Tag: History of Economic Thought

Must-read: Benjamin Mitra-Kahn: “Keynes passed away 70 years ago today–his copyright follows”

Posted on by Brad DeLong

Must-Read: Benjamin Mitra-Kahn: Keynes passed away 70 years ago today–his copyright follows: “The most frustrating (or magical) thing about doing archival research…

…is the need to first identify and then physically inspect every box of unknown letters. But what if… we could… move the history of economics scholarship from dusty rooms around the world to the web…. The Carnegie Mellon University digitisation of Herbert Simon’s papers shows it can be done though. Building an on-line Keynes archive would be a sizeable task, but not impossible. Including Keynes’ published, unpublished (possible through Rod O’Donnell’s INET project) and uncategorised work could be a real boon to scholars and people interested in Keynes…. I think there are a number of institutions out there with a real interest in Keynes’s work, meaning this could be done…

Regress in macroeconomic knowledge over the past 83 years

Posted on by Brad DeLong

Today, in 2016, Raghu Rajan thinks helicopter drops are “a step too far into the dark…”

His predecessor 83 years ago at the University of Chicago, Jacob Viner, thought they were one of the obvious technocratic steps to take, along with further raising the monetary base (i.e., in his day going off of the gold standard) even with short-term safe nominal interest rates at the zero lower bound (as they also were in his day).

Here’s Raghu:

Raghuram Rajan 2016): “If you read the writings of economists…

…it is not clear what’s keeping us still so slow, seven or eight years after the crisis. Ken Rogoff would say it is still the debt overhang and the deleveraging. [Robert] Gordon and others might say it is low productivity and still others may say it is the poorly understood consequences of population aging. But what do we do? And here I think there is more of a consensus that monetary policy pretty much has run its course. There are still guys who are looking for helicopter drops of money but I think that is a step sort of too far into the dark, where I am not sure there is a political consensus to do that in the major economies, if it comes to that…

Here’s Jacob:

Jacob Viner (1933): Balanced Deflation, Inflation, or More Deflation: “If going off the gold standard were as simple a matter for us…

…as for England and Canada, I would not only advocate it, but if [it]… did not suffice to lower substantially the internal purchasing power of the dollar I would recommend its accompaniment by increased government expenditures financed by the printing press or by loans…. England and… the other countries which went off the gold standard in 1931… [made] too restrained use of the freedom which the departure from the gold standard gave them them…. The countries that went off the gold standard have nevertheless weathered the economic storm much better…

We all agree that economies today are “so slow” and inflation pressures are by and large absent. What does Raghu think he knows today that Jacob did not–what have we learned in the past 83 years–that has turned helicopter drops from an obvious technocratic step to take to “a step too far into the dark”? What did Jacob think he knew that Raghu does not–what doctrines, true, false, or uncertain–because we have forgotten them?

Anyone? Anyone? Bueller?

The disappearance of monetarism

Posted on by Brad DeLong

I just hoisted a piece I wrote 15 years ago1—a follow-up to my “Triumph of Monetarism” that I published in the Journal of Economic Perspectives. I think of it as my equivalent of Olivier Blanchard’s “The state of macro is good” piece…

However, it is, I now recognize, clearly inadequate. It is quite good on how today’s New Keynesians are really Monetarists and how today’s Monetarists are really Keynesians. But it misses completely:

  • How use of the DSGE framework was morphing from (a) a rhetorical step to emphasize that assuming that agents in models behaved “rationally” did not entail any laissez-faire inclusions to (b) an unhelpful methodological straitjacket.
  • How there were about to be no Monetarists—how the right wing of macroeconomics, the Republican Party in the United States, the Tory Party in England, and all of Germany were about to, when confronted with the choice between following Milton Friedman’s well-grounded and empirically based arguments on the one hand and a mindless lemming-like devotion to austerity on the other hand, reject both empirical evidence and coherent thought and plump enthusiastically for the second.

I am still not sure how that happened…

A note on Niall Ferguson: Why did Keynes write “In the long run we are all dead”?

Posted on by Brad DeLong

Niall Ferguson (2013): An Open Letter to the Harvard Community: “Last week I said something stupid about John Maynard Keynes…

…Asked to comment on Keynes’ famous observation “In the long run we are all dead,” I suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay. This was doubly stupid. First, it is obvious that people who do not have children also care about future generations. Second, I had forgotten that Keynes’ wife Lydia miscarried…

Niall, I think, misses the entire point. There is much, much more here than he recognizes… And what he recognizes is not, in fact, here at all…

Niall speaks of Keynes’s “In the long run we are all dead” as if it is a carpe diem argument–a “seize the day” argument, analogous to Marvell’s “To His Coy Mistress” or Herrick’s “To the Virgins”. Ferguson sees his task as that of explaining why Keynes adopted this be-a-grasshopper-not-an-ant “party like we’re gonna die young!” form of economics, or perhaps form of morality.

But that is not what is going on.

post

The American anti-austerity tradition

By Nic Johnson, Robert Manduca, Chris Hong,

May 20, 2021

Equitable Recovery

Fiscal austerity intensifies the increase in inequality after pandemics

By Davide Furceri, Prakash Loungani, Jonathan Ostry, Pietro Pizzuto,

July 13, 2021

Equitable Recovery

Overheating is not a concern for the U.S. economy

By Equitable Growth,

April 26, 2021

Go to Keynes’s Tract on Monetary Reform. Read pages 80-82, so you see the “in the long run we are all dead” quote in context. It is not part of any carpe diem argument. Two sentences earlier we find:

If, after the American Civil War, that American dollar had been stabilized and defined by law at 10 per cent below its present value, it would be safe to assume that n and p would now be just 10 per cent greater than they actually are and that the present values of k, r, and k’ would be entirely unaffected…

Six sentences earlier we find:

[T]he [Quantity] Theory [of Money] has often been expounded on the further assumption that a mere change in the quantity of the currency cannot affect k, r, and k’,–that is to say, in mathematical parlance, that n is an independent variable in relation to these quantities…

Two sentences later we find:

In actual experience, a change in n is liable to have a reaction both on k and k’ and on r…

And six sentences later we find:

There was a decided tendency on the part of these banks between 1900 and 1914 to bottle up gold when it flowed towards them and to part with it reluctantly when the tide was flowing the other way…

Keynes is discussing not how to “seize the day” for pleasure.

Keynes is discussing how to use the quantity theory of money as an analytical tool.

What he is saying is that you cannot assume that you can analyze the consequences of an altered time path of the quantity of cash in the economy–n, in Keynes’s notation–without considering whether the public’s demand for real cash balances k, the public’s demand for real checking-account balances k’, and banks’ desired reserves-to-deposits ratio r will also change. This is a principle that today’s economists call the “Lucas Critique”. (No, it is not clear to me why they do not call it the “Keynes Critique”.) And this critique is correct: assume that those three other variables are not themselves altered when you consider an altered path for the money stock is, as Keynes says in the sentence after “in the long run…”, for economists to set themselves too easy a task–it sweeps all the problems of analysis under the rug–and too useless a task–it generates predictions that are simply wrong.

In this extended discussion of how to use the quantity theory of money, the sentence “In the long run we are all dead” performs an important rhetorical role. It wakes up the reader, and gets him or her to reset an attention that may well be flagging. But it has nothing to do with attitudes toward the future, or with rates of time discount, or with a heedless pursuit of present pleasure.

So why do people think it does?

Note that we are speaking not just of Ferguson here, but of Mankiw and Hayek and Schumpeter and Himmelfarb and Peter Drucker and McCraw and even Heilbronner–along with many others.

I blame it on Hayek and Schumpeter. They appear to be the wellsprings.

Hayek is simply a bad actor–knowingly dishonest. In what Nicholas Wapshott delicately calls “misappropriation”, Hayek does not just quote “In the long run we are all dead” out of context but gives it a false context he makes up:

Are we not even told that, since ‘in the long run we are all dead’, policy should be guided entirely by short run considerations? I fear that these believers in the principle of apres nous le déluge may get what they have bargained for sooner than they wish.

And Hayek’s bad-faith writing yielded a lot of fruit: cf. Himmelfarb:

[S]omething of the “soul” of Bloomsbury penetrated even into Keynes’s economic theories. There is a discernible affinity between the Bloomsbury ethos, which put a premium on immediate and present satisfactions, and Keynesian economics, which is based entirely on the short run and precludes any long-term judgments. (Keynes’s famous remark. “In the long run we are all dead,” also has an obvious connection with his homosexuality – what Schumpeter delicately referred to as his “childless vision.”) The same ethos is reflected in the Keynesian doctrine that consumption rather than saving is the source of economic growth – indeed, that thrift is economically and socially harmful. In The Economic Consequences of the Peace, written long before The General Theory, Keynes ridiculed the “virtue” of saving. The capitalists, he said, deluded the working classes into thinking that their interests were best served by saving rather than consuming. This delusion was part of the age-old Puritan fallacy:

The duty of “saving” became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory – the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.

Never mind that Himmelfarb cuts off her quote from Keynes just before Keynes writes that he approves of this Puritan fallacy–that he is not, as Himmelfarb claims, ridiculing it, but rather praising it:

In the unconscious recesses of its being Society knew what it was about. The cake was really very small in proportion to the appetites of consumption, and no one, if it were shared all round, would be much the better off by the cutting of it. Society was working not for the small pleasures of today but for the future security and improvement of the race,—in fact for “progress.” If only the cake were not cut but was allowed to grow in the geometrical proportion predicted by Malthus of population, but not less true of compound interest, perhaps a day might come when there would at last be enough to go round, and when posterity could enter into the enjoyment of our labors…

So if you do read Himmelfarb, do so with great caution: this is a strange woman indeed[1].

As for Schumpeter, in Schumpeter’s Keynes obituary Schumpeter is working as hard as he can to try to minimize Keynes’s global influence:

[England’s] social fabric had been weakened and had become rigid. Her taxes and wage rates were incompatible with vigorous development, yet there was nothing that could be done about it. Keynes was not… in the habit of bemoaning what could not be changed… not the sort of man who would bend the full force of his mind to the individual problems of coal, textiles, steel, shipbuilding…. He was the English intellectual, a little deracine and beholding a most uncomfortable situation. He was childless and his philosophy of life was essentially a short-run philosophy. So he turned resolutely to the only “parameter of action” that seemed left… monetary management. Perhaps he thought that it might heal. He knew for certain that it would sooth–and that return to a gold system at pre-war parity was more than his England could stand. If only people could be made to understand this, they would also understand that practical Keynesianism is a seedling which cannot be transplanted into foreign soil: it dies there and becomes poisonous be- fore it dies.

[“Childless”] is a truly classless move given Keynes’s wife Lydia Lopokova’s two miscarriages–the best we can hope for Schumpeter is that his self-absorption in the 1920s, 1930s, and 1940s had kept him from ever learning about them. There was when I was an undergraduate an oral tradition that Schumpeter’s “childless” was a sotto voce synonym for “homosexual”–I presume Himmelfarb picked that up from similar sources to those I heard it from.

But Schumpeter, at least, does not cite “In the long run we are all dead” as evidence for the proposition that Keynes’s “philosophy of life was essentially a short-run philosophy”. Instead, he simply asserts that Keynes’s “philosophy of life was essentially a short-run philosophy”.

Is there any evidence that Keynes’s “philosophy of life was essentially a short-run philosophy” that unjustly neglected the long run? Keynes would have denied it: Keynes would have said that he gave proper balance to the short run and the long run. But, he would have added, it is also the case–as Skidelsky quotes him in The Economist as Saviour–that:

Burke ever held, and held rightly, that it can seldom be right… to sacrifice a present benefit for a doubtful advantage in the future…. It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear…. We can never know enough to make the chance worth taking…

So here we have it: not Herrick or Marvell or decadent Bloomsbury. Instead, Edmund Burke. Not a heedless disregard for the future, but a sober acknowledgement of the limited power of the brains of jumped-up East African Plains Apes like us to even see the long-run, and a plea not to sacrifice those currently alive to the Dreadful Moloch of Utopian Fantasies of the Future.

Schumpeter has, I think, considerable explaining to do.

As does Hayek.

As does Himmelfarb.

The rest–the Fergusons and the McCraws and the Druckers and the Heilbronners and company? At the very least, they need to explain why they didn’t check their “In the long run we are all dead” quotes against the context, and why doing so did not then lead them to have an Inigo Montoya moment as they said: “wait a minute–this doesn’t mean what I thought it meant”.

[1] Himmelfarb, writing in 1960:

The familiar racist sentiments of Buchan, Kipling, even Conrad, were a reflection of a common attitude. They were descriptive, not prescriptive; not an incitement to novel political action, but an attempt to express differences of culture and colour in terms that had been unquestioned for generations. To-day, when differences of race have attained the status of problems–and tragic problems–writers with the best of motives and finest of sensibilities must often take refuge in evasion and subterfuge. Neutral, scientific words replace the old charged ones, and then, because even the neutral ones–“Negro” in place of “nigger”–give offense, in testifying to differences that men of goodwill would prefer forgotten, disingenuous euphemisms are invented–“non-white” in place of “Negro”. It is at this stage that one may find a virtue of sorts in Buchan: the virtue of candor, which has both an aesthetic and an ethical appeal…

That somebody could–in 1960–write of how “to-day… differences of race have attained the status of problems–and tragic problems” as opposed to 1920, when presumably differences of race were not problems? Feh!

On Machiavelli’s “Letter to Vettori”: Hoisted from the Archives from 2003

Posted on by Brad DeLong

Brad DeLong (2003): On Machiavelli’s “Letter to Vettori”: Or, The Value of the History of Economic Thought:

A surprisingly-large number of people have recently asked me why I am interested in the history of economic thought.

They make various points:

  • First, we don’t learn physics from Galileo’s Discourse on Two New Sciences. There are other, better, more complete, more accurate ways of presenting the material. In any real body of knowledge, the more up-to-date has to be preferred to the less because we know more than they did.
  • Second, there are the dangers of promoting dead and dry texts to the status of unquestionable authorities. Karl Marx saw misery in industrial England in the 1840s, jumped to the conclusion that market economies could never deliver persistent, sustained, significant improvements in real wages to the working class, jumped to the conclusion that markets had no place in any truly human mode of social organization, and–because his words became Holy Writ, the sacred gospel that was never to be questioned of a Millennarian World Religion–more than a billion people were doomed to even deeper poverty for more than a generation.
  • Third, there is the danger that one will read texts one has placed high on a pedestal and discover in them a secret message, a crucial form of knowledge that is desperately important and that only you have the wit to decode as it exists in hidden form beneath the surface of the ‘apparent meaning’ of the text.

These are indeed powerful drawbacks, ever-present dangers in any enterprise that contains any substantial intellectual history component. One may well find oneself attached to outmoded and partial knowledge, abandoning one’s right mind to become the acolyte of some strange old book-based cult repugnant to reason, or transformed into a madman convinced that only one and one’s own sect has been able to master the hermetic mysteries of the vitally-important true-but-hidden meaning of the text.

But there is an upside. What is the upside? Let me approach it in a roundabout fashion. Let me start by quoting a famous letter, a letter from circa-1600 Florentine politician Niccolo Machiavelli to his friend and hoped-for patron Francesco Vettori, describing what Machiavelli’s life is like in the internal political exile to which he was consigned after the fall of Florentine Republican government that he had served.

The letter is best known for its description of how Machiavelli spent his evenings, found in the second paragraph below:

I am living on my farm…. I get up in the morning with the sun and go into a grove I am having cut down, where I remain two hours to look over the work of the past day and kill some time with the cutters…. Leaving the grove, I go to a spring, and thence to my aviary. I have a book in my pocket, either Dante or Petrarch, or one of the lesser poets, such as Tibullus, Ovid, and the like. I read of their tender passions and their loves, remember mine, enjoy myself a while in that sort of dreaming. Then I move along the road to the inn; I speak with those who pass, ask news of their villages, learn various things, and note the various tastes and different fancies of men. In the course of these things comes the hour for dinner, where with my family I eat such food as this poor farm of mine and my tiny property allow. Having eaten, I go back to the inn…. I sink into vulgarity for the whole day, playing at cricca and at trich-trach…. So, involved in these trifles, I keep my brain from growing mouldy, and satisfy the malice of this fate of mine, being glad to have her drive me along this road, to see if she will be ashamed of it.

On the coming of evening, I return to my house and enter my study; and at the door I take off the day’s clothing, covered with mud and dust, and put on garments regal and courtly; and reclothed appropriately, I enter the ancient courts of ancient men, where, received by them with affection, I feed on that food which only is mine and which I was born for, where I am not ashamed to speak with them and to ask them the reason for their actions; and they in their kindness answer me; and for four hours of time I do not feel boredom, I forget every trouble, I do not dread poverty, I am not frightened by death; entirely I give myself over to them.

And because Dante says it does not produce knowledge when we hear but do not remember, I have noted everything in their conversation which has profited me, and have composed a little work On Princedoms, where I go as deeply as I can into considerations on this subject, debating what a princedom is, of what kinds they are, how they are gained, how they are kept, why they are lost…

In short, on the coming of evening Niccolo Machiavelli enters his personal library. There he talks to his friends–his books, or rather those who wrote the books in his library, or rather those components of their minds that are instantiated in the hardware-and-software combinations of linen, ink, and symbols of Gutenberg Information Technology that is his personal library. They are ‘ancient men’ who receive him ‘with affection,’ and for four hours he ‘ask[s] them the reason for their actions; and they in their kindness answer me; and… I do not feel boredom, I forget every trouble, I do not dread poverty, I am not frightened by death…’

Remember that Machiavelli lives only two generations after Gutenberg. He is thus one of the very first people in the world to have had a personal library. Before printing, libraries were the exclusive possession of kings, sovereign princes, abbots, masters of the Roman Empire (like Caesar and Cicero). The idea that a mere mortal–a disgraced ex-Assistant for Confidential Affairs to the Republic of Florence–might have a personal library would have been absurd even half a century before Machiavelli. To him, therefore, his personal library is not something he takes for granted, but something new, something he has that his predecessors did not. And so he can see clearly what his personal library does for him.

What does his personal library do for him? It does this: it enlarges his circle of friends. Especially in disgraced semi-exile–when many he would talk to are afraid to be seen in his company, and where he is afraid to be seen in the company of almost all the rest–the ability to read and reread his personal copies of Publius Ovidius Naso, Petrarch, Dante Alighieri, Titus Livius, Plutarch, and the rest makes them his friends: almost the only people who will receive him with affection, and definitely the only people who will honestly answer his questions about politics and history. And it is important to have such friends, and to pay them proper respect. Hence Machiavelli will not go to them in his clothes-of-the-day–those in which he had managed his farm, haggled over the price of firewood, gambled, and on which he had spilled beer. He will, instead, enter his library only in ‘garments regal and courtly.’

To my mind, studying the history of economic thought has much the same effect. It is not that any of us are in Machiavelli’s situation–where a single wrong sentence to the wrong person and we would find ourselves under torture in the dungeons of Florence’s Palazzo Vecchio. But it is very nice to add some highly intelligent, extremely witty, and very thoughtful people living far away–for the past is indeed far away, and in its strangeness provides an important element of perspective–to our circle of friends.

Moreover, people’s rough edges are filed off in their books. Adam Smith found Jean-Jacques Rousseau impossible in person, but that chunk of Rousseau’s mind that is instantiated in the hardware-and-software combination of Gutenberg Information Technology is very pleasant company. Nobody outside his family (save Friedrich Engels) could ever stand Karl Marx for any length of time. But that part of Marx’s mind that is instantiated in his books doesn’t fly into irrational rages, doesn’t accuse one of being a police spy, doesn’t beg for money, doesn’t demand that one accept that he is very much smarter than one. Instead, Marx-in-the-book speaks passionately of his hopes and fears for the future–hope coming from the progressive destiny of humanity and the extraordinary progress of technology, and fear coming from our constant tendency to f* up our social engineering problems–and (save when he starts raving Hegelian gibberish, or when you see that whole chunks of his argument fall away because he has confused the physical capital-output ratio with the value capital-output raio) can be very good company indeed.

And then there are those whom one really wishes one had gotten to know in person. For who would not like to be good friends with (if one were quick and witty enough to avoid becoming one of his targets) John Maynard Keynes, or David Hume, or John Stuart Mill, or Adam Smith?”

History: John Maynard Keynes Getting One Very Wrong

Posted on by Brad DeLong

Here it is plain to me that Keynes has simply not understood John Hicks–call this Keynes “Keynes the Pre-Hicksian”:

John Maynard Keynes (1937): The General Theory of Employment: “There are passages which suggest that Professor Viner is thinking too much…

…in the more familiar terms of the quantity of money actually hoarded,and that he overlooks the emphasis I seek to place on the rate of interest as being the inducement not to hoard. It is precisely because the facilities for hoarding are strictly limited that liquidity preference mainly operates by increasing the rate of interest. I cannot agree that “in modern monetary theory the propensity to hoard is generally dealt with, with results which in kind are substantially identical with Keynes’, as a factor operating to reduce the ‘velocity’ of money.” On the contrary, I am convinced that the monetary theorists who try to deal with it in this way are altogether on the wrong track.

Again, when Professor Viner points out that most people invest their savings at the best rate of interest they can get and asks for statistics to justify the importance I attach to liquidity-preference, he is over- looking the point that it is the marginal potential hoarder who has to be satisfied by the rate of interest, so as to bring the desire for actual hoards within the narrow limits of the cash available for hoarding. When, as happens in a crisis, liquidity-preferences are sharply raised, this shows itself not so much in increased hoards–for there is little, if any, more cash which is hoardable than there was before–as in a sharp rise in the rate of interest, i.e. securities fall in price until those, who would now like to get liquid if they could do so at the previous price, are persuaded to give up the idea as being no longer practicable on reasonable terms. A rise in the rate of interest is a means alternative to an increase of hoards for satisfying an increased liquidity-preference.

Nor is my argument affected by the admitted fact that different types of assets satisfy the desire for liquidity in different degrees. The mischief is done when the rate of interest corresponding to the degree of liquidity of a given asset leads to a market-capitalization of that asset which is less than its cost of production…

It seems very clear that this Keynes has not yet read–or has not understood–John Hicks (1937), “Mr. Keynes and the ‘Classics’: A Suggested Interpretation”.

Keynes thinks that money demand consists of three terms:

  • kPY, the amount of money needed to grease the amount PY of total nominal spending,
  • S, the liquidity-preference speculative demand for money, and
  • -jr, a term that depends on increases in the interest rate r curbing the speculative demand for money, and also inducing people to economize on their transactions balances.

For a given money supply, M, this gives us a money demand-money supply equation:

M = kPY + S – jr

Jacob Viner wants to take this equation and rewrite it in quantity-theory terms as an LM-curve relation:

kPY = M – S + jr

Y = [M – S + jr]/Pk

Y = (M/P)V, with V = [1-(S/M)-(jr/M)]/k

An increase in Keynes’s liquidity preference S is thus a reduction in the velocity of money V associated with any interest rate r. This is what Viner means when he writes that:

In modern monetary theory the propensity to hoard is generally dealt with, with results which in kind are substantially identical with Keynes’, as a factor operating to reduce the ‘velocity’ of money.

And he is correct.

Keynes says he disagrees. He claims that the key effect of a rise in liquidity preference is not to reduce the velocity of money–to produce “increased hoards”–but rather to raise the interest rate r. And working through the IS-curve relation:

Y = C + I
C = co + (cy)Y
I = io – (ir)r
Y = [co + io]/(1-cy) – [ir/((1-cy)]r

This rise in r reduces real spending Y.

Keynes is right when he says that an increase in liquidity preference S reduces Y working through the IS-curve relationship. But Keynes is wrong when he says that implies that Viner is wrong. Viner is right too. The LM-curve and the IS-curve relations jointly determine Y and r. You can use either. In fact, you have to use both in order to get an answer, even if you are not aware that you are using both. That is what Hicks made clear. But Keynes does not know it. And I see no signs that Viner knows it either.

Must-Read: John Maynard Keynes (1937): The General Theory of Employment: Today’s Economic History

Posted on by Brad DeLong

Must-Read: Today’s Economic History: John Maynard Keynes (1937): The General Theory of Employment: “There are passages which suggest that Professor Viner is thinking too much…

…in the more familiar terms of the quantity of money actually hoarded, and that he overlooks the emphasis I seek to place on the rate of interest as being the inducement not to hoard. It is precisely because the facilities for hoarding are strictly limited that liquidity preference mainly operates by increasing the rate of interest. I cannot agree that:

in modern monetary theory the propensity to hoard is generally dealt with, with results which in kind are substantially identical with Keynes’, as a factor operating to reduce the ‘velocity’ of money.

On the contrary, I am convinced that the monetary theorists who try to deal with it in this way are altogether on the wrong track.

Again, when Professor Viner points out that most people invest their savings at the best rate of interest they can get and asks for statistics to justify the importance I attach to liquidity-preference, he is over-looking the point that it is the marginal potential hoarder who has to be satisfied by the rate of interest, so as to bring the desire for actual hoards within the narrow limits of the cash available for hoarding. When, as happens in a crisis, liquidity-preferences are sharply raised, this shows itself not so much in increased hoards–for there is little, if any, more cash which is hoardable than there was before–as in a sharp rise in the rate of interest, i.e. securities fall in price until those, who would now like to get liquid if they could do so at the previous price, are persuaded to give up the idea as being no longer practicable on reasonable terms. A rise in the rate of interest is a means alternative to an increase of hoards for satisfying an increased liquidity-preference.

Nor is my argument affected by the admitted fact that different types of assets satisfy the desire for liquidity in different degrees. The mischief is done when the rate of interest corresponding to the degree of liquidity of a given asset leads to a market-capitalization of that asset which is less than its cost of production…

John Maynard Keynes (1937), “The General Theory of Employment”, Quarterly Journal of Economics 51:2 (February), pp. 209-223 http://www.jstor.org/stable/1882087

Must-Read: Marshall I. Steinbaum and Bernard A. Weisberger: Economics was Once Radical: Then It Decided Not to Be

Posted on by Brad DeLong

Must-Read: Marshall I. Steinbaum and Bernard A. Weisberger: Economics was Once Radical: Then It Decided Not to Be: “When it was first formed in 1885, the AEA was a radical challenge to the orthodoxy of classical, free-market economics…

…A generation of young American economists trained at German research universities in the 1870s returned to find their field dominated by an establishment largely confined to Harvard and Yale…. Richard Ely, an avowedly Christian Heidelberg-trained professor at Johns Hopkins with a calling to make economics a friend of the working man…. As originally drafted, the opening platform of the AEA declared ‘We regard the state as an educational and ethical agency whose positive aid is an indispensable condition of human progress. While we recognize the necessity of individual initiative in industrial life, we hold that the doctrine of laissez-faire is unsafe in politics and unsound in morals,’ and it went on to excoriate ‘the conflict of labor and capital.’ The mission of the new organization was to promulgate empirical economics research, including the nascent concept of peer review, a powerful weapon in asserting the scientific superiority of the new school over the establishment’s dry, unshakable orthodoxy….

[But] university presidents seeking stature for their institutions appealed to rich donors among the period’s Robber Barons, and that appeal was unlikely to be successful when rabble-rousers in the economics department were questioning the foundations of American capitalism…. Economists realized there was much to be gained in terms of professional stature and influence from making themselves appealing to the establishment, so they banished those elements that tainted them by association…. Even Ely himself eventually came around after his own notorious trial before the Wisconsin Board of Regents in 1894…. The economic tracts of that era began to enshrine the perfectly competitive market at the center of the intellectual firmament in economics…. It’s hard to escape the conclusion that in choosing to sideline left-wing elements among their own, economists gave up important if inconvenient empirical insights in favor of intellectual self-promotion, and that left them blind to the realities of inequality…

Is there a “correct” monetary policy? Yes!

Posted on by Brad DeLong

In what way does Peter Gourevitch think that Paul Krugman’s analysis of the Federal Reserve is wrong?

Here we have, first, Gourevitch saying: “opinions of the shape of the earth always differ”:

Peter Gourevitch: This is why Paul Krugman is wrong about the Federal Reserve: “The second set of criticisms reflects a more fundamental disagreement between economics and political science…

…Economists tend to assume that there is a single right answer (even if they disagree bitterly among each other about what the right answer is)…. Political scientists… assume that there is more than one interpretation of what is correct, and try to come up with theories about which “correct” answer is chosen…

I reject this.

I reject this completely.

I reject this utterly.

For more than a hundred years there has been a broad near-consensus among economists that there is such a thing as a “correct” monetary policy.

To quote Keynes (1924):

Rising prices and falling prices each have their characteristic disadvantages. The Inflation which causes the former means Injustice to individuals and to classes,–particularly to investors; and is therefore unfavorable to saving. The Deflation which causes falling prices means Impoverishment to labour and to enterprise by leading entrepreneurs to restrict production in their endeavour to avoid loss to themselves; and is therefore disastrous to employment, The counterparts are, of course, also true,–namely that Deflation means Injustice to borrowers, and that Inflation leads to the over-stimulation of industrial activity. But these results are not so marked… borrowers are in a better position to protect themselves than lenders… labour is in a better position to protect itself from over-exertion in good times than from under-employment in bad times.

Thus Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned. The Individualistic Capitalism of to-day, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring rod of value, and cannot be efficient–perhaps cannot survive–without one…

Paul Krugman’s point is that the consensus of the 1980 MIT macroeconomics posse is that right now a higher inflation target than 2%/year is appropriate and that raising interest rates is not appropriate. “Opinions of shape of earth differ” or even “There is no correct answer when there are competing rival views that are not easily testable in a complex world where one cannot readily carry out controlled experiments with obvious real world interpretations…” simply does not clear the bar as a criticism.

As I like to put it, back in 1820 Thomas Robert Malthus identified a “general glut” as a problem independent from and much more dire than a simple misallocation of productive resources that produced excess supply in one industry and excess demand in another:

Thomas Robert Malthus: The “General Glut” (1820): “[T]he effect of falling [manufacturing export] prices in reducing profits…

…is but too evident at the present moment. In the largest article of our exports, the wages of labour are now lower than they probably would be in an ordinary state of things if corn were at fifty shillings a quarter. If, according to [Ricardo’s] new theory of profits, the prices of our exports had remained the same, the master manufacturers would have been in a state of the most extraordinary prosperity, and the rapid accumulation of their capitals would soon have employed all the workmen that could have been found. But, instead of this, we hear of glutted markets, falling prices, and cotton goods selling at Kamschatka lower than the costs of production.

It may be said, perhaps, that the cotton trade happens to be glutted; and it is a tenet of the new doctrine on profits and demand, that if one trade be overstocked with capital, it is a certain sign that some other trade is understocked. But where, I would ask, is there any considerable trade that is confessedly under-stocked, and where high profits have been long pleading in vain for additional capital? The [Napoleonic] war has now been at an end above four years; and though the removal of capital generally occasions some partial loss, yet it is seldom long in taking place, if it be tempted to remove by great demand and high profits…

And back in 1829 the young John Stuart Mill identified the key cause as our possession of a monetary economy, and in a monetary economy Say’s Law–that supply creates its own demand–is false in theory: a general excess supply of pretty much all currently-produced goods and services, Malthus’s “general glut”, is the metaphysically-necessary consequence of an excess demand for whatever currently counts as money:

John Stuart Mill (1829): Essays on Some Unsettled Questions: “[In a non-monetary economy] the sellers and the buyers…

…for all commodities taken together, must, by the metaphysical necessity of the case, be an exact equipoise to each other; and if there be more sellers than buyers of one thing, there must be more buyers than sellers for another….

If, however, we suppose that money is used, these propositions cease to be exactly true…. Although he who sells, really sells only to buy, he needs not buy at the same moment when he sells; and he does not therefore necessarily add to the immediate demand for one commodity when he adds to the supply of another….

There may be, at some given time, a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible. This is always actually the case, in those periods which are described as periods of general excess… which is of no uncommon occurrence….

What they called a general superabundance, was… a superabundance of all commodities relatively to money…. Money… was in request, and all other commodities were in comparative disrepute. In extreme cases, money is collected in masses, and hoarded; in the milder cases, people merely defer parting with their money, or coming under any new engagements to part with it. But the result is, that all commodities fall in price, or become unsaleable. When this happens to one single commodity, there is said to be a superabundance of that commodity; and if that be a proper expression, there would seem to be in the nature of the case no particular impropriety in saying that there is a superabundance of all or most commodities, when all or most of them are in this same predicament…

And ever since then, every monetary economist worthy of the name has sought a government and a central bank that will pursue a monetary policy that makes Say’s Law true in practice even though it is false in theory. Everyone has sought for a policy that makes the demand for money in conditions of full employment equal to the supply, so that we have neither an excess demand for money and Keynes’s inexpedient Deflation, nor an excess supply of money and Keynes’s unjust Inflation.

There is a single right answer in monetary policy. It is the policy that hits this sweet spot.