment?

      • Craig
        December 16, 2019 at 5:26 am

        Just do the math and start a mass movement with those realities Ken. The mass of individuals’ minds aren’t cluttered with all of the abstractions and lesser theories about what the problem and the solution is as virtually everyone here.

        I never said Keynes said government had that obligation, I said we as the state had it. Keynes was really just a smart speculator and opportunist who both plagiarized and palliated his contemporary C. H. Douglas whose mere theory at least aligned with the then (and nascent-ly still now) concept of the new monetary paradigm. Keynes’ theory was the fall back position of Finance after the Great Depression. And of course both of them died before Kuhn made us all aware of the concept of a paradigm.

        I repeat (and answer) my question to you. What is your best guess as to what the current monetary paradigm/pattern is?

        A little hint. As every cent of it (even that which comprises the government deficit) is debt…..how can it be anything other than DEBT ONLY?????

      • Ken Zimmerman
        December 16, 2019 at 1:14 pm

        Craig, thanks for the response. I’ve done the math on proposals like yours. The math is good. But the politics is bad. Particularly today. I recognize that our current economic arrangements are based on debt. But if you look more closely you’ll see that many other parts of society are also based on debt, just not the monetary form. Your proposals would lead to more than economic changes if adopted across western societies. The legal system would be turned over. As would the foundations of most moral systems and religions.

        Thanks for the information on Keynes. Any suggestions for reading where I can document the points you make?

      • Craig
        December 16, 2019 at 6:25 pm

        Yes the math is beneficial for both individuals and enterprise. The both/and part of that sentence is what is the most important part of it. It indicates an integration/synthesis and means it is aligned with the natural philosophical/ethical concept of grace which is the pinnacle UNITARY concept behind every one of the world’s major wisdom traditions.

        I disagree that the politics is bad. It’s true that our politics and soon our social fabric are insanely polarized, but there’s a Japanese word that escapes me presently that can be translated as BOTH crisis AND opportunity. It’s just that you have to discover and communicate an actual answer that is in the integrative/mutual interest of BOTH the individual AND enterprise….like the new monetary paradigm of Gifting for instance.

        Monetary Gifting directly to the individual with a universal dividend and BOTH directly AND reciprocally implemented at the strategic point of retail sale with a 50% discount/rebate monetary policy is the way to rationally, effectively, ethically and stably create and maintain a truly fiat money system.

        “The legal system would be turned over. As would the foundations of most moral systems and religions.”

        The legal system and religious systems wouldn’t be destroyed as much as integratively transformed. The legal by a better focus (dynamic focus being an aspect of grace) on fact and relevance of issue, and our moral and religious systems would be re-focused on direct self actualized grace as in love in action as opposed to only Faith In their various dogmas, that is, the once removed from self actualization merely abstract religious mental stance.

      • Ken Zimmerman
        December 25, 2019 at 12:05 pm

        Craig. just allow me to reiterate, good luck!

      • Calgacus
        January 1, 2020 at 5:00 am

        does Keynes place conditions on the state’s role as the ultimate protector of the public good? For example, today does the state have an obligation to protect the public good and the vast majority of the populace that depend on it from the behavior of financial markets that threaten it and is that obligation absolute?

        Of course he said that. It was one of the most prominent motifs of his work throughout his life. How could this be in question?

    • Robert Locke
      December 16, 2019 at 12:07 pm

      Don’t rely on state intervention, organize civil society in a way that brings about social justice with a minimum of state intervention

      • Ken Zimmerman
        December 16, 2019 at 1:22 pm

        Robert, working with several groups on organizing just such civic challenges. So far, protests and petitions haven’t generated much traction. But will, of course keep trying. But to be honest, I have absolutely no reservations about destroying (rescinding the charters) of corporations or bankrupting the super-rich or even the less super rich if they continue to undermine democratic control of the US.

  5. Craig
    December 31, 2019 at 7:20 pm

    Yes, mass movements have always been the only way to herd the political apparatus toward sanity and ethics. The paradigm of the money system dominates the economy and rips off everyone. Who couldn’t get behind monetary gifting as the new paradigm?

  6. Craig
    December 31, 2019 at 8:43 pm

    Those who fail to see new paradigms are destined to end up in the dust bin of history.

    Craig 12/31/2019

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.